The Gilmo Report

November 28, 2021

November 27, 2021 10:11 pm ET

The downside air pocket I’ve been looking for per my discussions in recent reports finally materialized Thanksgiving evening, but with a little twist. A small catalyst in the way of news regarding a new mutation from the by-now venerable Cov-19 virus kicked off the festivities that extended throughout the night before Friday’s open. Much of the media panic porn regarding whether this new mutant is more or less infectious was prefaced with words like may or could.

Some of the more ambitious media coverage described the mutated version as “a new virus altogether.” That was enough to tip the FOMO leverage stack and over the falls went the market. The NASDAQ Composite Index busted its 20-day exponential moving average on Friday as volume, accounting for the short trading day, was brisk. The S&P 500 pulled a similar maneuver, while the Dow broke down from a short bear flag beneath its 20-dema.

 

 

While the NASDAQ is down four days from its all-time highs, the broader market as represented by the NYSE Composite Index ($NYA) and the small-cap Russell 2000 Index (represented by its proxy the iShares Russell 2000 ETF (IWM)), was already trending lower for several days prior. The NYSE Composite is now seven days off its prior peak while the IWM is now 13 days off its peak of early November.

This is consistent with the situation among individual stocks, many of which were already breaking down several days prior, even more in some cases. The look of these charts is a bit exhaustion-like from that perspective. With the major market indexes only handful of days off their peaks, it is not clear in which direction the path of least resistance lies from here.

 

 

Interest rates broke lower as money rushed into Treasuries, pushing the 10-Year Treasury Yield ($TNX) down to a weekly close of 1.494%. With a scary new mutant on the horizon, the kneejerk reaction was to read this as a strong motivation for lockdowns, continued QE from the Fed and more MTM (the polite acronym for stimmie checks) from the government. For now, interest rates remain closer to recent highs than recent lows.

 

 

Interestingly, the decline in interest rates on the renewed Goodbye to Tapering theme didn’t keep precious metals buoyant. Both gold and silver were rallying early in the day as the market broke sharply lower, but eventually they simply became sources of cash. The Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) both closed below their 50-day lines.

Both metals could also be considered potential short-sale targets here, but are extended from their recent highs despite sitting just below their 50-day lines. If one was in fact intent on shorting the metals, then the breaks below the 20-demas on Tuesday were the early signals to take. While these could work as short-sale entries, we would also want to be alert to any MAU&Rs that might develop along the 50-dma as well.

 

 

There were some opportunistic long trades to be had, since getting short into a big gap-down open is not necessarily the thing to do. In most cases, with respect to individual stocks it was only possible if one was extremely nimble and looking for logical cover points. I discussed one example in real-time on the Gilmo Live Blog on Friday, Alcoa (AA).

 

 

The five-minute intraday 620-chart on Alcoa (AA) shows all the excitement on Friday, despite the truncated trading day. An opening gap-down print at 47.74 could have been shorted immediately, although not without heightened risk given the pre-existing, extended gap-down move at that open. Both MACD and moving average lines crossed bearishly and it was straight down from there.

Twenty-five minutes after the open, a low at 46.03 was set and the MACD lines crossed bullishly (fast orange above slow blue) about 30-35 minutes later. That led to a move up into the 20-period exponential moving average (blue) where AA encountered resistance and drifted back to the lows. It undercut the prior 46.03 low, bottomed at 45.82 and then pushed back above 46.03.

While I don’t necessarily adhere to intraday U&Rs, they can sometimes offer some confirmation when combined with a bullish MACD cross, which we saw about 10-15 minutes later. From there, upside price velocity kicked in, and AA short higher to print its highest prices for the day above the $48 level. This was fun stuff and gives a decent idea of how the opportunistic 360-degree approach works in real-time.

In my view, by Friday, the need to sell became obvious since we had already seen so many stocks break down over the past week or so, and broader market indexes like the NYSE Composite and Russell 2000 were still in firm downtrends. When that occurs, I have my antennae up looking for possible long opportunities where I can find strong upside price velocity on a reaction bounce. The price velocity then works for you and allows one to take a smaller position in order to create a very manageable and potentially favorable trade on a risk-reward basis.

 

 

Another notable dynamic during Friday’s session was the rally in tech/software names, which are seen as benefiting from visions of new lockdowns as a result of a rogue, mutant virus. But the fact is that from a technical standpoint these stocks had been selling off for several days. In some cases, these stocks were already reaching oversold areas where U&Rs of both the price and moving average variety as well as moving average support came into play in logical fashion.

Look at the daily charts of Bill.com (BILL) and Snowflake (SNOW). BILL triggered a short-sale entry at its 20-dema on Monday and then broke below the 50-day line where it flopped around before undercutting the prior 284.39 low of November 4th and rallying. As I wrote over the weekend, if BILL “can regain the 50-dma then I’d watch for a weak rally back up into the 20-dema as a possible opportunistic short-sale entry as close to the line as possible.”

Bill rallied up toward the 20-dema today and stalled, so that could have been treated as a possible short-sale entry into the rally. Meanwhile, SNOW, which was in fact shortable on the failure at the $400 Century Mark two Fridays ago, was simply bouncing off its 50-day line in a small MAU&R move that ran up into the 20-dema on Friday.

 

 

In a case where the stock was not in a prior downtrend, but was in fact wavering on a recent breakout, such as Shopify (SHOP), we see a gap-up open on Friday reverse at the 10-day moving average and close back down at the 20-dema. That is either a lower-risk entry position using the 20-dema as a tight selling guide or, if the stock breaks below the line, a possible short-sale entry trigger point depending on how SHOP plays out from here.

We can see that Salesforce.com (CRM) and CrowdStrike (CRWD) were both short-sale entries earlier in the week. CRM is now sitting below its 50-dma in an extended downside position, while CRWD is in a similar position below its 200-day moving average. These can be watched for possible moving average undercut & rally (MAU&R) moves that could result in either short upside swing trades, maybe something a little more, or maybe not much at all.

The other possibility here is that the moving averages now serve as near-term resistance. If that’s how these play out, then they become shortable along the underside of the 50-dma for CRM and the 200-dma for CRWD with the idea of remaining flexible and ready to move the other way if price-volume action shifts toward MAU&Rs instead.

 

 

DataDog (DDOG) and Cloudflare (NET) both rallied back up into near-term moving averages on Friday. Earlier in the week and late last week both had triggered aggressive short-sale entries at their 10-day moving averages and then their 20-demas immediately thereafter. Two day rallies have brought both stocks back above their 20-demas, where NET is also running into resistance at its 10-day moving average.

These are fluid chart positions since you also have some prior lows at play here. My guess is that these cloud names will likely, emphasis on likely, play out depending on how the Omicron variant, as the World Health Organization has officially named it, news plays out. If it truly is a variant of real concern, then perhaps the QE-Forever theme rules and cloud names seen as a benefiting from new waves of lockdowns rally.

 

 

ServiceNow (NOW) and Workday (WDAY) also triggered short-sale entries at their 10-dmas and 20-demas this past week. NOW was much weaker as it slashed below its 50-day moving average and is now running into resistance at the line on a two-day oversold bounce. This could play out as a secondary shortable entry using the 50-dma as a covering guide.

WDAY shook out at its 50-day line on Wednesday, and then stalled along the line on Friday but still closed above it. That puts it in play as an MAU&R at the 50-dma which then serves as a selling guide. Both NOW and WDAY remain in fluid chart positions where resolutions in either direction are possible, so like the cloud charts above, these have some interesting possibilities to consider.

 

 

Coupa Software (COUP) and Okta (OKTA) illustrate just how beaten-down and oversold cloud names have become at their worst. They are both dangling down in the dungeons of their chart patterns. DocuSign (DOCU) has been trending lower and on Friday reversed at its 10-dma and closed below its lower 200-dma. Looks like a short entry on Friday at the 10-dma to me, using the 200-dma as a convenient trailing covering guide.

ZScaler (ZS) has only recently broken down from all-time highs this past week. It closed just below its 20-dema on Friday and looks more optimally shortable on moves up closer to the 10-dma. However, Friday’s close below the 20-dema creates a potential short-sale entry trigger here where the 20-dema becomes a tight covering guide.

 

 

Big-stock techs remained mostly weak on Friday. Apple (AAPL) is pulling in to test its 10-day moving average, where it may be buyable if it holds or shortable if it busts the line. Amazon.com (AMZN) turned out to be shortable when it reversed at its 10-dma on Friday and closed 34 cents below its 20-dema. This just barely triggers a second short-sale entry where you would likely be looking for an immediate move lower.

 

 

Alphabet (GOOG) broke down to its 50-dma, which is key near-term support, while Microsoft (MSFT) closed below its 20-dema for the first time since early October. This could trigger a short-sale entry for MSFT here using the 20-dema as a covering guide, although more opportunistic and intrepid short-sellers might have sought to pick the stock off closer to the 10-day line just above.

 

 

Meta Platforms (FB) and Tesla (TSLA) both illustrate the same type of choppy indecisive action around and along key moving averages. FB is above or below its 10-dma, 20-dema or 50-dma on a daily basis and closed Friday just below all three moving averages. Whether this is an optimal short-sale entry using the moving averages as covering guides remains to be seen.

TSLA ran into shortable resistance at the $1200 Century Mark and near its prior all-time highs earlier in the week. It then backed down and closed just above its 20-dema. This puts it in a position where it may work as a long entry using the 20-dema as a selling guide or a short-sale trigger if it breaks below the line.

 

 

Netflix (NFLX) gapped up on Friday, perhaps on hopes that the new Variant of Concern would send everyone back onto their couches in a fresh wave of lockdowns where they can finally get around to binge-watching Squid Games. That move turned out to be a shortable gap-up at the 10-day line as the stock then reversed to closed back at its 20-dema.

In this position NFLX may offer a lower-risk long entry using the 20-day line as a selling guide. Break the line and you have a short-sale entry trigger at the line on the heels of Friday’s short-sale entry at the 10-day line. Like many of these individual stock charts I’m discussing in this report, the chart here is rich with possibilities.

 

 

While most semiconductors gapped down on Friday, Advanced Micro Devices (AMD) and Nvidia (NVDA) held their ground with tight closes along their 10-day moving averages. That puts them both in lower-risk long entry positions using the 10-dmas as selling guides. If they begin to break support at the 10-dmas, then that would likely occur within the context of continued general market selling where more waves of leading stocks might potentially start to break down.

 

 

The first stock I discussed in this report was AA as an opportunistic U&R example. But there were others on Friday in the industrial metals space. Both copper producer Freeport-McMoRan (FCX) and steel producer Steel Dynamics (STLD) posted both price and moving average undercut & rally moves on Friday.

FCX did so as it shook out at its 50-day and 200-day moving averages and the prior 36.75 low of November 4th and closed at 37.24. That would trigger a U&R and MAU&R long entry using the 200-dma as the tightest selling guide and the 50-dma as the widest.

STLD posted a price U&R through its November 2nd low at 62.23 and a moving average U&R or MAU&R through its 50-dma and closed at 62.74 on Friday. That triggers long entries where one can use the 50-dma at 62.74 as a tight selling guide or the prior 62.23 low as a wider selling guide.

 

 

Uranium producer Cameco (CCJ) is another deep U&R set-up that occurred on Friday. The stock undercut the prior 23.41 low of October 29th by a single penny before rallying to close at 24.08. That would put it in a buyable position using the 23.41 low as a selling guide.

 

 

Lithium is also an industrial metal, and lithium producers Lithium Americas (LAC), and Livent Corp. (LTHM) are also in potential long entry positions. LAC is the stronger of the two as it pulled into its 10-day line on Friday and held in a tight price range. That becomes a potential low-risk entry point using the 10-day line as a selling guide. Break the line and LAC would then transpose in to a short-sale entry at that point.

LTHM is an Ugly Duckling type of set-up along the lows of its current base after undercutting the 28.71 low of November 16th and closing back above it on Friday. It also pushed up into its 20-dema without clearing the line so could still play out as a possible later-stage, base-failure, short-sale entry here using the 20-dema as a covering guide. It’s unclear which set-up will dominate in the coming days, but I would keep a close eye on LTHM’s lithium cousins for clues.

 

 

Individual stock chart patterns were ugly enough at the time of my mid-week report back on Tuesday. By Friday they became even uglier. Nasty gap-down breaks were seen across the board on Friday as decliners swamped advancers 2746 to 454 on the NYSE and 3436 to 955 on the NASDAQ. The main question that needs to be answered is whether this is a near-term exhaustion type of low or the start of a continuing and cascading downside market break.

Despite the ugly point drops on Friday, the worst-performing index was the Dow which declined -2.53%. As far as one-day sell-offs go, that’s pretty average, while the optics of a -905.4-point decline made it look far worse. Which is all to say that it perhaps wasn’t that all bad on a percentage basis, which either means it isn’t much or it still hasn’t released the full kinetic energy of a deeper sell-off.

As I’ve said repeatedly, this is a market for nimble swing-traders, at best. The scenario I was looking for to develop as we moved through the holidays, a mythically favorable period for stocks at best, is playing out. Extreme leverage, particularly from the retail FOMO crowd, is now coming to bear as the market hit an air pocket on Friday, deepening the current correction off the highs.

The market landscape is now littered with the carcasses of beaten-down stocks, with the potential for more if this mutant virus turns out to be as bad as the media panic porn brigades have already made it out to be. If it isn’t, then a good reaction rally may be in store. Fasten your seat belts!

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 essentially 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.

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