The Gilmo Report

May 30, 2021

May 30, 2021 12:21 am ET

The venerable investment firm Goldman Sachs (GS), which others may pejoratively refer to as being actually more of a bankster, released small-lot trading data this week indicating that retail investors had come flying back into the market. Previously, this smart money area of the market (yes, I’m being facetious) was nowhere to be found, and their absence perhaps showed up in the severe breakdowns we’ve seen in previously hot, FOMO names.

The question is, are they back to stay? We can argue over the source of this sudden resurgence in retail investor participation, but things like stimmie checks always come to mind. With the economy rapidly re-opening, perhaps some investment-minded individuals also returning to work might feel they have the extra cash to pick up some “cheap” stocks among their beloved FOMO names, many of which have perked up off of deep lows over the past two weeks. Maybe, maybe not.

What I do know for sure is that two weekends ago, in my May 16th video report, I for some strange reason felt compelled to devote my video time to reviewing the current situation with these prior FOMO names which have been beaten to a mushy pulp. I’ve said many times before that my biggest weakness after 30-plus years in this business is that I too often ignore my instincts, but in this case I decided to act on something that was stirring somewhere in my mind-body complex.

In the book, The Hour Between Dog and Wolf – How Risk Taking Transforms Us Body and Mind, by John Coates (Penguin Books, 2012), the author discusses the physiological aspects of trading and investing. As a result, he concludes that we assess incoming information and the appropriate responses to it not only with our brains, but also with our bodies. In fact, research shows that our body is often acting ahead of our brains as it processes information much faster, at least in terms of relative milliseconds.

I’ve experienced the phenomenon of investment instinct hundreds of times over the past 30-odd years, but because I can never pin it to something emanating from the cognitive mind, I have tended to distrust it, much to my chagrin at times. My view after reading this book is that instinct is what we might consider the point where the body, in combination with the subconscious mind which interacts 24/7 behinds the scenes with the body. I now think that had I kept a log of these instinct-thoughts, how they eventually panned out, and what my response was (including ignoring them), I might have one heck of a book to write.

In this case, I went with my instincts, as there were also many factors percolating on the charts of these names as they lingered in the sweltering humidity of the Ugly Duckling Swamp.  And indeed, many of those names have offered some nice swing-trading opportunities over the past two weeks that seemed to exist in their own little world, oblivious to the hot mess that has typified the current market environment.

Non-premium members can view the video report on YouTube at https://youtu.be/3W1LC-TU8Ck as a courtesy teaser, although it is obviously quite dated at this point. It does, however, give a nice picture of what my video reports are all about, as well as how I use HGS Investor Software to find Ugly Duckling ideas that other systems are not necessarily able to do, at least not as easily or uniquely as HGS Investor as I use it.

Some of the best performers among the former FOMO names I discussed in that May 16th video report, Three D Systems (DDD), Palantir (PLTR), Snowflake (SNOW) and Virgin Galactic (SPCE) have all had decent moves off their lows of two weeks ago. On Friday, three of the four reversed off the intraday highs in ugly fashion, playing out as short-sale targets at that point. How well they can hold up after becoming extended off the lows will be something to watch closely as it will tell us whether this FOMO bounce is destined to be short-lived.

SNOW also reversed on Friday, showing zero follow-through to Thursday’s big-volume pocket pivot and outside reversal to the upside following earnings. Since the Thursday pocket pivot occurred at the 10-dma, 20-dema, and 50-dma, then the highest of the three, the 10-day line, would be your reference for near-term support on any pullbacks from Thursday’s big pocket pivot. If SNOW breaks back below the three moving averages, then it would trigger as a short-sale entry, which would not be all that surprising given that one-day wonder moves are typical for this market.

 

 

Chinese electric vehicle names were also discussed as Ugly Duckling FOMO candidates, and they have also jacked off their lows. Li Auto (LI), NIO (NIO), Niu Technologies (NIU) and Xpeng (XPEV) have all been in oversold Ugly Duckling rally mode over the past two weeks but may be running into near-term resistance along their 50-day and 200-day moving averages.

LI has rallied as far as its 200-day moving average but reversed there on Friday, thus was actually shortable near the line. NIO has managed to push just beyond its 50-day and 200-day moving averages. It could be watched for a second long set-up along the moving averages or a failure back below that would trigger a short-sale entry.

NIU, the smart e-scooter maker, ran into resistance at its 50-day line on Friday, thus was shortable at the line which would then serve as a covering guide. Finally, XPEV has cleared its 50-day line, but just barely, and on Friday stalled above the line. Watch for it to potentially set up as a long along the 50-day line or if it fails back below the line it could then set up as a short-sale entry trigger if that occurred.

 

 

While Bitcoin has been floundering below its 200-day moving average after getting cut in half in just about two weeks’ time, the Bitcoin mining names have been attempting to rally from deeply oversold positions. Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT) are both former FOMO names and Bitcoin miners that finally got up off their 200-day lines and rallied over the past two weeks.

Buying them off the 200-day line was perhaps not the most difficult trade to make since the 200-dma would then serve as a selling guide. As they push up into the 20-day exponential moving averages in identical moves, they may become shortable up here if we see Bitcoin break last week’s lows just below $30,000. Something to keep an eye on.

 

 

We might also keep an eye on crypto-banking concern Silvergate Capital (SI) that has seen its fortunes rise and fall with Bitcoin and the Bitcoin miners. In this case you can see how the sloppy undercut & rally of three weeks ago has resulted in a rally right up near the 50-day moving average. That may bring it into shortable range, and as with MARA and RIOT, I would watch to see how these play out from here.

What is interesting with these Bitcoin-related names is that they’ve been rallying as Bitcoin and Ethereum have been getting destroyed. Thus, I tend to view their recent bounces are more self-contained reaction rallies that may set up short-sale entries as the rallies potentially fail in concert with a break to lower lows in the more popular crypto-currencies. If the crypto-currencies are able to recover, then these initial oversold rallies could develop into something more sustaining, so this is a fluid theme to focus on currently, in my view.

 

 

We’ve also seen other electric-vehicle related names charging off their lows this week, like Arcimoto (FUV) and notorious electric truck maker Nikola (NKLA). However, both stocks reversed off their highs on Friday on heavy volume. FUV was a textbook short-sale entry at the 50-dma where it reversed to close near the lows of the day. NKLA reversed on heavy selling Friday after a big upside move on Thursday as sellers took advantage of the move to unload shares.

Someone tweeted on my Twitter page that NKLA would go much higher as a result of a short-squeeze, and while there is about 20% of the float sold short as of mid-May, it’s obvious that it wasn’t the shorts scrambling to cover on Friday, it was the longs scrambling to sell into the move. The bottom line is that these two EV names are junk, plain and simple. The vehicles they make, they don’t sell many of, if any at all, and both companies are just big EV money losers.

And so, while one can catch some nice swing-trades off the lows of these patterns as they start to become mired in the Ugly Duckling Swamp, its not clear to me that they don’t just become short-sale targets into the rallies, as many did on Friday. Certainly, FUV and NKLA did, and for the most part the FOMO moves that I discussed two weeks ago have played out, at least in the near-term.

 

 

The bounce in the NASDAQ Composite Index over the past couple of weeks still hasn’t freed it from the confines of the wide, choppy price range it has been stuck in since February. On Friday, the index rallied early in the day but stalled by the close to end up only 0.12% on lighter volume. This is still uninspiring, but for now the 50-day moving averages remains as near-term support just below current levels.

 

 

The S&P 500 Index continues to bump up against its all-time highs around the 4200 level. It closed the week at 4204.11, so remains at near-term price resistance where it has stalled and churned two days in a row. Thursday’s stall & churn occurred on heavy volume due to MSCI Index rebalancing that day, while Friday’s occurred on volume that was about average, but higher than the volume seen on Monday through Wednesday.

 

 

The Ten-Year Treasury Yield ended the week at 1.581%, still in consolidation territory. The dollar, meanwhile, remains in a two-month downtrend, and overall, the backdrop has remained favorable for precious metals. The Sprott Physical Gold Trust (PHYS) ended the week with another up day on what was its seventh up day in a row as gold futures finished up Friday at $1906.30/oz. Needless to say, all that glitters is gold, and it remains extended all around.

 

 

Silver does, however, remain in a very buyable position as the Sprott Physical Silver Trust (PSLV) is holding very tight along its 10-dma with volume remaining low. The 20-dema serves as maximum near-term support, and I would certainly welcome any further pullbacks to the 20-day line as opportunistic entries. However, the PSLV looks like it is revving up to break out of this cup-with-handle it has been forming since the end of February.

 

 

As the yellow metal pushes higher, the gold-related names continue to track tight sideways. Agnico Eagle Mines (AEM) and Kirkland Lakes Gold (KL), Franco-Nevada (FNV) and Newmont Corp. (NEM) all correlate very closely as their patterns appear mostly identical. AEM did not post a pocket pivot on Friday because it closed below its 10-day moving average, so did not qualify.

Nevertheless, the action in AEM and the others looks quite constructive, and it may be a matter of looking for an opportunistic pullback to buy into. Otherwise, the longer these keep moving tight sideways, the more likely a breakout becomes. So choose your spots wisely if you’re looking to add to existing positions, as these continue to have the look of stocks setting up to move higher.

 

 

An interesting double-divergence is seen in the fact that while gold goes higher, gold stocks go sideways, yet as silver goes sideways silver miners trended higher this past week. Again, the opportunistic route of looking for pullbacks to near-term support is the best way to buy into these. We can see that First Majestic (AG) found support at its 20-dema on Thursday, while Coeur Mining (CDE) and MAG Silver (MAG) found support at their 10-day lines on the same day.

Thus, if one was watching these names closely on Thursday, buying opportunities at the 10-dma and 20-dema did occur. Gatos Silver (GATO), which up until mid-April was the big laggard in the group, is now the hot leader as it streaks to higher highs. Since clearing the 50-day line two weeks ago, it hasn’t so much as touched the 10-day line on the way up.

 

 

Semiconductors mostly held their ground into Friday after moving higher earlier in the week. Now Applied Materials (AMAT), KLA Corp. (KLAC) and Lam Research (LRCX) are at critical points in their patterns. Of course, KLAC, the weakest of the three, keeps running into shortable resistance at its 50-day line, while AMAT and LRCX are sitting up near prior price highs, which could play out as areas of overhead resistance.

AMAT and LRCX are stalling along their prior late-April highs at the $139 price area and the $649 price area, respectively. It is possible that this could play out as shortable price resistance, but we’ll have to see for sure this coming week. Both are also a little further below their early-April highs at the $145 and $669 price areas, respectively, so there are some variations possible with respect to how these play out, long and short.

 

 

The chip-makers, Advanced Micro Devices (AMD), Micron Technology (MU), Microchip Technology (MCHP), and Western Digital (WDC), have all continued to melt higher with AMD pushing through its 50-day line on Friday, most likely in sympathy to the move in Nvidia (NVDA). AMD’s move came on weak volume, so did not qualify as a pocket pivot, although one could treat it as a long entry using the 50-day line as a tight selling guide.

MU and MCHP have yet to reach near-term resistance, which for MU would be at the 50-day line and for MCHP at the prior late-April highs in the $160 to $164 price zone. WDC meanwhile is in re-breakout land after edging back above its prior breakout point of two weeks ago which can be tested on the long side using at least the 10-day line as a selling guide. Otherwise, any breakdown from here could also end up playing out as a short-sale entry trigger along the 10-day if WDC breaks below the line.

 

 

Qualcomm (QCOM) and Qorvo (QRVO) continue to act like shorts along resistance at their 200-day and 50-day moving averages, respectively. QCOM limped up to its 200-dma on Friday and reversed on what turned into a short-sale entry opportunity which remains the case if it opens just below the line on Tuesday. QRVO was meanwhile looking hot to trot on Thursday after posting a big-volume pocket pivot through the 50-day moving average.

However, this move was likely due to the MSCI Index rebalancing, as QRVO immediately stalled and closed below the 50-day line on Friday. Again, an example of big-volume strength one day that goes nowhere the next. Watch this closely as QRVO could simply play out as a short entry here along the 50-day line.

 

 

The strongest semiconductor name is Nvidia (NVDA), which has apparently been selling a lot of crypto-currency mining chips. It reported a strong number on Wednesday after the close but sold off on heavy volume Thursday. That turned out to be a big head fake and the stock reversed on Friday to break out of a steep V-shaped cup on Friday.

I don’t care much for buying breakouts, particularly when they come straight up off the lows of deep V-shaped patterns. But, if you’re a sucker for a good breakout to new highs, here’s one for you as NVDA is still technically within buying range of the breakout.

 

 

Apple (AAPL) and Amazon.com (AMZN) appear to correlate strongly as both flop around their 50-day moving averages. Both in fact triggered as short-sale entries at the 50-day lines on Thursday, with both now testing their 200-day moving averages. Breaks below the 200-day line in either would trigger secondary short-sale entries from here.

 

 

Facebook (FB) and Alphabet (GOOG) also correlate very closely on their charts, but in a way that is different from AAPL and AMZN. Both stocks are in double-top formations where we saw FB fail on a breakout attempt while GOOG reversed hard on Thursday at double-top resistance on heavy selling volume. I think you watch these for possible double-top, short-sale set-ups here as they are quite extended after coming straight up from the bottom of their patterns.

 

 

Microsoft (MSFT) is perhaps not doing as badly as AAPL and AMZN, but not as well as FB or GOOG as it splits the difference between its April highs and its May lows. It did regain the 50-day line on Monday, but that move did not carry any farther on Tuesday and Wednesday as it reversed at price resistance along the prior early-May highs.

Friday’s rally attempt ended up reversing with MSFT closing near the intraday lows as buyers lost interest. We can watch to see how the stock acts as it approaches the 20-dema just below and the 50-dma just below that. A breach of the two lines could trigger a short-sale entry if it occurs, so can be watched for.

 

 

Tesla (TSLA) continues to trudge higher as it is now 6% above the U&R it posted last week at the 591.01 low of late March. Think of a $59 stock getting up to $62.50 and you begin to see how insignificant the move is within the overall context of the daily chart. TSLA topped way back in early January in a climactic move and it’s all been more or less downhill since then.

Certainly, the stock has been oversold enough along the 200-day moving average to muster up a reaction bounce off the lows, but in this position I’m watching for a possible melt-up into the 50-day line as a potentially optimal short-sale entry. Otherwise, if it fails to hold the 20-dema where it sits right now, then a lower short-sale entry trigger could materialize right here.

 

 

Over in cloud land, I’m watching this bottom-fishing, buyable gap-up (BFBGU) in ZScaler (ZS) that so far is showing zero thrust beyond Wednesday’s post-earnings move. That ran into resistance at the prior April highs along the $200 price level, and the stock is simply backing and filling following Wednesday’s BFBGU. I’ve been stalking this as a short on approaches toward the $200 level, but the other things to keep in mind is that it is still a live BGU long entry using the Wednesday low at 191.50 as a selling guide.

This is therefore a very fluid situation, but I would note that ZS’ PE remains elevated at 413 times 2021 earnings estimates. If interest rates remain at elevated levels, can this continue to expand its PE and move higher? An interesting proposition, which is why I treat this as a two-side situation for now as price resistance has held even as the Wednesday BGU remains in force.

 

 

DataDog (DDOG) is another high PE-expansion cloud name running into resistance at both prior price highs and its 200-day moving average. I discussed it as a short at the line (I erroneously referred to the 200-dma as the 50-dma) in my Wednesday report, and that remained the case on another move up to the line on Friday. DDOG dutifully reversed at the line to close negative and remains a short-sale target as close to the 200-dma as possible while using it as a covering guide.

 

 

Salesforce.com (CRM) reported earnings after the close on Thursday and gapped up on Friday in a BFBGU type of move. It ended the day looking like a shooting star as it closed near the intraday lows. Technically, this remains a BGU using the 237.83 intraday low of Friday as a selling guide. Otherwise, there are some price highs nearby that could come into play as short-sale trigger points if this BGU fails, which may very well turn out to be the case.

 

 

Industrial metals and fertilizer names remain somewhat sloppy. All four of the industrial metals in the group chart below, Alcoa (AA), Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX) and U.S. Steel (X), were struggling at support on Wednesday, and I suggested that they could be tested on the long side using the 20-dema on FCX and the 50-dma on the other three as tight selling guides.

As it turned out, all three names gapped up on Thursday and were immediately out of buying range. It was, however, possible to chase them once they cleared their 10-dma or 20-dema and then use that as a selling guide. Of the four, FCX looks to me to be in the most favorable long entry position using the 10-day line as a selling guide.

 

 

Fertilizers are attempting to follow through on Wednesday’s bounces off the lows of their chart formations, but the action is unclear for the most part. CF Industries (CF) is in a better entry position as it snuggles into its 10-day line while Mosaic (MOS) is slightly extended. The leader, in my view, is Nutrien (NTR) which posted a new closing high on very strong volume Friday.

This move came on the heels of Wednesday’s big-volume pocket pivot move off the 20-day exponential moving average. The 10-day line would not be your best reference for buyable support on any pullback from here. Overall, the action in the fertilizer names is rather sloppy, but it appears that opportunistic entries along the lows of their patterns at near-term support along the 10-dma or 20-dema have been the way to go lately, and that likely will remain the case for now.

 

 

Caterpillar (CAT) posted a pocket pivot at its 10-day moving average on Thursday and held the line on Friday as volume declined. This puts it in a long entry position here using the 10-day line as a selling guide.

 

 

Dicks Sporting Goods (DKS) has been unable to clear the $100 Century Mark following Wednesday’s strong buyable gap-up move after earnings. The gap-up move was about 15%, so the stock either needs to consolidate briefly here or the $100 level becomes shortable resistance if it heads south. DKS has one thing going for it, which is that it currently sells at 12.2 times 2022 earnings of $7.97 a share, so does not suffer from any extreme PE-expansions.

This remains a fluid situation, as a decisive move up through $100 would trigger a long entry based on Jesse Livermore’s Century Mark Rule on the long side. Continued reversal at the $100 level, however, could just as easily trigger it as a short entry per Livermore’s same rule for the short side.

 

 

Perhaps DKS will play out in a manner similar to retail apparel player Crocs (CROX), known for their unique shoes. CROX also gapped up after earnings back in late April and made a run for the $100 Century Mark for the first time in its history. The move ran into resistance along the $100 level for several days before the stock cleared it and move about 10% higher before moving back into a consolidation phase.

Support along the 20-dema has held and has also offered long entry opportunities for moves back up toward the $110 level, but no substantial upside thrust has been generated since. It is again testing the 20-dem and the Century Mark here where it is initially buyable using the 20-dema as a selling guide. However, if it fails at the 20-dema it would trigger as a short-sale entry target at that point.

 

 

So, FOMO names have given swing traders some nice juice over the past couple of weeks, but where this goes nobody really knows, as the rest of the market mostly remains in a choppy state. In my view, there remains little for trend-following positional players to sink their teeth into, so the song essentially remains the same – play the swing-trading set-ups as they occur in real-time if you are oriented this way, otherwise sit tight. There is no need to force things, because when there isn’t much to do on the trend-following side, you simply don’t do much.

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.

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