The Gilmo Report

May 31, 2020

May 30, 2020 8:26 pm ET

The NASDAQ Composite Index ended a volatile week by posting a higher closing high on strong month-end volume Friday. The week saw big swings off the intraday highs and lows on Tuesday, Wednesday, and Thursday before the index found solid support at the 10-dma on the final trading day of the week.

 

 

The S&P 500 Index held support at its 200-day moving average on Friday as month-end volume spiked. Meanwhile, a press conference where President Trump railed on China for several minutes before walking off the podium created some interesting volatility on Friday. The indexes could have easily spun the other way, but the President did not announce additional tariffs on China.

This was taken as a positive news development, and the algos began buying robustly to produce a very bullish-looking close for the market. The action, while still capricious, confirms the news-dependency of this market, but the liquidity is there to drive strong upside when the news is considered benign. From an index point of view the action remains constructive.

 

 

Gold futures continued bouncing between the $1700 and $1750 an ounce price levels, keeping the Sprott Physical Gold Trust (PHYS) in a similar range. It spent the week shaking out below its 20-dema before regaining the line on Friday. This creates a moving average undercut & rally entry here using the 20-dema as a selling guide for shares bought at current prices.

 

 

Silver stole the show in May by staging a sharp upside move in the latter half of the month. That continued on Friday as the Sprott Physical Silver Trust (PSLV) posted a higher high on a pocket pivot volume signature. Because it was extended from the 10-dma, it does not qualify as a pocket pivot, but the action is constructive. Pullbacks to the 200-dma would remain your better, more opportunistic entries from here.

 

 

The Fantastic Five, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Facebook (FB), and Microsoft (MSFT) all continued to hold above their 10-dmas by week’s end. If the market rally is going to continue, then expect these names to continue right along with it. My notes on each:

Apple (AAPL) traded heavy month-end volume at its 10-dma but held the line on Friday. This keeps it in a lower-risk entry spot using the line as a tight selling guide.

Amazon.com (AMZN) closed just above its 10-dma which puts it in an entry position using the 10-dma as a tight selling guide. Alternatively, the opportunistic route for now seems to be waiting for pullbacks to the 20-dema as lower-risk entries.

Alphabet (GOOG) held support at its 10-dma all week long and looks buyable on pullbacks to the line from here.

Facebook (FB) is pulling into its 10-dma with volume declining, so this represents a lower-risk entry spot using the 10-dma as a tight selling guide.

Microsoft (MSFT) posted a pocket pivot on Friday thanks to higher month-end volume. Nevertheless, the pocket pivot can be taken on its face putting the stock in a long entry position using the 10-dma as a tight selling guide or the 20-dema as a wider selling guide.

 

 

Tesla (TSLA) posted a ten-day pocket pivot on Friday along its 10-dma, and this comes after two five-day pocket pivots along the line over the past six trading days. This puts the stock in a buyable position here using the 10-dma or 20-dema as your selling guides, depending on risk preference.

 

 

Netflix (NFLX) pulled in to retest Wednesday’s low and the 50-dma on Friday. Volume dried up nicely to -48% below average. The 50-dema is about 3.14% below where the stock closed on Friday, so one could buy shares here and use the 50-dma as a reasonable selling guide.

That said, we should also remain cognizant of the fact that a breach of the 50-dma could trigger NFLX as a short-sale entry at that point. That would likely need to occur in conjunction with a general market sell-off, however, so keep it in your bag of tricks.

 

 

Semiconductors looked strong on Wednesday but as I noted in my report of that day, most were rallying up into the highs of current price ranges that extend back to mid-April. Micron Technology (MU) was the culprit responsible for Wednesday’s turnaround in the group when it announced strong forward guidance, and it led the reversal on Thursday.

Thus, MU morphed into a short on Thursday near the open once it busted the 200-dma. On Friday, however, it pulled into and held the 10-dma as volume declined. This is still just stuck in the mud within a nearly two-month price range. If Wednesday’s volume buying was meaningful, however, then watch for another attempt to clear the 200-dma if the general market keeps rallying.

 

 

Not all semiconductors look that bad, however, despite the up-and-down volatility seen in the middle of the week. Applied Materials (AMAT) just pulled into its 200-dma and held the line again on Friday where it posted a five-day pocket pivot. This remains in a buyable position using the 200-dma as a tight selling guide.

 

 

Western Digital (WDC) has tucked into its 10-dma and 20-dema, where it posted a five-day pocket pivot on Friday. This looks buyable here along the two short moving averages while using them or the 50-dma as selling guides. WDC illustrates quite nicely the basic idea that you do not chase strength in these names.

It also shows that buying pullbacks into logical areas of support or on U&R set-ups is the best way to get into position for any potential breakouts going forward. I’ll have more to say about this in my weekend video report.

 

 

Advanced Micro Devices (AMD) reversed at its 20-dema yesterday, making for a decent short scalp. However, it held the 50-dma on Friday and rallied back above the 20-dema, where it ended the day. So far, both the U&R at the 50-dma and also through the prior 51.30 low have held.

Thus, I would look at any pullbacks from here closer to the 51.30 low and the 50-dma as your better long entry points. And while AMD closed just above the 20-dema on Friday, I still give more weight to the shakeout at the 50-dfma as a level of more reliable support on any pullbacks.

 

 

For the most part, if you chase strength in any semiconductor name, you’re likely to come away annoyed. The best way to buy any of these stocks is on weakness. Qualcomm (QCOM) illustrates this by morphing into a short on Thursday when it broke back below its 200-dma on increased selling volume.

That was good for a quick move down to the 20-dema where it found support and then rallied back above the 200-dma on Friday. That put the stock in a more buyable position, to be sure, but certainly did not look very appetizing at the time. Nevertheless, QCOM is once again top side of the 200-dma, but it has been the pullbacks to the 20-dema that have offered the better lower-risk entries.

 

 

Nvidia (NVDA) has regained its 10-dma after the big long-tailed supporting move at the 20-dema on Wednesday. This can be played as a moving average undercut & rally (MAU&R) at the 10-dma, using the line as a tight selling guide. There’s also the possibility of a retest of the 20-dema, and one can choose to take the more opportunistic route of waiting for this, should it occur.

 

 

It may be that the market doesn’t need the semiconductors at all to keep rallying. Cloud names continue to provide the power and upside thrust to help drive the market higher, and there is no evidence of a rotation out of clouds and into semiconductors.

CrowdStrike (CRWD) and DocuSign (DOCU) look like twins here as they shook out hard down below their 20-demas on Wednesday but reversed to close near their intraday highs. The Wednesday shakeouts led to higher highs on Friday as both stocks blasted to new highs on huge buying volume.

Needless to say, both stocks are quite extended at this point. They do, however, make the point that the best long entries can be found when stocks break for their 20-demas, just when they look their ugliest.

 

 

ZScaler (ZS) gave the group some impetus on Friday when it gapped up after reporting earnings Thursday evening. That played out as a buyable gap-up once the stock set an intraday low at 85.50 and turned higher from there. This thing is way extended now and would only be buyable on constructive retests of the 85.50 intraday low.

 

 

RingCentral (RNG) essentially shook out through its 20-dema earlier in the week and regained the line on Thursday, triggering a moving average undercut & rally (MAU&R) entry at the line. This was also a re-breakout move but is now extended. Watch for constructive retests of the 10-dma/20-dema confluence as lower-risk entries from here.

 

 

Slack Technologies (WORK) cleared the $35 level on Friday and is now quite extended from its recent breakout through the $30 price level. It had previously been buyable along the 20-dema. Earnings are expected on June 8th.

 

 

Not all clouds are extended, however. Zoom Telecommunications’ (ZM) broke out on Friday on a pocket pivot volume signature, which makes this buyable as a base breakout. The stock was buyable Thursday along the 20-dema as a MAU&R per my comments in Wednesday report: “If it can retake the 20-dema on the upside, then watch for a possible MAU&R long entry to set-up.

If looking to buy this now on an obvious breakout, I would use the 10-dma as my selling guide rather than a 7-8% stop-loss. Constructive pullbacks to the 10-dma could also offer lower-risk entries, which is always my preference.

 

 

Bill.com (BILL) had a huge move after earnings but has since drifted back to the top of its prior base. A lot of volume traded on Wednesday as it found support right at the prior breakout point. It is now back above the 20-dema so can be treated as a MAU&R long entry right here using the 20-dema as a tight selling guide.

 

 

Snap (SNAP) also played out as a MAU&R long set-up on Thursday when it regained the 20-dema. This was the first of two possible set-ups I discussed in my Wednesday report when I wrote, “The first would be an immediate move back above the 20-dema, triggering a moving average undercut & rally (MAU&R) long entry.”

That move on Thursday also played out as a pocket pivot at the 20-dema and then the 10-dma. This led to a pocket pivot breakout on Friday on strong volume. This is, therefore, a buyable breakout using the 10-dma as your selling guide, although for my money the MAU&R on Thursday was the more optimal and early entry.

 

 

Here comes Sleep Number Corp. (SNBR) right down to its 20-dema where it found support on Friday as volume dried up sharply. This puts it in a preferred lower-risk entry position using the 20-dema as your tight selling guide.

 

 

Enphase Energy (ENPH) has been discussed several times in my video report since it began setting up just below its 50-dma back in late April. That led to a pocket pivot at the 50-dma at that time and the stock has since broken out to new highs. Of course, as is the case with most breakouts, it failed, and the stock is now just below the prior new-high breakout point at 59.15.

ENPH closed Friday at 58.19, about 2% below the prior breakout point. It is currently holding support along the 20-dema which puts it in a lower-risk long entry position using the line as a tight selling guide. Even better, any pullback closer to the 20-dema, which is now at 55.56, would offer an even better entry if you can get it.

 

 

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.

Despite the volatility, I’m seeing a large number of stocks setting up in bases, and in most cases I look to buy near the lower regions of these patterns using various OWL set-ups. Certainly, if new groups are ready to participate in an ongoing QE-driven rally, it’s not hard to find some interesting candidates, and I will cover these names in greater detail in my weekend video report.

I marvel at the number of pundits who try ascribing the market rally to various “logical” reasons, from “institutional accumulation” (the data actually shows that professional investors like hedge funds have been selling the rally) to “hopes of a return to economic normalcy” (which isn’t likely to happen any time soon). I say dispense with all the deep-think baloney and understand that this market rally is about one thing and one thing only: QE to Infinity & Beyond.

But a rally is a rally, and the source of any rally is legitimate until it isn’t. If we wish to postulate a retest of the March lows, then we have to find a reason for the flow of QE to suddenly be diverted away from stocks. So far, that hasn’t happened.

Black Swans may still lurk out there, but the best way to guard against any trouble is to avoid buying strength and instead buy opportunistically on weakness. I cannot stress this concept enough. Buying high by chasing strength is often a good way to get your head ripped off when a sharp pullback ensues as we saw on Wednesday morning.

But that kind of volatility also creates opportunities if one knows what to look for and keeps the Ugly Duckling and the OWL close to their trading and investing heart. Just look at some of the bounces we saw off of logical but deeper support along the 20-dema and 50-dma on Wednesday in many stocks that populate my current long watch list.

As long as the rally continues, I believe we will see steady upside followed by occasional sell-offs that can have the look of the bottom dropping out. This is where your antennae should go up when looking for opportunistic long entries. At the same time, extended strength, often leading to double-top types of formations or rallies into price resistance, can produce tactical shorting opportunities.

On a practical level, I still find that individual stocks offer a variety of 360-degree opportunities. The key is in establishing a keen awareness of various areas of support and resistance on a chart and being ready to act opportunistically when the right conditions occur.

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 FB, ENPH, PHYS, and PSLV, though positions are subject to change at any time and without notice.