The Gilmo Report

May 20, 2020

May 20, 2020 3:35 pm ET

The market pulled its signature move once again by suddenly selling off into the close yesterday but then gapping up sharply this morning to erase the bearish losses in bullish fashion. This is part and parcel of the market’s zombie-walk rally protocol.

After getting hit hard in the first part of the week last week and stumbling backward, much like a zombie taking potshots from a shotgun, the market simply surged forward again to make higher highs today. The NASDAQ Composite Index illustrates the zombie-walk rally with three sharp two-day sell-offs over the past month that failed to kill the rally as it turned and rallied each time.

The NASDAQ is now within spitting distance of its February all-time highs. Within the context of underlying conditions and the immense uncertainty currently plaguing businesses, over 100,000 of which have now shut their doors permanently in the U.S., it may strike one as utterly surreal, but I can assure that continuously higher stock prices are very real.

 

 

The S&P 500 Index, on the other hand, has mostly been stumbling around for the past month and looks somewhat less surreal. It is still about 12% below its February highs and resistance still looms overhead at the 200-dma. Today’s rally brought it a little closer to the line on slightly higher, but very light volume.

 

 

From my perspective, the main issue is that by this time most everything has become well extended on the upside, and I’m not seeing anything that really whets my appetite on the long side. Unless the liquidity-driven buying frenzy starts to go after beaten-down industrials like Caterpillar (CAT) and Boeing (BA), it’s difficult to make a thematic case for anything that hasn’t already rallied sharply off the March lows.

I still prefer to wait for the opportunistic moments on pullbacks, and I’m starting to lean that way now. The other possibility is that the rally runs out of steam and a shortable air pocket materializes. This market may yet have some more surprises ahead of it, so for now I’ll remain flexible.

Fed Chairman Jerome Powell became the first Fedhead to admit that what the Fed does is print money, “essentially.” He did this on the well-known news show 60 Minutes Sunday night, and indicated that the Fed was ready to do “a lot more.” Translation: The QE money-printing spigots are wide open and can open much wider if necessary.

This was good news for precious metals. Silver continued to outperform gold as the Sprott Physical Silver Trust (PSLV) gapped above its 200-dma on Monday. It has since continued to move higher as it engages in a big game of catch-up to gold. It is now extended with the 200-dma now serving as buyable support.

 

 

With silver moving, I would expect to see a more decisive move in gold soon enough, but so far it too has been making higher highs. The Sprott Physical Gold Trust (PHYS) made a new seven-year high today. Gold futures are sitting around $1750 an ounce, and this keeps the PHYS in a buyable zone as close to the 10-dma as possible.

 

 

As the NASDAQ zombie-walks higher, so do the Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB) and Microsoft (MSFT). All of these big-stock names, which comprise a 21.1% weighting in the S&P 500 and a 45.6% weighting in the NASDAQ 100, as I noted over the weekend, are extended as they help power the market higher, with the sole exception of MSFT.

MSFT is in a buyable position along the 10-dma using the line as a tight selling guide. Meanwhile, FB has rocketed to new highs in a classic Flying V formation on its weekly chart, while AMZN broke out today on very light volume. But, these days, who needs volume?

 

 

The Fantastic Five get even more interesting when you look at their weekly charts, shown in the group chart below. Notice that all but AMZN have formed deep v-shaped patterns, also known as Flying V’s. In the old days, such deep v-shaped bases were considered faulty, but today I just consider these to be symptoms of QE at work.

 

 

Tesla (TSLA) continues to hold tight along its 10-dma, which keeps it in a buyable position using the line as a tight selling guide. Volume dried up to 59.9% below average today, creating some voodoo action at the 10-dma. This is one big-stock NASDAQ name that is sitting in a very reasonable long entry position using the 10-dma as a selling guide.

Because it is also forming a steep punchbowl type of pattern, TSLA is also a 360-degree situation where a failure through the 10-dma and 20-dema would trigger it as a Punchbowl of Death (POD) short-sale set-up. That can be watched for, but my guess is that this would only occur within the context of a general market pullback.

 

 

Netflix (NFLX) is another big-stock NASDAQ name coming into a buyable position. The stock is back at the 10-dma on light volume, putting it in a buyable position near the line while using it as a tight selling guide.

 

 

Nvidia (NVDA), not shown, remains quite extended after Friday’s big-volume pocket pivot off the 10-dma.  Earnings are expected tomorrow, May 21st, after the close, so for now this goes on our Earnings Watch List. A couple of other names that are also expected to report after the close tomorrow are Palo Alto Networks (PANW), and Splunk (SPLK). I’ll be keeping an eye on all three for potentially actionable set-ups in the wake of their respective reports.

Semiconductors have started to show signs of life, which is something I was expecting if the market kept rallying. Big-stock semis can serve quite well as alternative-currency names, and most are trying to come up out of 3-4-week trading ranges. Intel (INTC) illustrates this as it breaks out of its six-week price range.

Volume was below average but did qualify as a pocket pivot volume signature. Breakouts on a pocket pivot volume signature have been known to work, and perhaps the reason is that the volume doesn’t look high enough for standard-issue breakout buyers to buy.

My semiconductor of choice has been Advanced Micro Devices (AMD), which has been one of the leaders of the group. It’s currently working on the handle portion of a cup-with-handle base, but my preference is to look for constructive pullbacks to the 20-dema as lower-risk entry opportunities.

 

 

I erred in my weekend report by missing the fact that Qualcomm (QCOM) was down big on volume Friday, which in this market triggers the equation DBOV=Buy Signal. That’s how Friday’s big-volume gap-down played out this week as the stock has rallied back above its 200-dma.

QCOM is stalling a bit along the line, where it has failed at least twice before.  However, in this position, one could test it on the long side using the 200-dma as a tight selling guide. If it busts the line, then it may trigger as a short-sale entry at that point. 360-degrees, please!

 

 

Ping Identity Holdings (PING) looked like it was stalling at the 20-dema on Monday and Tuesday, but finally found its feet today by gapping up through the 10-dma on big volume. Because the big down-volume bar of last Thursday was caused by the pricing and release of an 8.5 million share secondary offering, we can call today’s action a pocket pivot at the 10-dma.

In this position, PING is extended. However, it can be watched for buyable pullbacks to the 10-dma from here.

 

 

Most cloud names I’ve discussed in recent reports are extended at this point. In the group chart below which includes Alteryx (AYX), CrowdStrike (CRWD), DocuSign (DOCU), and ZScaler (ZS), the only one that I might consider close to a buyable position would be ZS. However, ZS is expected to report earnings next week on Thursday May 28th.

The other three are all extended, and we await earnings from CRWD on June 2nd and DOCU on June 4th. AYX is not expected to report until July. Meanwhile, note that AYX and DOCU stalled today, with AYX posting very light volume while DOCU stalled and reversed off the intraday highs on heavy volume, which means they may set for some normal pullbacks.

 

 

Something in the cloud space that is perhaps a bit less extended is RingCentral (RNG) which has gone nowhere since its recent base breakout. It is now pulling down into the 20-dema with volume drying up to -52.5% below average. This brings it into a buyable spot using the 20-dema as a selling guide.

 

 

Slack Technologies (WORK) can’t seem to make up its mind here as it attempted a re-breakout today on very light and declining volume. The stock picked up an analyst recommendation and $35 price target, which helped produce the re-breakout and move back above the 10-dma.

One can play this in 360-degree fashion. If the re-breakout is going to work, then WORK should hold the 10-dma, so one could buy it here and use the 10-dma as a selling guide. A breach of the 10-dma, however, could be played as a short-sale entry using the 10-dma as a covering guide.

This is still evolving here, so I would be ready to play it in either direction based on the real-time evidence going forward. Meanwhile, be aware that WORK is expected to report earnings on June 8th.

 

 

Zoom Telecommunications (ZM) posted another all-time closing high today but volume was extremely weak at -41.2% below average. Some of the work-from-home theme stocks like WORK and NFLX, for example, have been a little soft here, and this may be because most states in the U.S. are starting to try and open their economies again.

This takes the emphasis off the WFH theme, and if the openings go well it could put the proverbial fork into them. That’s why I’m taking a 360-degree view of WORK, and likewise with ZM. Normally, a very low-volume wedging rally into a double-top formation would be an automatic short.

In this market, however, you have to expect the unexpected, which in ZM’s case would be a low-volume breakout to all-time absolute highs! That said, I’m perhaps more interested in keeping this in my back pocket as a possible double-top short target to stalk if we see any kind of more severe market pullback from here.

 

 

The diminishing WFH theme, at least in the short-term, hasn’t helped Citrix Systems (CTXS) either. We can also see how its low-volume breakout last week has failed miserably. As I wrote over the weekend, the stock was floundering along the 10-dma and 20-dema, “…but my tendency here is to short it using the 10-dma as a tight covering guide in the event it attempts a re-breakout.”

Bingo. CTXS failed at the 10-dma on Monday and went crashing through its 20-dema on heavy selling volume and then broke below the 50-dma yesterday. Today we saw a weak-volume rally back up into the 50-dma, which can be viewed as a secondary short-sale entry spot using the 50-dma as a covering guide.

That said, my preference was to hit the stock short at the 10-dma on Monday, as I discussed in my weekend report. In this position, it can be shorted, but it may not yield big results right away. The more opportunistic approach might be to look for a move back up through the 50-dma and into the 20-dema as a short-sale entry.

 

 

Snap (SNAP) gapped above its 10-dma on Monday but couldn’t hold above the line, closing one cent below on a pocket pivot volume signature. Had it closed at least one penny higher, then it would have been a clear pocket pivot. Nevertheless, it has held at the 10-dma and moved higher since. Still, the correct entry was at the 20-dema last week per my comments at the time, and that would continue to be the case from here.

 

 

Sleep Number Corp. (SNBR) is back at the 20-dema and 10-dma, and held both lines today as volume remained quite light at -60.5% below average. This keeps the stock in a buyable position, although one should have acted at the 20-dema earlier today when the stock tested the line successfully. Watch for further pullbacks to the 20-dema as lower-risk entries.

 

 

Gilead Sciences (GILD) has continued to fade into the sunset after closing below its 50-dma last Friday. That offered another short entry at the 50-dma on Monday and the stock headed lower from there on increased selling volume. In this position, I would now watch for weak rallies into the 50-dma as potential short-sale entries from here.

 

 

If you missed last Thursday’s big 24.81% one-day move in Alpha Pro Tech (APT), you may be staring at a second chance. That one-day was more than enough for a great swing trade, and now the stock is right back down to the 10-dma/20-dema confluence. Volume came in today at -79.9% below average, good for some extreme voodoo action at the 10-dma and 20-dema and a lower-risk long entry spot using the 20-dema as your selling guide.

 

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

With the indexes and most if not all of the real leaders off the March lows quite extended, it becomes difficult to find a lot of fresh long set-ups. I’ve found a handful in this report, but most of my best ideas are well-extended at this point.

It’s still difficult for “logical” people to wrap their head around this rally, but one must realize it is primarily, if not almost entirely, liquidity driven. Expecting a sell-off and retest of the March lows probably hinges on some near-term liquidity air pocket where money has to come out of stocks for some other purpose. What that would be, however, is not entirely clear.

So, without a forced-selling catalyst, the zombie-walk may continue. And the only way to handle it is by going with the available set-ups as they show up in real-time. We have had some shortable situations, such as CTXS and GILD, for example, and it is likely that more short-sale set-ups will appear along the way even as the market potentially goes higher.

The question is whether a critical mass of short-sale set-ups appears on the horizon, at which point we might find ourselves pushed in the other direction. That we can watch for, and in the meantime go with the long set-ups that you see while maintaining an opportunistic approach. In my view, the best way to deal with this market is to go with the flow, but without chasing it. Take it from there.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in PHYS and PSLV, though positions are subject to change at any time and without notice.

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