The Gilmo Report

November 29, 2020

November 28, 2020 7:45 pm ET

As we head into the final trading month of the year, the major market indexes, one by one, continue to poke their heads into new-high price ground. The NASDAQ Composite Index joined the new-high party on Friday after spending most of the week pushing through the 12,000 level. The Dow has dipped back below the 30,000 level while the S&P 500 Indexes skirts along new-high territory.

 

 

Precious metals continued lower, and on Friday picked up some downside impetus from a sharp 11.3% downside break in Bitcoin after it tested its all-time highs earlier in the week. The SPDR Gold Shares (GLD) broke support at its 200-day moving average, while the iShares Silver Trust (SLV) looks set to test its September low and its own 200-day line.

I would only become interested in either metal if a bottom in gold coincided with some sort of U&R by the SLV at its September low or support at the 200-dma. Thus, the only real reference for a low in the metals at this point is the September low and the 200-dma for silver with the idea that gold would correlate and find a low somewhere in mid-air below its 200-dma. We’ll see how this plays out.

 

 

The froth in the EV space has simmered down over the past few days. With respect to the Chinese EV names, you’re watching to see how they act on initial pullbacks to their 10-dma.  Li Auto (LI) is sitting right at its 10-dma, which theoretically could offer a lower-risk entry using the line as a tight selling guide. Nio (NIO) found support at its 10-dma on Thursday, while Niu Technologies (NIU) has pulled into its 20-dema, a potential entry using the line as a selling guide.

The hottest name in the group over the past week or so, Xpeng (XPEV) remains well above its 10-dma and can be watched for any pullbacks to the line. Given the short-term climactic look of this recent move, we might expect it to spend a little more time consolidating before it can move higher.

 

 

The general slow-up in the current EV-mania has also been felt in the U.S.-based EV names, but Fisker (FSR) was one outlier on Friday as it broke out on huge volume thanks to an analyst upgrade and $27 price target. The stock was buyable along the 10-dma on the Wyckoffian Re-Test three weeks ago, however, and chasing this breakout isn’t necessarily my cup of tea.

EV semi-truck name Nikola (NKLA) is breaking down sharply as it drops below its 200-dma. The ex-CEO will be clear to sell his 91.6 million shares on Monday, and the selling looks like investors trying to get out ahead of that. Of course, there’s no guarantee that the ex-CEO will in fact sell everything. With NKLA trading nearly 27 million shares a day on average, it may be liquid enough to handle it, so I’d watch for a possible shakeout (also known as a MAU&R) at the 200-dma this coming week.

Tesla (TSLA) ran into intraday resistance near the $600 Century Mark on Friday and is quite extended at this point. One could have treated the move up to 598.78 on Friday as a possible short-sale entry, but that would have required some nimble, intrepid feet. Workhorse (WKHS) is sitting up at the highs of a cup formation and can be watched for pullbacks into the 10-dma as potentially lower-risk entries from here.

 

 

FSR deserves a closer look on the weekly chart, which reveals that the stock is actually breaking out through the mid-point of a big double-bottom formation where the mid-point at 18.42 is the breakout point. Based on Friday’s close at 20.68, the stock is certainly extended from that breakout point, so we might watch for pullbacks closer to 18.42 as potential lower-risk entries.

The other characteristic of this chart to note is that the right side of the “W” looks like a cup with a one-week handle. But also notice that it is more than 50% deep, which also makes it very punchbowl like. The question then becomes, as it does with any deep and steep punchbowl formation, whether this latest five-week jack off the lows is sustainable without at least some sort of pullback and consolidation.

 

 

With the EV names, both U.S. and Chinese, losing momentum, so have the battery/charging stocks. Blink Charging (BLNK), Ballard Power (BLDP), Plug Power (PLUG) and Fuelcell Energy (FCEL) are all quite extended so that at this point one can only watch and see how they handle their first pullbacks into their respective 10-day moving averages, assuming this group move has more upside left in it.

 

 

Lithium-related names tried to get going on Friday thanks to news that Chinese lithium-producer CBAK Energy Technology (CBAT) entered into an agreement to supply lithium to Chinese EV-maker Kandi Technologies Group (KNDI). That sent CBAT on a five-day pocket pivot up through its 10-dma where it stalled and closed just above the line and in a marginally buyable position using the 10-day line as a tight selling guide.

Livent (LTHM) traded up slightly on the news but continues to just track along its 10-dma. Both Lithium Americas Corp. (LAC) and Piedmont Lithium (PLL) posted pocket pivots on Friday in reaction to the news, but both stocks stalled on those moves to close in the lower half of their ranges. I prefer to look to buy either one closer to their nearby moving averages, which for LAC is the 50-dma and for PLL the 10-dma/20-dema confluence.

One factor to consider here with this group is that lithium producers are suddenly being pressed for supply, and several that I’ve researched are currently looking at new projects to meet expanded demand. For this reason, I’d be on the lookout for possible secondary stock offerings as some of these companies look to take advantage of their large recent stock price increases from starting points down in the low single-digits or lower.

I would certainly be very interested in taking opportunistic advantage of any sell-off in any of these names if they did announce a secondary and the stocks came down.

 

 

Yalla Group (YALA) is holding up near its highs after another failed breakout attempt on Tuesday. From here, watch for pullbacks closer to the 10-day moving average at 9.79 as potentially lower-risk entry opportunities.

 

 

Jumia Technologies (JMIA) is looking near-term climactic after running up 11 days in a row and showing the widest one-day price spread in the run on Wednesday. Watch for a pullback to the 10-dma as a potential reference for a lower-risk long entry.

 

 

The NASDAQ Composite may be making new highs, but it doesn’t seem to be driven by similar action in the big-stock NASDAQ names that make up the proverbial S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT). The only one that looks reasonably attractive here is FB as it holds tight along its 20-dema with volume drying up, which puts it in a buyable position using the line as your selling guide.

 

 

My thinking on FB is based on the fact that both of its smaller social-networking cousins, Snap (SNAP) and Twitter (TWTR), continue to conduct themselves in at least a perky manner. SNAP is holding just above its prior re-breakout point at the $44 price zone, making pullbacks to that level or the 10-dma as it continues to rise possible lower-risk entries from here.

Meanwhile, TWTR posted another pocket pivot at the 50-day line on a nice pick-up in trading volume. It’s slightly extended, and I might consider it more buyable closer to the 50-day moving average on any pullbacks from current levels.

 

 

The $60 million question for Netflix (NFLX) is whether it’s forming a bear flag or the lows of a potential base. We already have one Ugly Duckling OWL long-entry signal in the pattern in the undercut & rally (U&R) of three weeks ago along the late-October low at 472.21. Pullbacks closer to that low over the past 2-3 weeks have all held, yet at the same time the 20-dema and 50-dma have served as overhead resistance.

I see a pattern here with potential in both directions, and my guess is that this may resolve in accordance to where the market goes from here. Keep making new highs, and NFLX may continue to build on the prior U&R. See the market roll over and NFLX may play out as a bear flag. Play it as it lies.

 

 

The NFLX weekly chart shows that the stock is currently holding along the lows of the long base structure it has formed over the past four months. From a macro-perspective and from the perspective of historical short-selling patterns, this is something of a textbook, late-stage, failed-base (LSFB). Only problem with this is that anything “textbook” in this market often turns out not to be.

Basically, what you have now is a little two-weeks tight, bear flag underneath the 10-week moving average. Note also the support action off the base structure lows three weeks ago. Very interesting stuff, and I’m watching this closely to see just how it resolves, whether I can go long closer to the prior late-October low, or continue to short it on rallies up to the 10-week line, or both.

 

 

Among industrials that I follow, only Caterpillar (CAT) looks half-way appealing as it holds tight at its 10-dma, a long entry spot using the line as a selling guide. Cummins (CMI) and CSX Corp. (CSX) are wavering at their 10-day lines, while Deere (DE) posted an odd, but very ugly-looking outside reversal on heavy volume Wednesday.

 

 

Industrial metals stocks have been a hot place to be over the past few days, but the stocks are hard to come into given the bleak earnings outlooks. While all these names were already rallying off the March lows in long up trends, some have gathered some upside momentum. In addition to U.S. Steel (X), which I discussed in my last report, we’re also seeing old-line aluminum maker Alcoa (AA) pushing about 25% higher over the past three weeks.

Either the market is seeing something big on the horizon for aluminum usage, or this is just money looking for a “cheap” place to hide. Who knows? While the move doesn’t really interest me since there’s been far better juice elsewhere in this market (e.g., the EV space), it is interesting to see given the lack of fundamentals in names like AA or X.

 

 

This coming week will be very interesting on the earnings front since several cloud names that have followed closely in recent reports are expected to come out with earnings. On Monday, Zoom Video Communications (ZM) is expected to report after the close. Tuesday after the close we’re expecting a report from Salesforce.com (CRM).

Wednesday will be very busy with CrowdStrike (CRWD), Okta (OKTA), Snowflake (SNOW), Splunk (SPLK), and ZScaler (ZS) all expected to report after the close that day. DocuSign (DOCU) will round out the week on Thursday when they are expected to report earnings after the close.

In the meantime, we’ve got DataDog (DDOG) and Shopify (SHOP) acting differently along their respective 50-day moving averages. DDOG has rallied right up into the line on light volume which may initially be tested as a short-sale entry using the 50-dma as a tight covering guide.

SHOP has followed through on Wednesday’s pocket pivot, but recall that on Tuesday I wrote that it looked buyable as it tucked into its 20-dema with volume drying up sharply. That little voodoo pullback set up Wednesday’s pocket pivot, and SHOP is back above the $1,000 level again but now extended.

 

 

Fastly (FSLY) continues to pique my interest as it hangs tight along its 10-dma and 20-dema, but ran into resistance at the 50-dma on Friday as volume declined. It may very well be a short here using the 50-day line as covering guide. Or it simply pulls back into the 10-dma and 20-dema where it becomes buyable again if we see volume continue to dry up.

 

 

The weekly chart helps clarify the bigger picture, and we can see that according to the textbook, FSLY is a late-stage failed-base (LSFB) short-sale set-ups where we see a wedging-volume rally up into the 10-week moving average. Thus, again, it looks like a short here using the line as a covering guide, based on the premise that this is an LSFB in progress.

At the same time, just like with NFLX, there is a big U&R in play here as well along the lows of the prior failed base at the 71.39 low. That U&R has remained in force for the past month. So, this could resolve in either direction, as I see it, and that may be a function of general market context going forward.

From a fundamental standpoint, there is one potential catalyst that could send the stock back up through the 50-day line. That is, that recently FSLY lost Chinese social-media giant TikTok as a customer, thanks to the Trump Administration’s hard line against the company. With a new administration coming in, there is potential, in my view, for TikTok to return as a customer, which would likely send the stock on a re-breakout move if it occurred.

Something to think about on a fundamental basis, but also something for which we might look for clues in the technical action. I think this wedging rally into the 50-dma and the way it resolves from here might be part of the set of clues we might watch for down here underneath this key moving average.

 

 

Meanwhile, my current Four Horsemen among cloud names that all reported earnings at the same time back in the earlier part of November, Appian (APPN), Hubspot (HUBS), CloudFlare (NET), and The Trade Desk (TTD), remain some of the strongest cloud leaders in the current market rally phase.

APPN has been the rocket stock following a move through the $100 Century Mark for the first time two weeks ago. That was a perfect long entry signal that quickly led to further upside and an eventual move in excess of 50% as the stock cleared the $200 Century Mark early in the day on Friday. It then stalled to close at 191.68.

At this point it looks pretty well played out, although it looked that way three days ago on the chart as well. A clean reference for overhead resistance is easily found at the $200 Century Mark. We should consider that Wednesday’s massive price jack was caused by a talking head on CNBC saying that the stock is in “low-code apps” which are a “major new secular trend.” That may certainly be true, but how much of it is already in the stock in a blow-off type of move?

HUBS is approaching the $400 level on a short flag breakout Friday on below-average volume. It was buyable at the 10-dma on Wednesday, per my comments in Tuesday’s report. Watch for a move through or resistance at the $400 level.

NET broke out on Friday on below-average volume but was buyable along the 10-dma per my comments in recent reports. TTD continues to make new highs, but is doing so on wedging volume, so I’m watching for a pullback perhaps down as far as the 10-dma from here.

 

 

Advanced Micro Devices (AMD) and Marvell Technology Group (MRVL) show how well-correlated they are in the side-by-side chart view below. Again, I find that creating groups of charts as one chart view or side-by-side chart view among closely-related stocks is useful in a market environment like this where stocks tend to correlate closely based on group or thematic characteristics.

So, we see below that AMD and MRVL look like carbon-copies (anybody remember what those were?) of each other in identical v-shaped patterns where the left side is a sharp two-day break and the right side is a slow, grinding move right back to where it all started. Once again, Down Big on Volume becomes a buy signal.

Both stocks are out of buying range, especially with MRVL expected to report on Thursday after the close. The two companies do compete in certain areas, so MRVL can garner sympathy from AMD, among other names, like AVGO, INTC, MU, NVDA, and NXPI, etc. For this reason, MRVL is on the Earnings Watch List for this week, with AMD and other names as mentioned serving as possible sympathy vehicles.

 

 

Qualcomm (QCOM) and Qorvo (QRVO) reflect a different set of twins that correlate quite strongly while differing from the examples above quite starkly. Both stocks had buyable gap-up breakout moves in early November after reporting earnings and have since consolidated those moves in sloppy sideways patterns.

Both stocks have also found support at their 20-dema over the past several days on deep pullbacks. QCOM is now stalling at the 10-dma on light volume. You also see a lot of red price bars in the pattern with long upper tails, so we want to watch to see how it conducts itself on any retest of the 20-dema, whether direct, or of a Wyckoffian nature.

QRVO was looking slightly ugly on Wednesday as it reversed Tuesday’s price move on higher and heavy selling volume but held at the 10-dma. It then held the 10-dma again on Friday as volume declined. Perhaps buyable here or on any further pullbacks to the 20-dema.

 

 

Nvidia (NVDA) is meanwhile an entirely different semiconductor animal as a late-stage, failed-base (LSFB), short-sale set-up in progress. And it is something of a textbook case as well. And, as I’ve said, when I find myself using that term textbook, I become wary. But, wariness or not, the stock is playing out as an LSFB after reversing at the 50-dma on Friday.

The two-day rally into the line came on weak volume, and the stock has now spent four days below the 50-dma. I would still watch for a possible MAU&R long entry signal at the line, or something else that might develop after MRVL reports earnings on Thursday. Otherwise, on its face, this is a short-sale here using the 50-day line as a covering guide.

 

 

All three of my space plays, Iridium Communications (IRDM), Maxar Technologies (MAXR) and Virgin Galactic (SPCE), are currently extended on the upside. In opportunistic fashion one would be looking for possible lower-risk risk buy entries to emerge in IRDM at the 20-dema, MAXR at the 50-dma, and SPCE at the 10-dma.

 

 

Sonos (SONO) continues to track tight sideways after posting a buyable gap-up (BGU) move last week after earnings. The intraday low of the BGU day is at 20.20, so pullbacks close to the level would be your best lower-risk entry opportunities. Also watch the 10-dma as it rapidly rises to meet up with the stock which could provide a separate or even coincidental reference for support to the 20.20 low.

 

 

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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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Sentiment as measured by a variety of indicators remains at historically high bullish levels as I noted last weekend, which as we all know is considered a bearish indication. This may be telling us that a near-term top is coming, but it certainly doesn’t tell us when it is coming. As I noted in my last two reports, froth may be a big force in this market, but it is a force that can continue for a longer period of time than you think.

Thus, I can only say, may the froth be with you and not against you. At some point the current froth will very much work in favor of the shorts. And of course we should remain alert to when this might occur without getting locked into a bearish frame of mind before the time is right. Back in late 1999, there was much talk of all the froth getting absurdly out of hand by year-end, but the rally continued into March 2000.

For those of us who rode the froth on the upside, the ride on the downside was almost as euphoric if one was able to capitalize on the short side of the market as it began to develop after the top in March 2000. The term “frothy” is generally interpreted in the pejorative sense, but I always see it as a good thing, because it creates these absurd-looking market rallies that can be played on the long side with great effect. Conversely, it also leads to inevitable, ensuing brutal market breaks that can be played short with great effect, as was the case in 2000.

What makes the current environment perhaps somewhat less believable for many is the fact that this market rally phase has come during a time where it seems to make no sense. However, when one simply takes the individual stock set-ups at face value, everything makes more sense. And that, as I’ve noted many times before in 2020, is what makes it possible to navigate perhaps the strangest market we’ll ever see.

As the iconic actor Jack Webb, who played the role of Joe Friday in the equally iconic TV series Dragnet used to say, “All we know are the facts ma’am.” The same is true for those of us playing in this current market environment, where the only facts we know are the individual stock set-ups. Stick to the set-ups, and the noise becomes irrelevant.

I’ll have more to say about this in the weekend video report. Be 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.