The Gilmo Report

November 16, 2022

November 16, 2022 6:49 pm ET

A benign Producer Price Index yesterday morning saw the core number come in flat at 0% month-over-month vs. expectations of a 0.4% gain but it failed to produce the same market response we saw after the Consumer Price Index last week. Following a relatively muted gap-up open, at least compared to last Thursday’s post-CPI jack, the indexes peaked near the open and began executing a slow-motion rollover maneuver.

Then news that Russian missiles had hit Polish territory and killed two civilians came out of nowhere and sent the indexes skidding to the downside. Overnight it was revealed that the wayward missiles were most likely of Ukrainian origin, fired in defense at incoming Russian missiles. With the start of World War III at least delayed for now, the futures were free to clamber back above the unchanged line overnight.

I blogged early in the morning yesterday that the reason we were not being treated to a 1,000-point rocket ride in the Dow Jones Industrials was likely due to the fact that the entire planet was not positioned massively net short coming into the PPI. That contrasted sharply with the situation at the time the CPI was announced last Thursday, and without the help of scrambling shorts the indexes were just not their usual chipper Fed pivot rally selves.

All we know for sure is that the index rally has stalled for now and is at the very least in the process of consolidating prior gains. It does not mean that a downside reversal and break is imminent as the Dow approaches the mid-August highs. For that we can only rely on what we are seeing in individual stocks and in this regard the market below the index surface remains distinctly multifurcated.



The U.S. Dollar as represented by its proxy, the Invesco US Dollar Index Bullish (UUP) ETF, and the 10-Year Treasury Yield ($TNX) both remain near recent lows. The dollar picked up a short safe haven boost from the Russian missile news but eventually settled down into what is a short bear flag. Meanwhile, the 10-Year yield sits a 3.692%, down 64.1 (0.641%) bips from its October 21st peak at 4.333%.



The muted reaction in the dollar and interest rates following a flat PPI matched the roughly muted reaction in stocks but it is reasonable to assume that a Fed pivot favorable PPI was already priced in. Precious metals also reacted in muted fashion, with many mining and related stocks selling off after initial upside moves, as interest rate and the dollar hold tight along recent lows and precious metals hold tight along recent highs.

I am often asked “what is wrong” with gold and silver since they should allegedly be moving higher as so-called hedges against what has been rampant inflation in 2022. The answer to that question is found in the recent action and response of gold and silver to the idea that Fed interest rate increases are rapidly approaching an end point.

When the benign CPI came out, what did gold and silver do? They rallied. If inflation is the primary driver of the metals, then why didn’t they sell off afterwards? Instead, they rocketed higher, taking the mines and related stocks higher with them. They rallied because the dollar tanked.

In my experience, precious metals tend to do better in deflationary environments than inflationary environments, but ultimately, they tend to negatively correlate to the dollar. A little historical example from my 33-year career will make my point.

You can read all about my great trade in silver back in 2010-2011 in Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market for more grisly details, but back then a big move in gold and silver rode the back of a tanking dollar. The daily chart of the Invesco US Dollar Index Bullish (UUP) ETF from 2010-2011 shows a brutal downtrend in the dollar.



That inversely correlated to a big move to the upside in gold and silver, as the continuous silver futures contract daily chart from 2010-2011 shows below. Back at that time I was making regular appearances on Fox Business News and as silver was approaching $30, I was interviewed on Fox where the talking head, Stuart Varney, asked me to give my upside target for silver.

To me that is a foreign question since I simply subscribe to what Ed Seykota used to say, which is, “The trend is your friend until it bends at the end.” My intent was to simply ride silver higher until it finally issued concrete topping signals. Where on the chart that would occur, I had no idea, frankly. But ol’ Stuie would have none of that as he pressed for a price target.

I recall having looked at a Point & Figure chart of silver at the time on, which provides P&F price targets right on the P&F chart when applicable. In this case, it showed a price target of 49 or so. Remembering that, I just spewed out “$50!” As it turned out, silver topped out right at $50, maybe just a few cents lower depending on what futures contract you were watching.

The silver futures chart below shows the absolute peak at 49.82. From there both gold and silver plummeted. As discussed in Trade Like an O’Neil Disciple, by the time it was pressing for $50 an ounce, silver was posting a clear O’Neil style climax top. Boom! Boom! Out go the lights! And out I went as a fat profit was taken.



Interestingly, while gold and silver both went parabolic and topped in May 2011, the situation with gold and silver miners and related stocks was quite bifurcated. Silver miners like First Majestic Silver (AG) correlated closely to the move in silver, so served as excellent alternative vehicles for playing the big parabolic uptrend in the white metal at that time.

Of course, playing an individual precious metals stock as a way of playing a correlated move in the metals offers more leverage, if one exercises proper stock selection. Study this chart carefully and you will note that it began moving just ahead of silver and eventually ran from a breakout price of $4.09 to a high of $26.80, a 555.25% move.

At the same time, silver ran from $18.43/oz. to $49.82/oz., a gain of 170.32%. Both I and my colleague Chris Kacher elected to play the move in silver back in 2010-2011 via the leveraged ProShares Ultra Silver (AGQ) ETF, which over the same time period ran from 120.66 to 764.16 for a total gain of 533.31%. This is comparable to the performance of First Majestic Silver (AG) so illustrates the basic idea of how miners also leverage moves in the metals.



We already know that stock selection when choosing miners and related stocks as long candidates is key in the current examples of AngloGold Ashanti (AU) and Gold Fields (GFI). It was no different back in 2010-2011 because as silver miners like AG rocketed higher gold miners were a different story.

Big-stock gold miner, and institutional favorite Agnico-Eagle Mines (AEM), for example, peaked in December of 2010 and then simply trended lower from there. When gold and silver were going parabolic and making new highs in May 2011, AEM was making lower lows in what at that point was a five-month downtrend off the December high.



As gold and silver were rallying and the dollar was tanking, was the Fed raising rates back in 2010-2011 as it is today? No, they were in fact keeping their Fed Funds target rate at 0% while injecting trillions of dollars in liquidity into the system via massive bond purchases, otherwise known as QE.

So, forget inflation because if inflation starts backing up rapidly and rates and the dollar start falling sharply then the precious metals space is likely to catch fire as I have written in previous 2022 reports. The only caveat would be that if we see a deflationary sell-off in stocks like we did in 2008 then the precious metals sector will likely sell-off with stocks, so remain opportunistic here without excessively salivating over short-term upside.

Back in late 2008 we saw gold and silver get whacked with stocks before bottoming ahead of the stock market and turning higher. That began the great precious metals bull run from late 2008 to mid-2011.



Currently gold and silver are attempting to consolidate last week’s strong gains following long entry signals two Thursdays ago. The Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) are both holding up near recent highs but likely need more time to set up if indeed they are going higher.

While the PHYS has the appearance of being in mid-air with no nearby moving average support, the PSLV is setting in between its lower 10-day moving average and the higher 200-dma. As these settle in we can keep an eye out for any long entries that might set up in real-time.



My two favorite gold miners for some time now, AngloGold Ashanti (AU) and Gold Fields (GFI), are also attempting to consolidate last week’s torrid upside price action following buyable gap-up (BGU) moves two Thursdays ago, a week before the CPI number.

If you measure the move in AU from the buyable gap-up (BGU) on the day of the CPI report two Thursdays ago from 13.65 to the 18.40 peak of last Friday, AU shot about 35% higher in six days. Over that same time period, and from a similar BGU two Thursdays ago, GFI bested AU, running from 8.23 to a high of 12.80, a gain of 55.52% in just five days.

Those are massive, high-velocity price moves. If you catch one of those, then you are well-advised to take profits as things get piggy on the upside. At that point avoid letting greed overcome you by pushing you to try and re-enter, if at all, too soon. In normal markets, it often takes weeks, if not months to realize gains of 35-55% in a single stock, so maintain perspective.

For now, while it is possible to buy the pullbacks to the 200-day line with the idea of exiting quickly if the lines are breached, I might consider just letting these settle down a bit more with the idea that some time spent tightening up along the 200-dma could set up a more substantial second leg up from here.



After upside price moves over the past two weeks that had starkly lower upside price velocity than the gold miners, silver miners are in consolidation mode as well. First Majestic Silver (AG) acts a little like silver as it tries to settle in between its 10-dma and 200-dma. On the other hand, it can technically be treated as a short-sale entry here just below the 200-day line which then serves as a tight selling guide.

Compania Minas Buenaventura (BVN) is extended from its 200-dma while MAG Silver (MAG) is pulling into near-term support along its 10-dma. Meanwhile, Pan-American Silver (PAAS) is still trying to find a low after selling off in response to its announced joint buyout of Yamana Gold (AUY) in partnership with Agnico-Eagle Mines (AEM).

As with the golds, it now appears to be mostly a matter of letting these sift out and set up again. With AG flashing a short-sale entry trigger we must also be open to the fact that the recent upside moves could retrace more than they have so far.



Whether this recent strength in the precious metals space is indicative of more upside to come or not is unknown and unknowable currently. My guess is that if indeed we have a move in silver and gold comparable to what we saw in 2010-2011 then we are in the embryonic stages, at best. Embryos, as you know, still need time to develop.

Study the charts of gold and silver from 2010-2011 carefully and you will note that a lot of percolating action took place before things reached a boiling point. Besides getting a sense of how the bases set up back then, consider market context as well. Go back and study what was going on at that time with respect to the Fed, fiscal policy, and general underlying conditions.

We are also seeing consolidation in the industrial metals names I have discussed in recent reports. Aluminum producer Alcoa (AA), copper producer Freeport McMoRan (FCX) and steel producers Nucor Corp. (NUE) and Steel Dynamics (STLD) are all backing and filling slightly after strong upside moves last week. Like gold and silver, they are potential beneficiaries of a declining dollar.

Currently I am just watching for AA to find support along its 10-dma while FCX appears most likely to find support at its 200-dma. NUE and STLD are attempting to break out but are pulling back from new highs. The 10-dma for either would constitute near-term support such that constructive pullbacks could offer lower-risk entries at the 10-day lines.

We should also maintain awareness that NUE and STLD are in positions where they could morph back into short-sale targets under the right conditions. In fact, STLD is already playing out as a possible Century Mark short-sale set-up at the $100 Century Mark after today’s close at 99.30, using the $100 price level as a tight covering guide.

NUE on the other hand is playing out as a possible, double-top, short-sale set-up along the 145.44 price high of September 12th which is off to the left of the small daily chart below. NUE triggered an entry yesterday when it closed at 144.05 after hitting an intraday high at 145.65 and then moved lower today.



Uranium producer Cameco (CCJ) has spent the week so far bouncing between its lower 20-dema and higher 200-dma. Each time it has been shortable at the 200-day line and buyable at the 20-dema. At least until today as it closed below the 20-dema and the lower 10-dma to trigger a secondary short-sale entry here using the 20-dema as a tight covering guide.



I discussed lithium names as potential short-sale targets in my weekend report, and we can see below that all four, Albemarle (ALB), Lithium Americas (LAC), Livent Corp. (LTHM) and Piedmont Lithium (PLL) have come apart this week.

ALB is a recent “breakout in a leading stock” that has now failed after it broke below the 308.24 breakout point out of view on the left side of the chart. The stock also gapped below the $300 Century Mark yesterday and went nowhere today.

That triggered a second short-sale entry at the $300 level which now serves as a covering guide. If ALB goes on to break below the 50-day moving average, then it would trigger yet another short-sale entry at the line which is then used as a covering guide.

The other three have flashed multiple short-sale entries at prior moving average support over the past couple of days. LAC triggered yesterday at the 50-dma where it was again shortable at the line this morning. LTHM triggered short-sale entries yesterday at the 10-dma, 20-dema and 50-dma and then moved lower today.

Note that LTHM had already reversed at double-top resistance last week, while PLL triggered a concrete, double-top, short-sale entry last Friday that was also a failed breakout attempt. Yesterday PLL triggered short-sale entries at the 10-dma and 20-dema and then spun around the 50-day line before closing just above.

PLL then triggered a short entry at the 50-day today and closed right at the 200-dma. In this position any small rally back into the 50-dma would bring it into short-sale position using the 50-dma as a covering guide. Otherwise, any break below the 200-dma would trigger a fresh short-sale entry if it moves lower from here so can be watched for.



Lithiums have turned tail so bad after recent rallies that even the leader of the pack, Sigma Lithium (SGML) has finally cracked. It triggered a short-sale entry at its 20-dema yesterday. Today it briefly attempted to hold support at the 50-day moving average before breaking lower.

That triggered a fresh short-sale entry at the 50-day which is then used as a covering guide. However, keep in mind that SGML is already quite extended from the last short entry trigger at the 20-dema so could easily push back above the 50-day line in a normal reaction move.



After flipping to a short-sale entry at price resistance along the highs of its current price range at 110.59 and 110.79 last Friday, CF Industries (CF) triggered more short-sale entries today at its 10-dma and 20-dema before closing right above the 50-dma. Any break below the 50-day line would trigger another short-sale entry using the 50-dma as a covering guide.

Mosaic (MOS) traded in a volatile range yesterday but today gapped just below its 20-dema where it triggered a short-sale entry and moved lower from there. Nutrien (NTR) bumped into moving average resistance at its 20-dema today where it was shortable and then reversed from there. All three stocks can also be watched for any rallies back up toward the 20-demas which would bring back into more optimal short-sale range from here.



As the Dow 30 stocks lead the market the NASDAQ Composite continues to lag. Big-stock NASDAQ names Apple (AAPL), (AMZN), Alphabet (GOOG) and Microsoft (MSFT) which have rallied off recent lows but with much less velocity and range than their Dow counterparts. We can see that all four spun out yesterday and stalled as they closed in the lower part of their respective price ranges.

The 50-day moving averages come into play for all four as levels of support or resistance to watch carefully here. If AAPL, GOOG or MSFT break below their 50-day lines then they would obviously trigger short-sale entries using the 50-days as covering guides. AMZN was already a short at the 50-day line where it reversed yesterday and rallies back up into the line from here would bring it back into more optimal short-sale range so can be watched for.



Netflix (NFLX) has picked up a few buy recommendations lately along with a favorable Barron’s magazine article which have all helped to propel the stock past the late-October left-side high at 305.63. It closed today at 306.02 so can be watched for any move below 305.63 as a possible, double-top, short-sale (DTSS) entry trigger.

Tesla (TSLA) remains one of the weakest of the big-stock NASDAQ techs as it now follows its 10-day moving average lower. It could have been shorted again at the 10-dma yesterday where it reversed and remains extended as a test of last week’s lows appears likely.



VanEck Semiconductor (SMH) ETF ran right into its 200-day moving average yesterday as I pointed out in last night’s blog post. That put it in a shortable position using the leveraged Direxion Daily Semiconductor Bear 3X (SOXS) ETF and down it went.



The nine big-stock semiconductor names that I have discussed in recent reports, Applied Materials (AMAT),  Advanced Micro Devices (AMD), Intel (INTC),  KLA Corp. (KLAC), Microchip Technology (MCHP), Qualcomm (QCOM), Qorvo (QRVO), Skyworks Solutions (SWKS), Texas Instruments (TXN) reflect a certain group mentality in this regard.

Like the SMH, all nine have turned tail and have all lit up brightly over the past two days in the post-CPI market pile-in. While there are concrete short-sale entry triggers in AMAT at the 200-dma and MRVL at the 50-dma, the easy way to play the semiconductors on the short side is to simply use the SOXS given how tightly they all correlate.



With semiconductors rolling over today the big-stock clouds also decided to chime in. The nine names I’ve discussed in recent reports, (BILL), (CRM), CrowdStrike (CRWD), DataDog (DDOG), DocuSign (DOCU), Cloudflare (NET), Okta (OKTA), Snowflake (SNOW), and Workday (WDAY). You’ll notice that these cloud names are correlating quite closely not unlike the way semiconductors like to engage in synchronized group movement.

Among these we can see that BILL, DDOG, OKTA and SNOW were all short-sale entries at the 50-day moving averages yesterday. OKTA also triggered a short-sale entry at the 20-dema today. Today we saw DOCU and NET trigger short-sale entries at their 50-day lines. Rallies in any of these back up toward the 50-dmas could bring them back into more optimal short-sale range so can be watched for.



As the index rally loses momentum, we can see that  cybersecurity names I discussed in the last two reports, CrowdStrike (CRWD), CyberArk Software (CYBR), Fortinet (FTNT) and Palo Alto Networks (PANW) all made for nice short-sale targets to stalk yesterday as they turned lower with the market.

You have CRWD triggering a short-sale entry at the 20-dema and CYBR triggering a double-top short-sale (DTSS) entry at the 160.31 late-October left-side peak and moving sharply lower today. Yesterday FTNT gave shorts a nice entry at the 200-day moving average while PANW did the same thing at its own 50-day moving average.



Sunrun (RUN) and SunPower (SPWR) remain above their 50-day moving averages following big-volume pocket pivot moves through the line last week. I would only be interested in these as possible long entries on constructive (e.g., low-volume) pullbacks to the 50-day lines or on the short side if they were to bust their 50-day lines. Play ‘em as they lie.



Solar power storage cousins Enphase (ENPH) and SolarEdge (SEDG) are hanging along recent highs, but with different dynamics to their charts. ENPH actually triggered a double-top, short-sale entry at the 316.87 left-side peak from November 1st last week and it keeps bumping up toward that area of price resistance.

We can continue to watch for double-top type action here on any approach closer to the 316.87 high while watching for any break below the 10-dma and then the 20-dema as a possible short-sale entry trigger. So far, this is an unresolved pattern that could eventually resolve in either direction.

SEDG is holding tight after clearing its 200-dma in a post-earnings run-up. The tight price action is being accompanied by a steady dry-up in volume so this might be considered a potential entry on any constructive test of the 200-dma. If it breaks the 200-day line, then you have the usual short-sale entry trigger using the 200-dma as a covering guide.



First Solar (FSLR) continues to make any real progress following its base breakout of nearly three weeks ago. It does, however, continue to hold near-term support along the 10-day line. On the long side, I would look for a constructive pullback to the 20-dema as a lower-risk entry opportunity, otherwise a breach of the 20-dema could trigger it as a short-sale entry where the line becomes my covering guide.



Vertex Pharmaceuticals (VRTX) remains on the fence as a possible late-stage breakout failure, but so far it clings to support along the confluence of its 10-dma and 20-dema. If it holds, it is a long entry using the 20-dema as a maximum selling guide and if it busts then it morphs into a short-sale entry trigger using the 10-dma/20-dema confluence as a covering guide.



Last week we saw crypto exchange go bankrupt, triggering a market sell-off last Wednesday just before Thursday’s CPI report turned everything around. This week we get a Black Swan false alarm when misguided Ukrainian missiles land in Polish Territory after being misidentified as Russian missiles.

This all just serves to illustrate and highlight the unique and at times bizarre underlying conditions that beset this market from time to time. Again, as I have said repeatedly, the best way to approach this market as a swing-trader is to focus on a small list of names, a playlist if you will, of selected stocks to monitor in real-time for actionable set-ups, long or short.

If one was looking to get long last week, even ahead of the CPI report, then our precious metals names that were flashing BGUs two Thursdays ago offered the proverbial E-ticket ride. Yesterday, as the market stalled and rolled over, a large number of names discussed over the weekend, from fertilizers to lithiums to techs of various stripes provided very reasonable short-sale targets and most moved lower today.

Anybody who has been around long enough to know what a fresh, new bull market feels and acts like knows that this is far short of a glorious new bull market phase. It feels more like a bear market rally, but that does not mean that some areas of the market could continue to move higher.

Fedheads have also been out on the speaking circuit referring to this bizarre idea of stepping down interest rates increases to only 50 basis points. I say bizarre because there was a time when such a rate increase would be considered quite substantial. Now it is taken as a slowing of interest rate increase and a reason for a Fed Pivot Hopes rally to blossom anew.

As I wrote in my last report, the big percentage moves in miners like AU and GFI last week were of a magnitude that generally takes several weeks or months to traverse in typical market environments. If that is all we get in terms of sizable upside following the benign CPI-Lite number last week and the flat PPI number yesterday, I am more than happy to take it.

Meanwhile, the real-time set-ups are quietly and not so quietly pushing us back to the short side. Whether that expands into a more deleterious downside move in the general market or just presents a bunch of short-sale swing-trading scalps are unknowable. To paraphrase our oh-so-brilliant U.S. Vice-President, all we can do is what we have been doing, which is to follow the set-ups. Keep your watch lists manageable and play them as they lie.

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


Explanatory Notes

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 unique requirements for a U&R other than the price action. It is like Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is simply 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.

Note #3: The “620-Chart” is a five-minute intraday chart with an orange six-period exponential moving average and a blue 20-period exponential moving average. The MACD settings are (6,20,9,C,false,true) on eSignal. Consult your own data provider for details on how to create a five-minute intraday chart with these settings.