The Gilmo Report

May 23, 2021

May 22, 2021 1:55 pm ET

The market remains in the soup, as I noted in my last report, as it chops around and looks set to move lower. In my view there is no reason to be long this market currently. If we take a step back and look at the NASDAQ Composite Index chart, we can see the clear double-top breakdown three weeks ago that led to a roughly 8% correction.

That was good enough for an intermediate-term correction, and so last week the index bounced and began working its way up to the 50-day moving average. On Friday it finally got there, gapping just above the line at the open before reversing to close down -0.48% on lighter volume, despite options expiration. This looks primed to head lower from here pending evidence to the contrary.



The S&P 500 Index has meanwhile run into some turbulence over the past two weeks as the character of a nice, smooth, and orderly uptrend noticeably changed in early May. Two weeks ago, the index began chopping lower and has so far tested its 50-day moving average twice over that time span. On Friday it filled the gap-down falling window from May 10th and reversed on higher options expiration volume. Perhaps a third test of the 50-day line is coming.



The choppiness evident in both the S&P and NASDAQ charts illustrates that, as I’ve been saying for some time now, this is a market for nimble swing-traders, not long-side intermediate-trend followers. With the S&P and the NASDAQ reversing at logical resistance levels on Friday, however, the question now becomes whether short-sellers will soon be presented with a playable downside break. That remains an open question for now, but we can examine the evidence and devise an appropriate approach if that becomes the case.

We can start with some of the tech names that have been rallying over the past week or so, like the semiconductors. Semiconductor equipment maker Applied Materials (AMAT), a big-stock name in the group, reported earnings Thursday after the close. It rallied up to a peak of 133.90 in the after-hours before coming in to open up on Friday at 129.85. It spent the day churning around its 50-day moving average before closing just below the line on heavy volume.

This should be watched carefully as it may work out as a short-sale entry right here using the 50-day line as a covering guide. If AMAT can regain and hold the 50-day line, then you have a potential long entry situation, but for now the situation remains fluid, so play it as it lies.



There wasn’t much either way in the AMAT report that generated any kind of serious sympathy moves in other semiconductors. The other equipment makers that I follow, KLA Corp. (KLAC) and Lam Research (LRCX), both pulled back on Friday in varying chart positions. KLAC ran up to its 50-day line where it reversed, therefore was playable as a short entry close to the line while using it as a covering guide.

LRCX is a little more like AMAT as it cleared its 50-day line Thursday and then pulled back in a test of the line on Friday. If it holds support at the 50-dma, then that could present a lower-risk entry spot. A break below the line would, of course, trigger it as a short-sale target at that point. One should also monitor the other names in the group as they tend to move together.



In the semiconductor group chart below consisting of Advanced Micro Devices (AMD), Micron Technology (MU), Microchip Technology (MCHP), and Western Digital (WDC), all four rallied up into resistance on Friday and reversed. Thus, all four were potential short-sale targets as they approached resistance before reversing on the day, and remain so for now.

AMD reversed from a point with a little over 1% of its 50-day moving average, MCHP ran right into its 50-day line on Friday and turned south from there. MU ran out of gas even before it could reach its 20-dema and remains deep in the bowels of its chart pattern. MU reversed on Friday as it approached Monday’s big breakout point from which it immediately and miserably failed on Tuesday.



Qualcomm (QCOM), Qorvo (QRVO), and Marvell Technology Group (MRVL) are all weak semiconductor charts rallying up into shortable resistance. MRVL ran into its 50-day line on Friday where it stalled, and is for now a short here using the line as a covering guide.

QCOM and QRVO are both having issues at lower resistance along their 20-day exponential moving averages. They can be viewed as short-sale targets right here at the 20-demas which then serve as covering guides. Pending further evidence to the contrary, that is what these look like to me right here, right now.



These ten semiconductors discussed above, AMAT, KLAC, LRCX, AMD, MCHP, MU, WDC, MRVL, QCOM, and QRVO, represent a compact but representative list of semiconductors that can serve as action watch list candidates. Currently these mostly look like short-sale set-ups into rallies off the lows of roughly two weeks ago and are worth keeping a close eye on here.

Big-Stock NASDAQ names were also mostly weak on Friday, giving rise to a nice long trade in the three-times leveraged ProShares UltraPro Short QQQ ETF (SQQQ) as I outlined in my live blog posts on Friday. As I noted in my blog post, I was looking for a reversal in the NASDAQ 100 names based on a potential negative gamma squeeze, and that’s just what we got.

While Facebook (FB) and Alphabet (GOOG) contributed with slight declines while remaining in similar consolidations, Apple (AAPL), (AMZN), Microsoft (MSFT) and Tesla (TSLA) all reversed at logical resistance. AAPL, AMZN, and MSFT did so at their 50-day moving averages while TSLA ran into resistance much lower in its chart at the 200-day line. I would also circle back to the FB and GOOG charts to point out that both had buyable gap-up (BGU) moves in late April after reporting earnings, and those BGUs have long since failed.

The weakness in these and other NASDAQ 100 names is what made the SQQQ trade work quite well on Friday, so we can keep this approach handy for the coming week if the NASDAQ 100 names remain wobbly. Stay tuned to the Live Blog page for opportunities in the SQQQ or any other of my favored little friends consisting of the leveraged inverse index ETFs and the ProShares Ultra VIX ETF (UVXY) as potential set-ups emerge in real-time.



The rallies earlier in the week in tech names resulted of course from the Fed meeting minutes which indicated that while the Fed was starting to think about thinking about thinking about tapering, they weren’t quite there yet, and the fed funds rate would remain as it is, near 0%. This kept the Ten-Year Treasury Yield ($TNX) in check throughout the week. But as I’ve said before, I view this current action in market interest rates to be indicative of consolidation after sharp run-ups earlier in the year as they discounted beforehand the latest hot CPI and PPI numbers.

The consolidation in the $TNX extending back to late March looks constructive, and I would be watching for any possible breakout that would potentially begin to presage and discount further inflation that would likely be confirmed by future CPI and PPI reports. It does not appear to me that the Fed is all that interested in standing in the way of inflation, assuming it can do anything about it anyway. The $TNX chart is likely the first place to look for clues as to further increasing inflation numbers coming down the pike.



Gold remains in a strong uptrend as futures posted a higher high to end the weak at around $1881/ounce. This has sent the Sprott Physical Gold Trust (PHYS) to its highest close since February. Meanwhile, silver is pulling back some and the Sprott Physical Silver Trust (PSLV) pulled into its 20-dema on Friday, which is where my preferred opportunistic entry lies. As I noted on Wednesday, “I’d be watching the 20-dema for near-term support and also as a more opportunistic entry point if I can get it.” And so, we did.

While PHYS remains extended pending any test of the 10-day, which has now crossed above the 200-dma, the PSLV is in a buyable position after closing one penny above the 10-dma on Friday. Of course, my preference remains looking for pullbacks to the 20-dema as the more opportunistic route, and that’s what the PSLV gave us on Friday.



Gold miners and related stocks spent the week consolidating their uptrends and mostly moving tight sideways. Agnico Eagle Mines (AEM) and Kirkland Lakes Gold (KL), Franco-Nevada (FNV) and Newmont Corp. (NEM) can be watched for constructive pullbacks to near-term support at key moving averages, mostly the 200-dma for AEM and KL, the 20-dema for FNV, and the 10-dma for NEM as possible add points.



A number of silver miners meanwhile experienced some reasonable upside this past week, like First Majestic (AG), Coeur Mining (CDE), and Gatos Silver (GATO). GATO has been a surprise dark horse here as it rocketed 33% higher for the week. Meanwhile, AG and CDE ran up earlier in the week and spent Friday pulling back. For now, those two would be buyable closer to their 10-day lines as they continue to pull back.

MAG Silver (MAG) is holding tight along its 10-dma and closed Friday about 2% above the line. It appears buyable as close to the 10-day line as possible while using that as your selling guide.



Industrial metals names that I follow mostly look like shorts, like most other stuff stocks currently. After faltering at their 20-day exponential moving averages earlier in the week, Alcoa (AA), Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX) and U.S. Steel (X) all continue to flounder below the 20-day line, with some being shortable at the line on Thursday and Friday.

CLF and X reversed Friday at their 20-day lines, while AA remains somewhat below it own 20-dema. FCX closed Friday one penny below its 20-dema, so can be viewed as being in a short-sale entry position using the 20-day line as a covering guide.



If we look at these same four industrial metals stocks on weekly charts instead of dailies, we can see that these have had big runs off their lows of last year. CLF, FCX, and X are also in position where later-stage base failures could occur. We can also see that CLF and X are just starting to falter and fail at prior base breakout points, so this is something to watch for IF we see the general market head lower.



Uranium producer Cameco (CCJ) reversed Friday at its 10-dma which I might be inclined to treat as an aggressive short-sale entry using the 10-day line as a covering guide, especially if we continue to see stuff stocks come under selling pressure. Teck Resources (TECK) was already a short per my Wednesday report, with weak rallies back up into the 20-dema serving as lower-risk entry opportunities.

On Thursday, TECK reversed at its 20-dema after gapping through the 10-dma and closing below the 20-dema on Wednesday. It remains below the 20-dema such that rallies up into the 20-dema from here would also constitute potential short-sale entries while using the line as a covering guide.



The mover of commodities, Caterpillar (CAT) is having trouble holding its early-May breakout and has recently failed when it dropped below the 20-dema on Wednesday. A tepid rally into the 10-dma on Friday may bring this into a shortable position, with the idea of watching for a break below the 20-dema as confirmation.

Of course, those of you who have a bullish view of CAT can always watch for re-breakouts. That would likely occur in the event of a continued market rally, whereas further downside in the indexes could easily see CAT bust the 20-dema and morph into a full-blown, late-stage, base-failure type of short-sale set-up.



Agricultural commodities have remained weak, and this has kept pressure on agricultural names. As the Teucrium Corn ETF (CORN), the Teucrium Soybean ETF (SOYB), the Teucrium Wheat ETF (WEAT), and the iPath Coffee ETF (JO) pull back deeply as they consolidate prior sharp gains that extended into early May. It is possible that these pullbacks present potential lower-risk entry opportunities as they develop, so that can be watched for.

Overall, however, we’ve seen agricultural names like Agco (AGCO), Corteva (CTVA), and Deere (DE), not shown, come apart recently. You can check those charts on your own, along with the daily chart of Bunge (BG), which has rallied just above its 20-dema and can be watched for a reversal back below the line as a possible short-sale entry trigger if it occurs



Fertilizers also remain under pressure. At this point I’m only following three big-stock names in the space, CF Industries (CF), Mosaic (MOS) and Nutrien (NTR), all of which are now living below their 10-day moving averages. The 20-demas lie just below, so we can watch these carefully to see whether the 20-day lines offer buyable near-term support or whether these names start to bust the 20-day lines and trigger as short-sale entries.



As with the industrial metals I think it’s important to keep in mind that these fertz have had long runs off their lows of last year. We can see this in the weekly chart of CF Industries (CF), which looks like the weekly charts of MOS and NTR as well.



Homebuilders have been getting trashed with several plumbing lower lows after protracted breaks off their early-May peaks when some were hailing the group as an area of market leadership. That situation has certainly changed drastically. But as I’ve said before, obvious strength in this market doesn’t seem to last too long in most cases. Such was the case with the builders.

Of the six names shown below, only Beazer Homes (BZH) looks to be in a shortable position after reversing at the 10-dma on Friday. Hovnanian (HOV) is another candidate, but because it only trades 94,157 shares a day on average, it is much too thin for my blood. The others remain week and can of course be watched for rallies into their 20-dema, such as Pulte Home (PHM) and Toll Brothers (TOL) as possible short entry points from here.



Cloud names have been rallying over the past few days, and if we revisit the six cloud names I’ve discussed as short-sale targets since late February, Avalara (AVLR), CrowdStrike (CRWD), DocuSign (DOCU), Okta (OKTA), Twilio (TWLO) and ZScaler (ZS), we can see that all but CRWD are setting up in potential short-sale positions on their charts.

AVLR, DOCU, and ZS all reversed at their 20-demas on Friday, while OKTA ran into resistance at its 20-dema and 50-dma. TWLO ran into resistance at its 20-dema and 200-dma. Meanwhile, CRWD continues to rally as cyber-security names benefit from recently favorable news flow. But overall, we can see that the clouds, as with most techs that have been rallying lately, appear to be losing upside momentum and in some cases are pushing into potential secondary short points on their charts.



If you’re the type who likes to flip through hundreds of charts throughout the day, as I do, you have probably already noticed the at-times uncanny correlations you see among stocks in similar groups or within certain thematic categories. Sometimes, however, the correlations exist beyond such boundaries.

Compare the charts of Snap (SNAP) and PayPal (PYPL), for example. We can see that SNAP peaked in late February and has since been rolling around in what now looks like a series of right shoulders in a potential head-and-shoulders formation. On Friday, it rallied into the 50-day line and reversed, thus presenting a lower-risk short-sale entry at the line which then becomes your selling guide.



PayPal (PYPL) looks substantially similar to SNAP with peak in February which came on the hype and hoopla over allowing its customers to buy and sell Bitcoin. Note that the peak in PYPL also correlates to peaks in Bitcoin miners and other corporations that were dabbling in the crypto-currency, like Microstrategy (MSTR), Square (SQ), and Tesla (TSLA).

With the bloom off the rose amid the Bitcoin bubble popping this past week, these stocks may all be vulnerable to further downside. PYPL is setting up here as a possible short after forming several potential right shoulders in a possible H&S type of formation. It is shortable here after running into resistance at the 50-day line on Friday, using the line as a covering guide.



As I’ve already said, I don’t see anything that compels me to be long this market outside of any swing-trading opportunities that might arise in real-time. Most of the charts I’m looking at appear to be losing momentum as they run up into potential price or moving average resistance. This naturally tilts my view more toward the short side currently because that is where I’m seeing the set-ups start to appear.

That said, we know that this market loves to climb the proverbial Wall of WTF, so I would expect volatility and bizarre intraday swings to dominate the action. If a more concerted trend were to develop, currently I would give odds that it would be to the downside. Thus, if you are not a short-seller or swing trader, then there is no reason to be involved currently, as the market may be hinting of more weakness to come. Play it as it lies.

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


Notes on Terminology

Note #1 – Moving Averages: 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 (black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Note #2 – U&R Set-ups: A U&R, or undercut & rally, is a long entry signal that occurs when a stock undercuts (moves below) a prior meaningful low in its chart pattern and rallies back above that low. The precise entry occurs at the prior low, which then becomes your selling guide. There are no other special requirements for a U&R other than the price action. It is similar to Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is essentially a shakeout at a moving average where your entry point occurs at the moving average as the stock is coming up through the line. This then becomes your selling guide. You can run things tight by using the actual price levels as stops or allow for 1-3% of further downside (otherwise known as downside porosity) before being stopped out.