The Gilmo Report

November 18, 2020

November 18, 2020 7:34 pm ET

The major market indexes ran back up near their prior highs earlier this week before heading back the other way today. The NASDAQ Composite Index gives the general look of things as it rolls over from the declining tops trend line on higher volume. On its face this looks like at least near-term bearish and I would look for a possible test of the 20-day exponential moving average.

 

 

Investors piled into Dow stocks to start the week off, pushing the narrowest of the major market indexes to all-time highs on Monday. That didn’t last long as the index pulled an outside reversal to the downside on higher volume today.

 

 

None of this strikes me as all that surprising given numerous signs of excessive bullishness, such as the American Association of Individual Investors’ sentiment survey showing bullish readings not seen since January 2018. And, of course, we’ve seen some deterioration in key areas of the market, some of which became exacerbated today.

Precious metals have come under pressure along with stocks as both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) headed back to the downside today. Gold closed today at 174.59, which means it for now remains above the September 24th low at 173.77 but now below the October 7th low at 176.43 and the October 29th low of 174.83. If I’m long GLD I would consider myself stopped out based on the move below the latter two lows.

The SLV closed today at 22.55, which keeps it above all the relevant lows in its current pattern. Those would be 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. However, if I were long SLV here along the 10-dma and 20-dema I would also consider myself stopped out based on today’s close below both of those moving averages.

 

 

We found out Monday afternoon why Tesla (TSLA) had been holding very tight sideways with volume drying up along the 65-day exponential moving average. It was added to the S&P 500 Index, sending the stock up overnight and an opening price of 460.17. It printed a high of 462 within 15 minutes of the opening bell and then headed south from there.

That was essentially a one-day wonder trade on the short side playing TSLA as a shortable gap-up (SGU) yesterday. Today, however, the stock found its feet and turned higher on a big-volume trendline breakout. My guess is that this is mostly due to a move into the stock as index funds initiate positions after it was added to the S&P 500. Therefore, while this was playable for nimble traders at the right inflection points, I would not want to chase this breakout at this point.

 

 

Among other related U.S. EV plays, Workhorse Group (WKHS) continues to demonstrate why I remain a fan of the Ugly Duckling as it moves higher following its bottom-fishing pocket pivot of two Mondays ago. It cleared the 50-dma today on slightly higher, but below average volume. At this point it either fails at the 50-day line or holds tight along the line and sets up again, so play it as it lies.

 

 

Fisker (FSR) is holding up reasonably well along last week’s highs but is quite extended on a phenomenal price run since it posted a Wyckoffian Retest at the 10-dma two weeks ago. Now we can watch as the rapidly rising 10-dma moves higher to meet up with the stock, at which point we can see whether a new lower-risk entry appears.

If you were only watching the action in these U.S. EV-related stocks, you wouldn’t have known that the indexes were coming in sharply most of the day. This is another reason why we focus on the individual stock set-ups, although at this point TSLA, WKHS and FSR are not in buyable positions and could easily come in with the general market if it continues to move lower.

 

 

Of course, in this market, we have to be alert to the fact that sometimes the best shorts are stocks we were just long. That is the 360-degree approach at its core, and it showed up today in Chinese EV leader Nio (NIO) which reported earnings last night. After spinning around in after-hours trade, it opened this morning’s pre-open trading session above the $48 price level. My primary trading platform opens for trading at 4:00 a.m. PDT here on the West Coast, while other platforms don’t allow for trading until 5:00 a.m. PDT. Its effect can be seen on the intraday five-minute 620-chart below.

NIO quickly flashed a sell/sell-short signal on the 620-chart right at 4:00 a.m. and then tested that high an hour later at 5:00 a.m. By the time the opening bell rang, it was printing 45.75 and then continued lower from there. Note that the first MACD cross to the upside on the big-bar spike could have easily induced one to cover their short position.

This, in my view, would have been just fine, since getting 7-8% of playable downside in a stock before the opening bell rings sounds like a pretty good way to start the day to me. Nice work if you can get it. NIO did continue lower after reversing along the 20-period exponential moving average before reaching a low of 42.50 and then working its way higher from there.

To catch this type of trade you have to be up early, of course, but you also have to know ahead of time what you’re going to be focused on for the day. NIO was already on our Earnings Watch List for Tuesday, and for me it was only one of two names I was watching for earnings reports yesterday afternoon.

So, unless your preparation is in the “sweet spot,” and you’re awake enough to trade it, you may not catch it. Nevertheless, it illustrates how one can wring a beautiful short trade out of a stock one might have previously been campaigning on the long side. Amid today’s general market turmoil, the shift from long NIO to short NIO was not hard to make within the context of the overall parabolic move higher in the stock and the simultaneous general market weakness.

 

 

Despite the frothiness in the group and today’s shortable pre-open set-up in NIO, the Chinese EV names are not coming completely undone here. In fact, NIO held support at its 10-dma and can be watched closely to see how or whether it is able to hold support here at the 10-dma. If it can’t, it may trigger another short-sale entry at that point.

Li Auto (LI) and Xpeng (XPEV), the other two Chinese EV auto makers that I follow, both remain well above their 10-day moving averages. They can be watched for potentially lower-risk entries along the 10-dma as it rises to meet up with the stocks or the stocks pull down to meet up with the 10-dma.

Smart E-scooter maker Niu Technologies (NIU) was slammed into its 10-dma and the top of its prior base today where it can be watched for support. If it can hold here, then this may offer a lower-risk entry from here.

 

 

As EV names have garnered a lot of attention in recent weeks, the cousin-play to the EV group has been the lithium producers. EVs will likely remain a potent area of thematic strength in any market up-cycles, and this will likely keep cousin-plays in play, so to speak. These are themes to keep in your mind whether the market continues higher, corrects, or goes into a full-blown bear market.

Even during a period of market weakness, one should always be looking for new themes that could drive moves in certain groups of stocks as areas of potential new leadership in any future bull market phase. Currently, lithium-producing stocks have been acting well as a cousin-play to the EV names.

Just for fun, I’ve thrown a fourth lithium name into the group chart below, CBAK Energy Technology (CBAT), a Chinese lithium producer. This stock was trading down under $1 for a long time, a true penny-stock, before launching higher when the lithium theme came into being after TSLA announced its deal with Piedmont Lithium (PLL).

CBAK Energy Technology (CBAT) has been going nuts over the past week and is well extended at this point. It may be one to keep an eye on as well since any intermediate-term trends in the lithium use and consumption will likely extent to China and elsewhere beyond the U.S, but it does strike me as a lower-quality name.

Livent (LTHM) is pulling in after peaking above $16 and I would simply keep an eye on this as it approaches its rising 10-dma and 20-dema where it may eventually find a lower-risk entry spot. It posted a fairly ugly outside reversal to the downside on heavy selling volume, so a continuing pullback to the 10-dma may be a key test for the stock.

Lithium Americas Corp. (LAC) reported earnings on Monday and has slid back into its 10-dma and 20-dema where it offers a potentially lower-risk long entry position using the moving averages as a tight selling guide.

Piedmont Lithium (PLL) is pulling into its 10-dma and 20-dema where it would offer a lower-risk entry spot, so this can be watched for.

 

 

I continue to believe that space travel and space-based commerce will be a thematic area ripe for investing when the right vehicles show up over time. Currently, there are only a handful of names in the space, of which Virgin Galactic (SPCE) has been my favorite. However, one has had to be opportunistic when it comes to choosing one’s entry points in these names.

SPCE certainly fit that bill on Monday and Tuesday as it pulled right into the confluence of its 10-dma and 20-dema where one could find a lower-risk entry using the two moving averages as selling guides. SPCE then pushed to higher today as it now tests the mid-October highs. The 20-dema would be my preferred reference for support on any buyable pullback from here.

 

 

When one is looking for pure plays in the space space, so to speak, the only other two that I’ve come up with over the past year are Iridium Communications (IRDM) and Maxar Technologies (MAXR). But they, too, require an opportunistic, Ugly Duckling approach when looking for entries.

IRDM is fascinating because of just how ugly it was looking as it tested its 200-dma at the end of October. But those paying attention might have noticed a shakeout at the line, also known as a moving average undercut & rally (MAU&R) long set-up, in combination with a bottom-fishing pocket pivot. The stock has since steadily trekked back up to its February highs.

MAXR also provides the Ugly Duckling touch with a U&R move after posting a huge-volume downside break, bringing into play the Down Big on Volume = Buy Signal formula that is very common in this market. But we don’t just buy a DBOV for that reason alone – we must see a concrete OWL set-up following such a move as a potential lower-risk entry.

With MAXR, the DBOV occurred just before it posted a U&R through its September 9th low at 22.40 that also streaked up through its 23.45 low of September 24th. A double U&R on one day. It is now back above the 50-dma where we can watch for another set-up as it potentially tracks along the line.

 

 

On the hunt for new merchandise, I’ve recently started discussing Yalla Group (YALA). The company, a social-networking concern that provides a voice-centric social-networking and entertainment platform in the MENA region (Middle-East and North Africa), came public in late September at $7.50 a share. Since then it formed one base, broke out and then quickly failed, something not atypical for this market.

The stock ran into resistance along its 10-dma today and reversed but was not buyable here in any case. What I think I want to do here is look for some sort of opportunistic U&R set-up along the lows of the IPO base, so I need to set downside alerts at these lows: 7.50, 7.88, and 8.27. If the market keeps coming down, we may get a retest of at least one of these lows.

 

 

Over time, themes based on this part of the world, the Middle East and Africa, may become big stuff. In April 2019 we saw the IPO of Jumia Technologies (JMIA) billed as the “Amazon.com of Africa,” come out at $14.50 a share and quickly rally to a peak of 49.77 before getting crushed on allegations of fraud. It hit a low of $2.15 in March of this year and has been making a comeback ever since.

JMIA broke out of a cup-with-handle base today on strong volume. The weekly chart below shows the breakout as well as the longer-term price/volume history of the stock. Another one to watch for potential thematic potential within the MENA theme.

 

 

In any market rally phase, I’m always more interested in where the real juice is at. That tends to be among the strongest thematic plays that come along, and in my view, this is where real growth investors want to be focused. Getting excited over a perceived “rotation” into cyclicals might work for the more mundane among us, but personally, gimme the juice!

The S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT) have also been a thematic play, as members who’ve been around for a while know. They are the embodiment of the alternative-currency theme where the stocks of big-cap, established, and reliable companies like these become repositories of cash as money moves out of the fiat dollar.

Where these names reach their limit with respect to this theme amid their continuously expanding P/E’s is something to watch for. Today they all roll lower with AAPL and GOOG rolling below their 10-dmas, FB, rolling below its 20-dema, MSFT selling down to its 50-dma, and AMZN reversing at the 50-dma yesterday where it was a short-sale entry at that time.

If the market goes lower, these go lower, as I see it. Therefore, keep an eye out for further breaches of near-term support as potential short-sale entry triggers if these begin to break down. In some cases, intrepid short-sellers may want to come after these on today’s breaches of the 10-dma by AAPL and GOOG or the 20-dema by FB.

 

 

Netflix (NFLX) has been one to work on the short side as it continues to find resistance at its lower 10-dma and 20-dema after failing at the 50-dma last week. It was a beneficiary of the entertain-from-home theme resulting from the corona crisis, but that has been wearing thin more lately. For now, I call this a short on rallies up into the 10-dma or 20-dema, even better on weak rallies that might carry up as high as the 50-dma from here.

 

 

Semiconductors have acted better on balance lately, and I’m currently focused on four semiconductors as potential 360-degree situations depending on how they and the general market play out from here.

Advanced Micro Devices (AMD) and Marvell Technology Group (MRVL) both pulled into their 10-day moving averages today as volume declined. This puts them in position first as potential long entries at the 10-dma while using the line as a tight selling guide. If they break below the 10-day lines, then they would trigger as short-sale entries at that point.

 

 

Qualcomm (QCOM) and Qorvo (QRVO) are the other two, and I’m leaning toward treating both of these as potential short-sale targets. QCOM pushed to all-time highs this morning before reversing hard into the close on heavy selling volume. A breach of the 10-dma triggers this as short-sale entry if it occurs.

QRVO has already breached its 10-dma, which triggered it as a short-sale entry at that point today. Any weak rallies into the 10-dma would potentially offer lower-risk short-sale entry opportunities from here.

 

 

After-hours Nvidia (NVDA) has reported earnings and as I write this afternoon the stock is trading below $530, which would put it just below the 50-day moving average on the daily chart in what is an evolving late-stage, base-failure type of short-sale set-up. I’ll be watching this one closely tomorrow morning for a possible actionable set-up, which right now looks likely to be a shortable gap-down through the 50-day line.

 

 

Clouds were strong beneficiaries of the work-from-home (WFH) theme engendered by the corona-crisis, and the group has been a strong area of leadership since March. But conditions have been changing for the group as certain names start to come undone. We can see some of these in the group chart of DataDog (DDOG), Shopify (SHOP), Zoom Video Communications (ZM), and ZScaler (ZS), below.

All these names were already showing signs of weakness before they blew up two Mondays ago on the Pfizer (PFE) vaccine news. Since then they’ve remained weak with ZS looking the most shortable when it has rallied up into resistance along the 20-dema or 50-dma. The other three, DDOG, SHOP, and ZM, may be shortable on rallies up first into resistance at their 10-dmas, with the 20-dema or 50-dma as secondary levels of resistance if they rally past the 10-dma.

 

 

If you’re a short-seller and the market starts coming down, I think selected cloud names may become reasonable, short-sale campaign targets, as I noted in the weekend report. We have some candidates on rallies shown above, and below we have Salesforce.com (CRM), CrowdStrike (CRWD), DocuSign (DOCU) and Okta (OKTA) which, again, are all expected to report earnings on the first three days of December.

Among these, CRM is looking a bit double-toppy here, but one can just look for a break below the 10-dma as a possible short-sale trigger. CRWD, and OKTA continue to hold support at their 50-day moving averages but can be watched for breaks below the 50-dma as their own potential short-sale triggers. Meanwhile, DOCU has rallied right up into its 50-dma where it may be shortable here using the line as a tight covering guide.

 

 

In the same manner that I tend to be opportunistic on the long side, seeking to buy Ugly Duckling/OWL set-ups on weakness, I am also opportunistic on the short side. In this market I have had to adapt my short-selling tactics to this contrarian, opportunistic way of thinking. That is why double-tops and early failures along the 10-dma or 20-dema in leading names are newer short-sale set-ups that I prefer to use in this environment.

With this in mind, we can examine the better-acting clouds names out there in Appian (APPN), Hubspot (HUBS), CloudFlare (NET), and The Trade Desk (TTD), all of which posted big BGUs when they reported earnings two weeks ago. APPN has been the strongest of the four as it streaked through the $100 Century Mark on Monday, triggering a long entry based on Jesse Livermore’s Century Mark Rule for the long side.

In all four stocks I see potential 360-degree situations that could play out in either direction, most likely dependent on what the general market does from here. APPS reversed hard today off the intraday peak on heavy volume, while the other three are trying to consolidate their prior BGU price moves as all four remain above their 10-dmas.

The proposition here is simple. If they hold support at their 10-day moving averages from here, then they may offer lower-risk long entries using the 10-dma as a tight selling guide. How they play out, however, will likely be highly dependent on the general market situation. Cloud names bear watching here as an area of leadership that could continue shifting more toward an area ripe with short-sale set-ups.

 

 

Uber (UBER) and Lyft (LYFT) continue to hang up near their recent highs, with both stocks gapping to higher highs on Monday. Neither one has given up any ground just yet, but if the general market continues to sell off, be alert to any breaches of the 10-dma which could trigger these as short-sale targets within the context of a more bearish general market.

 

 

Snap (SNAP) continues to find support along its 20-dema but also resistance at its 10-dma. It closed just above the 10-dma but remains within a short five-day range with resistance along the 41.50-42 price area. Watch for any breach of the 20-dema as a possible short-sale entry trigger.

Twitter (TWTR) has meanwhile continued to find resistance at its 50-dma, where it reversed today on light volume. It continues to be shortable on rallies into the 50-dma from here, using the line as a covering guide.

 

 

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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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The action so far this week proves out my view this is something of a seat-of-the-pants affair where one reacts to set-ups as they occur in real-time. At the same time, cracks have been developing in this market even as the Dow posted all-time highs on Monday.

The bottom line as I see it is that if you are long anything in this market currently, then simply review your selling guides and be ready to act if and as necessary. If you are an active trader with an eye toward short-selling when the set-ups are right, then I think things have the potential to get very interesting right here, right now. Stay tuned.

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.