The Gilmo Report

May 27, 2020

May 27, 2020 7:16 pm ET

The market has been showing some interesting divergence here as the indexes push back toward all-time highs. The NASDAQ Composite Index and the NASDAQ 100 Index have slowed their upside paces while the NYSE-based indexes have acted relatively better. Both NASDAQ indexes sold off yesterday with the NASDAQ 100 getting hit with a big-volume reversal off the highs.

Today the NASDAQ indexes both headed lower early in the day as the Dow and S&P 500 headed higher, but both finally found their feet and closed higher on the day. Now that all the dust has settled, the chart shows that NASDAQ simply bounced off its 10-dma today on strong volume, although slightly less than yesterday’s. The zombie-walk continues.

 

 

Meanwhile, the Dow and S&P 500 Indexes have continued to rally over the past two days as beaten-down industrials like Caterpillar (CAT) and Boeing (BA) have rallied. This has helped push the S&P 500 Index back above its 200-dma on higher volume, a bullish near-term development. The 200-dma now serves as a ready reference for support.

 

 

Over the weekend I made a case for the idea that if the current market rally were to continue, the semiconductors might easily emerge as a new area of leadership for the market. This was based on the idea that they have lagged since the March lows and could also serve as alternative-currency names given the long-term established businesses of the big-stock semiconductor names.

That theory looked to be playing out yesterday morning as semiconductors across the board gapped higher. This, unfortunately, quickly put them out of buying range, but the oddity was that in several cases these gap-up moves played out as shortable gap-ups. I noted this tepid action in a blog post yesterday after the close.

Today, things again looked bleak for the semiconductors’ potential reemergence until Micron Technology (MU) came out with strong forward guidance ahead of its expected June 25th earnings report. That lit a fire under the group as the Ugly Duckling came galloping to the rescue.

Most of these semi names were pulling into deep support, like MU, before turning on the news. MU posted a big-volume pocket pivot as it cleared the 200-dma. This puts it in a buyable position using the 200-dma as a tight selling guide.

 

 

Applied Materials (AMAT) also recovered on the MU news, bouncing smartly off its 20-dema and pushing back above the 200-dma. This puts AMAT in a buyable position using the 200-dma as a tight selling guide.

 

 

Advanced Micro Devices (AMD) gapped up with the group yesterday but immediately turned tail and slashed below its 20-dema on higher selling volume. That triggered the stock as a short-sale entry at that point, and it continued lower today as it blew through the 50-dma this morning.

However, the stock bottomed early in the day and once the MU news came out it gained a head of steam to close near its intraday highs in a long hammer formation. It touched the 49.09 low of May 1st and then proceeded to rally back up through the 50-dma (a moving average undercut & rally) and then through the 51.30 low of May 13th.

That triggered the second U&R, this time a simple price U&R using the 51.30 low as your selling guide at that point. From here, the stock is buyable using the 51.30 level as a tight selling guide, or one can look for any retest of the 51.30 level as a lower-risk entry.

 

 

Qualcomm (QCOM) gapped up to its 200-dma and also turned tail yesterday, closing nicely in the red and then continued lower as it broke below its 20-dema today. However, it also bottomed intraday and began to turn, gathering momentum on the MU news a little later in the day.

This move can be treated as a moving average undercut & rally (MAU&R) at the 20-dema, using the line as your selling guide.

 

 

Despite today’s strength on the MU news, what you might notice about all of the semiconductors discussed above is that they are all still stuck within price ranges extending back to mid-April. While the intraday bottoming and turning action to the upside after the MU news looks constructive, keep in mind that it did come on news.

For that reason, make sure you know where your out points are on any of these, and remain alert for any potential changes. The semiconductors were looking very weak early in the day today, and whether this is due to a more substantial underlying condition that was temporarily overcome by the MU news today remains to be seen.

They remain a key group to watch here. As I wrote over the weekend, “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.”

Nvidia (NVDA) was also knocked down to its 20-dema today on heavy volume. But it turned with the group and ended up well off its intraday lows and the 20-dema. Bottom line: If you wanted to own this stock, then the place to buy it was at the 20-dema, so you had to be paying attention.

Watch for constructive retests of the 20-dema from here as lower-risk entries. At the same time, be cognizant that a break below the 20-dema could trigger NVDA as a late-stage, failed-base (LSFB), short-sale set-up, IF that were to occur. It briefly looked like that might be the case today early before the stock found support and rallied smartly off the lows.

 

 

Clouds started weakening yesterday, and I discussed this, and the weak semiconductor move in a blog post yesterday afternoon as potential clues that this market was perhaps not going to sustain the current rally. Today, the clouds cut loose to the downside with many breaking below their 10-dmas and then their 20-demas before recovering off their lows.

The group chart below of some of my favored cloud names, Alteryx (AYX), CrowdStrike (CRWD), DocuSign (DOCU) and ZScaler (ZS) shows some very sharp and deep intraday breaks below the 20-dema in each case followed by a sharp recovery back above the 20-dema. That’s some volatile action, to be sure, and makes handling these at this juncture somewhat problematic.

While ZS is on Earnings Watch given that it is expected to report earnings tomorrow after the close, the other three may need to set up along their 20-demas again if lower-risk entry points are to be determined. Meanwhile, I’d watch for weak rallies into the 10-dmas in any of them as potential short-sale entries now that they are showing signs of cracking.

 

 

RingCentral (RNG) may be a late-stage, failed-base (LSFB), short-sale set-up in progress, but that is unclear right now as the stock bounced off its 50-dma today. It failed to hold the 20-dema yesterday as it reversed below the line on higher volume. Today it broke lower but found support near its 50-dma and is now rallying back up into the 20-dema.

This opens up the possibility of playing it as an LSFB and looking to short it at the 20-dema which coincides with the prior base breakout point. If it can regain the 20-dema, however, it might attempt a re-breakout within the context of a continuing market rally.

 

 

Slack Technologies (WORK) continues to hang in there. It again found support along the 20-dema as volume declined today. For now, this looks mostly like a long on pullbacks to the 20-dema. Meanwhile, a breach of the 20-dema would have bearish consequences as a possible failed-base type of situation.

WORK may continue to chop around, however, for the next couple of weeks.

That’s because the company is expected to report earnings on June 8th.

 

 

Zoom Telecommunications’ (ZM) low-volume rally in May finally ran in to trouble yesterday as it busted the 10-dma early in the day, triggering as a short-sale target at that point. This was a 360-degree situation over the weekend, and the bear side was discussed as follows, “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.”

The stock then continued lower today before finding support near the 50-dma on higher volume. The intraday rebound took ZM right back up into its 20-dema, which sets it up first as a short-sale entry using the line as a tight covering guide. If it can retake the 20-dema on the upside, then watch for a possible MAU&R long entry to set-up.

 

 

The Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB), and Microsoft (MSFT) all were hit with selling early today before rebounding with the NASDAQ Composite. These are my notes on each:

Apple (AAPL) is holding tight along its 10-dma which puts it in a lower-risk entry spot using the line as a tight selling guide.

Amazon.com (AMZN) pulled a U&R through the 2337.80 low of May 13th, and a MAU&R at the 20-dema. It’s extended from the U&R, but within range of the MAU&R using the 20-dema as a tight selling guide.

Alphabet (GOOG) held support at its 10-dma today, which keeps it in a lower-risk entry position using the 10-dma as a selling guide.

Facebook (FB) found support at its 10-dema on a deep break early in the day and rebounded to close well off the intraday lows. In this position, however, I would prefer the opportunistic approach of looking for pullbacks to the 20-dema as better, lower-risk entries if I can get ‘em.

Microsoft (MSFT) posted a five-day pocket pivot at its 20-dema after shaking out through the line and closing back above it. This puts it in a MAU&R long entry position using the 20-dema as a tight selling guide.

 

 

Netflix (NFLX) continued its slide over the past two days before bouncing off the 50-dma today on a pocket pivot volume signature. This, therefore, qualifies as a supporting pocket pivot at the 50-dma. However, I would only look to buy shares as close to the 50-dma as possible.

Of course, NFLX was shortable yesterday at the 20-dema, per my comments over the weekend: “…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 [stay-at-home] appeal loses traction.”

 

 

Tesla (TSLA) posted its second five-day pocket pivot in four trading days today as it rebounded off its 20-dema and closed above its 10-dma. If it won’t bust the 20-dema, it isn’t a Punchbowl of Death (POD) short-sale set-up. For now, it looks more like it should be treated as a long here using the 20-dema as a tight selling guide.

On the flip-side, if TSLA does eventually break below the 20-dema in decisive fashion, it may evolve into a POD short-sale set-up. For now, however, the evidence to support treating it as a short right here isn’t there, end of story.

 

 

Snap (SNAP) is another one of those stocks losing its luster as a SAH or stay-at-home stock. It continued moving lower today as selling volume picked up, closing one cent below its 20-dema. In this position I’m watching for two possible set-ups.

The first would be an immediate move back above the 20-dema, triggering a moving average undercut & rally (MAU&R) long entry. The second would be a move below the prior 16.42, and then a rally back above that would trigger a U&R long entry. This may also coincide with a test of the 200-dma.

 

 

Sleep Number Corp. (SNBR) continues to track along its 10-dma and 20-dema. It gapped higher yesterday but churned around in a very small price range all day before posting its highest close since the March bottom. Today it got caught in the spin-cycle but found support at the 10-dma.

SNBR therefore remains buyable on pullbacks to the 10-dma/20-dema confluence. Some day it may even have a significant upside price move, but so far it is still tracking time.

 

 

Covid-19 related names are losing their appeal fast, and this includes mask-maker Alpha Pro Tech (APT), not shown, which is now below its 50-dma. Other hot-shot vaccine-plays like Moderna (MRNA) are getting kicked around. MRNA today finally found some deep support at its 50-dma, but not before plummeting nearly 50% from its peak of only seven trading days ago.

This illustrates quite nicely the danger inherent in trading these types of FOMO stocks. They collapse as quickly as they rise, and the idea of actually investing in one can be disastrous. They are trading vehicles ONLY, and in both directions, as MRNA shows.

I tweeted in the pre-open two Mondays ago that MRNA was likely a short into the news-hype gap move it had going on that morning, trading as high as $94 in pre-open trade. Nice work if you can get it.

 

 

Gold futures have been testing the $1700 level and this has brought the Sprott Physical Gold Trust (PHYS) down below its 20-dema. Optimally, I’d like to see a pullback to the 50-dma as an opportunistic entry, but that may not happen. Given that it is back below the 20-dema, I look for any pullbacks to the 50-dma as especially attractive, opportunistic entries.

 

 

The Sprott Physical Silver Trust (PSLV) held support at the 200-dma again today but note that it found support at the rapidly rising 10-dma as well. As I wrote over the weekend, given silver’s inherent volatility, do not be surprised if it moves a little further below the 200-dma to test one of the shorter moving averages.

It remains buyable here using the 20-dema as a maximum selling guide. In general, however, maintain an opportunistic approach with both precious metals. Pullbacks are the preferred entries, and often it is the deeper pullbacks that are the better ones.

 

 

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.

Today’s trade was characterized by deep sell-offs in many leaders early in the day followed by extremely sharp rebounds. In some cases, as with certain semiconductors, the rebounds took the stocks back into positive price territory for the day. I found some very profitable success on the short side today hitting the early rally and then covering on the moves down to support once things turned on the 620 chart.

I have to say that if I did not maintain discipline and follow the signals by 620 charts were giving me off the lows as my short-sale targets sold down into support, I might have had a very bad day. While the short side was very profitable within the first 90 minutes or so of the day, it ended relatively quickly as stocks ran back to the upside.

Early in the day, I began to think that we might see a big down day for the market given the way things were breaking so rapidly to the downside. But this market loves to fool traders, which is why using a tool like a 620-chart is critical for survival. Western Digital Corp. (WDC) is a stock I came in long over the weekend and then flipped to the short side this morning at the open.

The five-minute 620-chart below shows the bearish MACD cross right after the open. That was a short-sale signal at around 46, and the stock then dropped straight down to a low of 43.16 in the first 80 minutes of the trading day. A bullish MACD cross served as my cover signal, and the stock kept going higher from there, catching some momentum on the MU news at around 10:30 a.m. my time.

At that point, the stock became an intraday buy, and WDC then went on to post a pocket pivot along its 10-dma and 20-dema today. This illustrates the capricious nature of this market on an intraday basis, and one must be very alert to changes and signals as they occur. An undisciplined approach can be disastrous if you let things sneak up on you.

 

 

Once again, the indexes are zombie-walking their way to higher highs as the S&P moves above its 200-dma for the first time since early March. In terms of optimal long set-ups, I can’t say this is necessarily a target-rich environment right here, right now.

However, I am content to see what the semiconductors can do here, as I think they provide enough fodder for the long side if this market rally continues. If not, then perhaps they will lead us back toward the short side. But for now, as with anything else in this market, just play them as they lie, and be hyper-alert to the set-ups, even if they emerge very quickly in real-time as we saw today.

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.