The Gilmo Report

November 15, 2020

November 15, 2020 12:23 am ET

The markets spent most of the week chopping around following Monday’s ugly reversal off the gap-up highs. Thursday the indexes posted distribution days as they rolled over from an initial upside move on higher volume and then rebounded on Friday as volume receded. The NASDAQ Composite Index is again approaching its highs and potential overhead price resistance as volume wanes.

 

 

Some will cite the action in the Russell 2000 Index as a bullish development for the market, but this is largely due to strong upside moves in a broad number of health care and financial names, the two largest industry groups in this major small-cap index. A Biden administration is considered favorable for health care stocks, while the steady rise in interest rates over the past few weeks has given a boost to financials.

 

 

The Russell 2000 is now correlating strongly to both the S&P 500 and Dow Indexes, as the group chart shows below. I’m using representative ETFs for the indexes, but we can see how these three indexes are holding in choppy ranges following Monday’s big reversal off the peak while the NASDAQ remains somewhat choppier. While the Russell is pushing higher, I don’t see any strong set-ups or thematic plays among names that are special solely for their status as small-caps.

 

 

As I’ve written many times, I often find that my 30 years of experience in the markets can become useless since this market does not always adhere to historical norms. Interpreting the action within a framework of what the market did in the past, before the massively distortive flood of QE is often a pointless exercise.

The only way to stay on track in this market is to watch the individual stock set-ups, with the idea that the set-ups will push you more to the long or short side in a more or less natural process. Sometimes, when the market is showing some sharp bifurcation, as it has this past week, one might also be working both the long and short sides of the market simultaneously. Sometimes this can be in the same stock on the same day when two-sided volatility warrants it.

Precious metals have stabilized and even rallied slightly after Monday’s drubbing. The SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) remain above recent lows, keeping prior U&R long entry set-ups in force despite the big break on Monday. The GLD closed Friday at 177.16 as it ran into resistance along the 10-dma and 20-dema but continues to hold above the September 24th low at 173.77, the October 7th low at 176.43, and the October 29th low of 174.83, thus the prior U&Rs along those lows remain in force.

 

 

The iShares Silver Trust (SLV) has run back up to its 50-day moving average, closing just below the line on Friday. As with the GLD, the key takeaway is that it remains above all of the key lows in its base, namely the 20.45 low of September 24th, the September 30th low of 21.53 in combination with the October 6th low at 21.62, and the October 29th low at 21.27. Friday’s 22.90 low keeps all the prior U&Rs through those lows in force.

 

 

The hottest place to play in this market independent of the index craziness has been the Chinese electric vehicle names which I first started discussing back in August when they were all trading in the ‘teens. I personally thought the action in these names had turned a frothy speculative color last week, but by Friday of this week things were downright bubbling. In addition, by Friday, the volatility proved to be just as shortable at the end as it was buyable at the beginning.

None of the Chinese EV auto-makers, LI, NIO, or XPEV, makes money (NIU make scooters and money too), nor are they expected to in the immediate future. But the thematics have been strong for this group as a frothy, speculative but very viable area of the market where, as we discovered this week, the volatility can cut both ways.

Xpeng (XPEV) reported earnings Thursday pre-open and gapped up, streaking 33.4% higher that day from an already extended position. It was playable at the open as a buyable gap-up after it opened at 36.48, quickly set an intraday low at 35.60, and shot higher from there.

Li Auto (LI) then reported Friday morning and gapped up to its opening price of 38.76. It then pulled in to set an intraday low at 37.56 and then posted an intraday high at 40.86. That was the end of the line as the stock then reversed back to the downside to close in the red. Sympathy moves in XPEV, Niu Technologies (NIU), and Nio (NIO) met a similar fate as XPEV and NIO reversed sharply off their intraday highs to close negative while NIU gave up most of its intraday gains but closed up slightly.

Smart E-scooter maker Niu Technologies (NIU) is expected to report November 23rd, while Nio (NIO), is expected to report earnings after the close this coming Tuesday, November 17th. It had been the leader of the pack until LI and XPENG reported strong increases in revenues this past week and went berserk on the upside. Now the whole group is ablaze although quite extended and out of buying range.

 

 

On its face, this looks like blow-off type of action for the Chinese EV auto makers and at the very least these names will have to settle down and set up again. However, alert short-sellers paying attention to my Tweets early Friday might have picked up on these shortable gap-up moves in LI and XPEV as they reversed more than 30% and 20% off their Friday intraday peaks, respectively.

The excitement in Chinese EV names has usurped the spotlight from Tesla (TSLA), which is playing out more as a short than a long currently, but not by much. It reversed at the line on Thursday as selling volume picked up slightly, but no severe breakdown has occurred. Meanwhile, it is hanging around in U&R land where the early-October low at 406.05 remains in force as a U&R long entry point and selling guide.

 

 

The slack in TSLA might have induced one to turn to the two stocks that recently signed lithium supply agreements with the American EV leader. Piedmont Lithium (PLL) launched Thursday after I discussed it in my Wednesday report as being quite buyable along the 10-dma following three pocket pivots in a row. This action came on the heels of a prior undercut & rally (U&R) move on November 2nd back through its September 30th low. It is now extended but could have been bought early on Thursday morning ahead of the move.

 

 

Livent (LTHM) continues to hang along its recent highs, pushing to a higher closing high today. The 10-dma has moved up while the 20-dema is approaching the top of the prior base. Therefore, if I were looking to jump into shares of the stock, I would prefer to look for the more opportunistic pullback to the 20-dema if I can get it. Otherwise, if one buys it along the 10-dma, one could then use that or the 20-dema as tight or wider selling guides, respectively, as desired.

 

 

One could also consider the third lithium name that I follow and have discussed previously in my video reports, Lithium Americas Corp. (LAC). It has not yet announced a supply deal with TSLA the way PLL and LTHM have, so maybe it’s next. Who knows? All I know for sure is that the stock posted a roundabout type of pocket pivot at its 10-dma, 20-dema, and 50-dma on Friday which is actionable using the 50-dma as a tight selling guide.

 

 

Workhorse Group (WKHS) moved higher on Thursday after hanging tight along the 20-dema right after posting a bottom-fishing pocket pivot at the 10-dma on Monday. It’s pulled into the area between the 10-dma and 20-dema on Friday, which puts it in a potentially lower-risk entry position using the 20-dema as a tight selling guide or the 10-dma as a wider one.

The question, however, is whether the blow-off type action in Chinese EVs means the bubbles in the speculative champagne that is the electric vehicle space have fizzed away. Whether this has an impact on WKHS down here remains to be seen, but for now one can simply play it as it lies and according to the real-time action on the chart.

 

 

The big surprise this week has been the sideline U.S. EV company, Fisker (FSR). I discussed this set-up in detail in my video report last Saturday based on the Wyckoffian Retest I was seeing as the stock tucked into its 10-day moving average as volume dried up sharply. FSR recently merged with the SPAC formerly known as the Spartan Energy Acquisition Corp. (SPAQ). The merged entities now trade under the FSR symbol.

A Wyckoffian Retest, or Test for Supply, is a simple set-up. A stock sets a low and bounces on strong volume. It runs up a bit and then begins to pull back down toward the initial low without quite getting there as volume dries up significantly. When another reference point comes into play, like a moving average (in this case the 10-dma) that serves as a convenient selling guide.

FSR’s Wyckoffian Retest was a textbook affair, leading to a sharp upside move on Monday that also qualified as a big-volume pocket pivot through the 50-dma. It then held tight along the line for two days before moving higher from there. It’s now back to the September highs, and quite extended, but a good example of a very successful Wyckoffian Retest Ugly Duckling set-up, good for a roughly 70% gain in one week.

 

 

The S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT), continue to settle down after getting tousled about on Monday and Tuesday. GOOG continues to hold up above the prior week’s buyable gap-up (BGU) but is now out of buying range. AMZN meanwhile was a short at the 50-dma on Thursday.

The other three, AAPL, FB, and MSFT, are moving sideways in tight fashion after bouncing off their 50-day moving averages on Wednesday. FB and MSFT are also holding along their 10-dma/20-dema confluences, and all three stocks are showing sharp declines in volume.

On its face, this looks constructive with the idea that FB and MSFT are actionable as longs at their 20-demas with the idea of scooting out quickly if they fail to hold the line. However, the patterns remain a bit chaotic with big-volume swings in either direction and for this reason it’s difficult to make any convicted calls here, but they can be tested with the idea of using tight stops.

 

 

Netflix (NFLX) is coming in to test the prior October low at 472.21 where it posted a U&R move on Tuesday. At the same time, it’s stalling and reversing at its 10-dma and 20-dema. While this could resolve to the upside, I would watch for any weak rally back into the 20-dema or even the 50-dma as a lower-risk short-sale entry opportunity.

Otherwise, one can play this on the long side as a U&R using the 472.21 low as a tight selling guide. There are clear areas of support and resistance in the pattern, so a 360-degree approach is warranted here, taking into account how this might play out from here as a long or a short.

 

 

Semiconductors have been a mixed bag, with the group below, consisting of Advanced Micro Devices (AMD), Broadcom (AVGO), Marvell Technology Group (MRVL), Nvidia (NVDA), and Skyworks Solutions (SWKS), looking no more resolved at the week than they did on Wednesday when I wrote my mid-week report. SWKS is the only one that looks reasonably actionable, and it was a short at the 50-dma on Friday.

Otherwise all I see here is a lot of choppy volatility with little in the way of tight price action but plenty in the way of stalling and churning action on the daily price bars. At best, one could take a flying leap at AMD or NVDA on the long side at their 50-day moving averages with the idea of bailing out if they can’t hold support at the line. NVDA, however, is expected to report earnings after the close on Wednesday, November 17th.

 

 

There are a number of other semiconductors that look more like Qualcomm (QCOM) and Qorvo (QRVO) as recent strength has resulted in mostly sideways, consolidative action. Both names are chopping sideways following buyable gap-ups that occurred the prior week. I would be inclined to watch these two closely and wait for a pullback to, or meet-up with, their respective 10-day moving averages. Otherwise, one could always act on pullbacks closer to their BGU intraday lows, which for QCOM would be 141.83 and 140.68 for QRVO.

 

 

Cloud names for the most part also remain in a volatile state after getting clocked on Monday. Salesforce.com (CRM), CrowdStrike (CRWD), DocuSign (DOCU) and Okta (OKTA) are all expected to report earnings on the first three days of December, a little over two weeks from now. But the only set-ups I’ve seen over the past couple of days have been short-sale entries at the 50-dma for CRWD and the 10-dma for DOCU on Friday.

CRM and OKTA closed Friday just above their 50-day moving averages, so one could take a flying leap at these on the long side with the idea of clearing out of Dodge if they bust the line. And, of course, if they were to bust their 50-day lines, they would then trigger as short-sale entries at that point.

 

 

When I look at the second cloud group chart, I see two short-sale set-ups that occurred at their respective 50-day moving averages, one in Splunk (SPLK) on Thursday and a much uglier one in ZScaler (ZS) on Friday. Workday (WDAY) is sitting on top of its 50-dma, where one could take a long shot at it using the line as a tight selling guide, but it is expected to report earnings next week on November 19th.

Zoom Video Communications (ZM), the darling of the WFH movement, can’t even muster a rally back up as far as its 10-dma, the lowest of its nearby moving averages. It appears to be headed for a retest of the Tuesday low as volume declines. But for the most part this is a busted pattern with no signs of healing, or even thinking about healing, yet, as its expected November 30th earnings report date approaches.

 

 

Perhaps we might have better prospects with the group of recent cloud earnings gappers, consisting of Appian (APPN), Hubspot (HUBS), CloudFlare (NET), and The Trade Desk (TTD), all of which posted big BGUs when they reported. While all of these names have pulled back from their BGU peaks, some remain in buyable positions.

APPN is heading for the $100 Century Mark for the first time, closing just below $100 on Friday as volume picked up sharply. That could create either a long entry if it clears $100 based on Jesse Livermore’s Century Mark Rule on the long side, or a short-sale entry if it fails and reverses at the $100 level. Play it as it lies.

HUBS has failed to hold above the intraday low of its own BGU move six days ago on the chart but can be watched for constructive support at the 10-dma if it meets up with the line one way or the other. NET meanwhile is holding tight just above its own BGU intraday low at 61.70 where it is in technical buying range of the BGU. Any constructive pullback closer to 61.70, however, would offer a lower-risk entry.

TTD is sitting a little over 1% above its BGU intraday low at 725.30, which keeps it within buying range based on Friday’s close at 734.77. There is no guarantee, of course, that any of these will resolve bullishly, since breaches of near-term support could also trigger them as short-sale targets.

 

 

Uber (UBER) and Lyft (LYFT) are hanging in there pretty well after posting a couple of buyable gap-up moves over the past week or so. In both cases, I’d be watching for pullbacks to or meet-ups with the 10-day moving average as potentially lower-risk entries from here.

 

 

Snap (SNAP) gapped up off support at its 20-dema, where it closed on Wednesday and held tight and just above the 10-dma on Friday as volume dried up. This offers a potentially lower-risk entry here using the 10-dma as a tight selling guide. Otherwise, any further, constructive pullbacks to the 20-dema would offer more opportunistic entries if the 10-dma doesn’t hold.

Twitter (TWTR) has consistently run into resistance around the 50-dma over the past week but continues to hold tight sideways and just under the line as volume dried up to -61% below average on Friday. This could set up a move up through the 50-day line and the prior 44.30 low of October 15th, which can be watched for.

 

 

Virgin Galactic (SPCE) remains well above its 20-dema as it continues to move higher following Monday’s pocket pivot at the 20-dema and 50-dma. Watch for pullbacks to the 20-dema as lower-risk entries if you can get ‘em.

 

 

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Note #1 for newer members: 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 for newer members: 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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I wrote a couple of weeks ago that the Chinese EV name were perhaps the last strong thematic play I’ve been able to come up with in this market. They’ve worked quite well, even better than I thought they might, given the extreme price volatility in the form of sharp upside moves and equally sharp downside reversals over the past two weeks. Right now, I do not see any new thematic trends on the horizon.

For this reason. I consider the market to be something of a seat-of-the-pants affair where one reacts to set-ups as they occur in real-time. Thus, one could have been long Chinese EV names earlier in the week and shorting them into the gap-up moves on Friday, or playing U.S. EV  name FSR for a 70% move all week long, lithium-maker PLL for a less exciting but still tangible price move or shorting names like ZS or DOCU on Friday as they rallied into overhead resistance.

In terms of finding the next strong, intermediate- to longer-term trends, it’s a different story. Are lithium-related names just getting started? Or is their recent price action a function of being a follow-on cousin group to the EV froth? Will the clouds recover or are they now a group to focus on as mostly short-sale targets into weak rallies, as some were this past week? Are big-stock techs topping?

I find myself asking more questions than coming up with firm answers currently. For that reason, I simply keep my focus on individual set-ups that strike me as actionable and see what the market is willing to give me as I sort out the market’s clue in real-time. Aside from that, I prefer to treat things in a watchful manner, ready to pounce when and where I see daylight while avoiding the trap of falling into a rigidly bullish or bearish stance. Take it from there.

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 no positions, 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.