The Gilmo Report

May 24, 2020

May 23, 2020 6:40 pm ET

The market ended the week quietly as it consolidated prior gains. The NASDAQ Composite Index was up slightly on lighter volume ahead of the three-day Memorial Day weekend holiday. After a move to higher highs on Wednesday, the two-day pullback on declining volume looks benign.

 

 

The S&P 500 Index is consolidating in a similar manner, forming a short flag formation as it tracks tightly just below the 200-dma. Volume has been very light, but for now the 200-dma remains a key reference. A decisive move through the line would be bullish for the index as it attempts to catch up to the NASDAQ Composite.

 

 

Precious metals have pulled back slightly, but this has brought both gold and silver into actionable long entry positions. The Sprott Physical Gold Trust (PHYS) pulled into its 20-dema on Thursday as volume kicked up slightly. That offered a lower-risk entry at the line.

PHYS closed tightly at the 10-dma on Friday as volume dried up. This keeps it in a buyable position using the 20-dema as a selling guide. Overall, gold remains in a constructive consolidation extending back to early April as gold futures bounce around between $1700-1750 an ounce.

 

 

The Sprott Physical Silver Trust (PSLV) is pulling back into its 2000-dma in what looks like a normal reaction and retest of the line. Volume has declined, so Friday’s tight action at the 200-dma puts PSLV in a secondary long entry position following the original entry down at the 50-dma a little over two weeks ago.

One would then use the 200-dma as a selling guide for portions of one’s position purchased above the line. How well PSLV obeys its 200-dma remains to be seen since it is volatile. For that reason, keep an eye on the 10-dma and 20-dema lines as alternative support references as they start to catch up to the PSLV after a sharp run-up from the 50-dma.

 

 

In this report I’m going to stick to stocks that I believe are actionable unless I believe one merits a discussion of its current state. Among the big-stock NASDAQ names that I follow, including the Fantastic Five of Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB) (which took off this week) and Microsoft (MSFT) there are a handful of actionable names.

Amazon.com (AMZN) failed on a breakout attempt earlier in the week but is now pulling into its 10-dma as volume dried up to – 53.4% below average on Friday. This puts the stock in a buyable position using the 20-dema as a maximum selling guide.

 

 

Microsoft (MSFT) closed very tightly at its 10-dma on Friday with volume drying up to -60.4% below average. This puts it in a buyable position using the 20-dema as a maximum selling guide. That said, the more opportunistic approach of waiting for a pullback to the 20-dema, should it occur, is always in play.

In general, volume levels declined on Friday ahead of the three-day holiday weekend for many stocks, including those I will discuss in the remainder of this report. However, I will initially take the volume evidence on its face and go from there. In my view, the action at least shows that investors were not in a hurry to unload stocks ahead of the long weekend.

 

 

Netflix (NFLX) has drifted below its 20-dema on very light volume. With states re-opening, the stay-at-home (SAH) theme in the stock likely slackens up a bit. Watch for a possible moving average undercut & rally move back up through the 20-dema, which could trigger a typical MAU&R long entry signal.

Otherwise, if NFLX can’t regain the 20-dema, it may simply be shortable here using the line as a covering guide. In this case we would look for a move down to the 50-dma as a potential downside target in the event that the stock’s SAH appeal loses traction.

 

 

Tesla (TSLA) remains in a buyable position as it holds tight along its 10-dma with volume remaining very light. The 20-dema can serve as a tight selling guide. Meanwhile, keep in mind the 360-degree aspects of the pattern.

A break below the 10-dma and 20-dema would trigger TSLA as a Punchbowl of Death (POD) short-sale set-up, actionable at that point while using the two moving averages as covering guides. Where TSLA goes from here will likely depend on the general market action.

 

 

If the market rally persists, I have to think that semiconductors are likely to wake up from their current torpor. There are a few outliers like Inphi (IPHI), but for the most part the big-stock members of the group haven’t yet found their mojo, or their mo-mo.

Advanced Micro Devices (AMD) has continued to hold support along the 20-dema as volume declines. This keeps it in a buyable position using the 20-dema as a tight selling guide.

 

 

Applied Materials (AMAT) is one of the biggest of the big-stock semiconductor equipment names, and it has finally been able to maintain a move above the 200-dma. Four prior attempts since early April have failed, and the most recent one has now pulled into the 200-dma where it held support with volume declining.

This puts AMAT in a buyable position using the 200-dma as a tight selling guide. AMAT reported earnings last week and has moved slightly higher since as it clears resistance along the 200-dma. So far, this looks constructive, and AMAT’s cousin KLA-Tencor (KLAC), not shown, confirms this by the look of its own chart, which you can check on your own.

 

 

Qualcomm (QCOM) has also suffered from an ability to clear resistance at its own 200-dma, but it has been consolidating throughout May without violating its 20-dema. One down-big-on-volume break for one day last week was just the proverbial DBOV=Buy Signal.

Volume dried up to -53.4% below average on Friday, so I’m inclined to test this pullback on the long side here. The 20-dema, of course, then becomes your selling guide.

 

 

Here’s Micron Technology (MU), another one of the big-stock semiconductors, dipping into its 50-dma as volume dries up sharply. In my view, we are approaching a critical juncture for the semiconductors. All of the big-stock semi names have been consolidating for some time now, nearly two months in MU’s case.

This pullback puts it in a buyable position, in my view, using the 50-dma as a tight selling guide.

 

 

If the general market is going to go higher, I’m looking for some rotation into areas that have been percolating for some time, and the semis are one area that catches my eye. A lot of these patterns also look like they could be right shoulders in potential head & shoulders formations, but so far remain unresolved.

However, Intel’s (INTC) range breakout on a pocket pivot volume signature may offer a clue as to where the group is headed. Technically, this is buyable using the 10-dma or 20-dema as a selling guide, and if it holds up it may be a harbinger for the group in general.

 

 

Therefore, I see the group as being a pivotal area of the market in that a continued market rally may be dependent on these stocks coming to life in a significant way. That’s one real possibility. The other, of course, is that they all act like right shoulder roll-overs in H&S formations and take the market lower, and breaches of near-term support as outlined above would be your first clue.

So, it is still necessary to consider the situation with the semis as having a 360-degree character. But I tend to think that how the semiconductors resolve from here will have a definite influence on the general market action going forward.

In the cloud space some of my favored names like Alteryx (AYX), CrowdStrike (CRWD), and DocuSign (DOCU) remain well-extended on the upside, while ZScaler (ZS) will be one to watch this week when it reports earnings Thursday May 28th.

RingCentral (RNG) is in the sweet spot here as it pulls right into the 20-dema on a voodoo volume signature. It’s also testing the top of its prior base, and one can go long here while using the 20-dema as a selling guide. Keep in mind that a breach of the 20-dema would potentially trigger the stock as a short-sale based on a typical breakout-failure type of set-up.

That set-up would of course be a later-stage failed-base (LSFB) short-sale set-up. For now, RNG’s pullback to the breakout point on light volume looks constructive. So unless further evidence triggers otherwise, it is a long right here, right now.

 

 

Slack Technologies (WORK) is edging higher following Wednesday’s low-volume re-breakout. It continues to run into resistance along the $32 price zone. It has been possible to buy shares along the 10-dma, as discussed in Wednesday’s report, but moves off the line have run into steady resistance whenever a 32-handle is on the price.

Initially, I might look to short this rally around the $32 area, where the stock has admittedly been soft. Bottom line: If looking to buy WORK shares, then the most reasonable spot would be a pullback to the 20-dema. Otherwise, a second breakout failure may be in the works. WORK is expected to report earnings on June 8th.

 

 

Ping Identity Holdings (PING) remains buyable on pullbacks to the 20-dema, as it was again on Thursday and Friday. Continue to watch for such pullbacks as entry opportunities with the idea of using the 20-dema as your selling guide.

 

 

Zoom Telecommunications (ZM) is either on the verge of a breakout or a breakdown, as I see it. It’s been hovering around the prior highs after rallying up toward the $180 price area on very light volume for all of May. Nobody’s really buying it, but then nobody’s selling it either, at least not yet.

Perhaps the moment of truth arises as the stock meets up with the 10-dma, or rather the 10-dma meets up with the stock. In any case, ZM is in double-top land, but the 10-dma stands as near-term support and could support a breakout attempt. A breakdown, however, below the line might trigger this as a short-sale as the low-volume rally back up toward the $180 level looks vulnerable to at least a pullback from here.

 

 

Snap (SNAP) is holding support along the 10-dma where it can be considered buyable using the 20-dema as a maximum selling guide. That said, I prefer the more opportunistic approach of waiting for a pullback to the 20-dema.

 

 

Sleep Number Corp. (SNBR) is something of a snoozer as it tracks tight sideways for the past month. Volume continues to evaporate, and at this point things are looking pretty parched, so I’d be looking for a move to develop soon. It’s still buyable here along the 10-dma and 20-dema on pullbacks.

Overall, however, the retail sector is flat on its back, but some stocks have been able to make comebacks, surprisingly enough. The one danger is that retail sales remain soft throughout the year, but then that’s what stops are for.

 

 

I’ve blown-up the chart of Alpha Pro Tech (APT) to give a detailed, easy-to-see view of the current action. The typical voodoo pullback into the 50-dma is once again showing up after the stock’s significant one-day wonder move last week. If it is setting up for another move to the upside, this is how it’s going to do it, so APT can be viewed as being in a lower-risk entry spot using the 50-dma as a tight selling guide.

 

 

As for other Covid-19 stock plays, I will again review the group in this weekend’s GVR. There are some set-ups brewing in this area but remember that these stocks carry significant risk. “Cures” and vaccines for the virus can turn out to be big nothing burgers over time, and this can have a negative effect on the stock in question.

This was the case with Gilead Sciences’ (GILD) Remdesivir. After much hype that created several shortable rallies over the past two months, the drug has proven to be a nothing-burger as the stock fades further below its 50-dma.

Meanwhile, extreme hype over a vaccine study can put a stock into a climactic phase as was the case with Moderna (MRNA) this past week. I tweeted on Monday that the move up to 94, about 50% from the prior close, in pre-open trade looked shortable and it was as the stock then dropped all the way back to where it closed the Friday before, hitting 65.31 on Thursday.

The question in my mind is just how much money are these companies going to make off a vaccine, even assuming that they are successful in creating one in the first place? And therein lies the risk in viewing these as anything more than FOMO trades on the upside, and then short-sale targets once the FOMO and hype has run its course.

That was certainly the case with MRNA this past week. The initial study cited in an interview on Monday morning with the CEO was painfully over-hyped. The results were extremely limited, and it will still be a long time before we see an effective vaccine from anybody.

In the meantime, however, I am happy to play the volatility in this area on either side, long or short, as appropriate. But this is not a sandbox for investors to play in as the volatility and news-risk is extremely high, and the primary reasons why I have limited my discussions of the Covid-19 “group” to the GVR.

 

 

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.

In essence, the index action looks constructive, so one cannot fault the rally on that basis. However, I’m still finding that most of my best ideas have become quite extended on the upside, resulting in a much less target-rich environment on the long side. That said, the short side is as of yet nowhere near target-rich either. As Bill O’Neil used to say to me, the market can reach a point where it can become a bit like “trying to squeeze blood from a turnip.”

If the rally is going to continue, then I want to see some rotation into other more-dormant areas of the market. Semiconductors are one such area, and we can watch this group closely for any opportunities and set-ups that may arise, and I’ll discuss this in more detail in the weekend GVR. While I’m starting to see some potential Ugly Duckling types of set-ups show up in semis, the action is far from clear, and they could all simply fail.

Meanwhile, retail investors have been piling into the market as the anecdotal evidence of Millennials seeing the March pullback as a “generational buying moment” and individuals using their stimulus checks to trade stocks as WFH becomes TFH (trade from home) begins to build.

Small-lot option trading is going through the roof, and retail investment brokerages are seeing a massive surge in new accounts and trading activity. Chronic gamblers, now barred from casinos during the lockdown, have turned to stocks to placate their need.

All of this reminds me of early 2000, but with the Fed’s balance sheet exceeding $7 trillion for the first time ever this week, the amount of liquidity out there is insane. It creates a significant wild card against a backdrop for stocks that has never been seen before, and thus makes market forecasters’ jobs difficult. Market history is no guide when the market simply continues to make history.

All of this brings us back full circle to the only sane way to handle all the insanity. Just focus on the set-ups, and pick your spots based on the ability to set the most optimal selling guides as tight risk-management must remain a key consideration. These remain fascinating, if not outright bizarre, times, and I would not be surprised if this remains the case for some time, so stay alert.

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.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.