The Gilmo Report

November 4, 2020

November 4, 2020 7:15 pm ET

An indecisive election outcome led to an indecisive market day today. The major market indexes posted the largest post-election rally in 120 years in the first half of the day on the premise of a deadlocked government as the Senate appears likely to maintain its majority. The market then spent the rest of the day frittering that big move away.

The market ignored a weak ADP jobs number of 365,000 jobs vs. expectations of 600-650,000 and launched higher on the third day of a sharp rally off the Friday lows. From a purely technical standpoint, the impetus was provided by the Dow’s U&R along the early-September lows as it bounced off the 200-day moving average last week. Today it stalled badly at the 50-day moving average on higher volume as it gave back over half of its prior gains.

 

 

The NASDAQ Composite Index, with the help of the NASDAQ 100 Index which posted a 4.41% move, did much better as it held onto most of its gains on the day on higher volume. This move sent the index gapping back above its 50-day moving average, which now serves as a clear reference for downside support.

 

 

From a practical standpoint, it was difficult to get long anything today at the open given that most stocks were gapping up sharply at the open. At best, one could have treated any stock gapping up, provided the volume levels were strong enough, as a type of buyable gap-up using the intraday low as a selling guide. In my view, however, it was best to avoid chasing the confusing election-related strength given the initial price extension.

The group chart of the S&P Five, Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT) does a good job of displaying the various price move permutations we saw today. It also demonstrates why the NASDAQ led all the other major market indexes today on the upside.

Of the five, while each gapped and move higher today, only GOOG posted a buyable gap-up since it was the only one that traded enough volume at 83% above average. FB came in with volume only 48% above average, while MSFT gapped higher on a 28% volume increase over average, and AMZN 25% above average.

AAPL remains below its 50-day moving average while GOOG was already well above its own 50-day line and the other three gapped through their 50-day lines today. FB is extended, while technically GOOG is still within buying range of today’s BGU using the 1706.03 intraday low as a tight selling guide.

AMZN and MSFT are within buying range of their 50-day lines using the 50-dmas as a tight selling guide. As usual, if the stocks reverse and break back below their 50-day lines, they could transpose back into short-sale targets at that point.

 

 

Despite the big index strength, Tesla (TSLA) flipped back below its 50-day moving average early in the day and stayed there to close just below the line on slightly lighter volume. Technically, this is a short here using the 50-day line as a tight covering guide. If it can quickly regain the line, however, and hold it, it would then transpose into a potential moving average undercut & rally (MAU&R) long set-up at that point while using the 50-day line as a tight selling guide.

 

 

Netflix (NFLX) is another example of big-stock weakness and an opportune short-sale entry amid the big index rally today. The stock gapped up slightly and ran right into its 50-day moving average where it reversed on higher volume, thus could have been treated as a lower-risk short-sale entry at the line while using it as a tight selling guide. Further rallies into the 50-day line would continue to serve as potentially lower-risk short-sale entries from here.

 

 

Precious metals held more or less steady today as interest rates and the dollar fell. The SPDR Gold Shares (GLD) traded above-average volume today as it posted a supporting type of pocket pivot at the 10-dma and 20-dema. This looks interesting here and may be buyable using the two moving averages as tight selling guides.

 

 

Silver, on the other hand, dipped back below its 10-dma and 20-dema on higher volume, but remains above its recent September and October lows. Silver futures also remain above the 23.58 early-August low, closing today at 23.97. Thus, the iShares Silver Trust (SLV) remains in a buyable position using the 23.58 low in silver futures as a reference for a tight selling guide.

 

 

Cloud stocks started the day out well, with mixed results within the group. DocuSign (DOCU) is an example of a pocket pivot gap-up move and could have been bought right at the 50-day moving average early in the day. This would have put one in position to ride the stock as it moved higher while using the 50-dma as a tight selling guide.

Note, however, that DOCU was merely a pocket pivot at the 50-day line, not a buyable gap-up since volume was not at least 50% above average. At this point, the stock is well extended, and it is now a matter of seeing how well it can hold the 50-day line on any pullback from here.

 

 

In the cloud group chart below, Salesforce.com (CRM) has rallied right into its 50-dma on a pocket pivot volume signature. But it has to be watched here since a reversal at the 50-day line would trigger this as a short-sale entry if it occurred.

CrowdStrike (CRWD) just cleared its 50-dma on light volume, so could be treated as a long entry using the 50-dma as a tight selling guide. Otherwise, if it rolls back below the 50-day line it would trigger as a short-sale target at that point.

Okta (OKTA) looks a bit like DOCU except that it did in fact post a buyable gap-up today on very heavy volume. It is now extended, but overall, it is remarkable to see how sharply these stocks have all rebounded off last week’s lows.

 

 

In the second cloud group chart, Splunk (SPLK) has regained its 50-dma on higher volume but not sufficient for a pocket pivot. Meanwhile, Workday (WDAY) gapped through its 50-dma only to reverse hard and closed back below the 50-day line and near its intraday lows. Thus, this would have triggered as a short at the 50-dma earlier in the day and we can watch for weak rallies into the line as potential short-sale entries from here if we can get ‘em.

Zoom Video Communications (ZM) bounced off its 50-day line today but the move was not terribly impressive. ZScaler (ZS) regained its 50-day line today on a pocket pivot volume signature so could be treated as a long entry here using the 50-dma as a tight selling guide. A reversal back below the line would potentially transpose this into a short-sale target if it occurred.

 

 

Bill.com (BILL) is expected to report earnings tomorrow after the close, so is not included in the third cloud group chart. Among the other three, Coupa Software (COUP) rallied into its 50-day line today where it offered a lower-risk short-sale entry and then stalled on declining volume. I would look at rallies closer to the 50-day line as potential lower-risk short-sale entries from here while using the line as a covering guide.

ServiceNow (NOW), which reported earnings last week, gapped up sharply today on big volume, qualifying as a buyable gap-up using the 501 intraday low as a selling guide, about 2% below the 513.58 closing price. Shopify (SHOP) has traded right into its 50-day moving average which can initially be viewed as a short-sale entry using the line as a tight covering guide. SHOP also reported earnings last week and sold off. Within the context of that sell-off, today’s rally appears somewhat insignificant.

As with the other cloud names, note the sharp recoveries over the past 2-3 days in these names. This is quite remarkable but not that surprising in this market where the Ugly Duckling can pay a visit when things look their ugliest. This was the case last week for most of these patterns. As I noted over the weekend, by Friday things were so beaten-down that reaction rallies might be expected.

 

 

A Biden presidency is likely viewed as being one that will be less combative toward China, and so the move in techs today was not surprising when viewed in this light. Semiconductors, which have in the past been affected by the U.S.-China trade dispute that dominated the headlines last year and the year before, also rallied sharply across the board today.

Broadcom (AVGO) gapped up today and rallied through its 50-day moving average, stalling slightly into the close but holding above the line on about average volume.  This can be treated as a long entry position using the 50-day line as a tight selling guide. Otherwise, a reversal back below the line would trigger this as a potential short-sale entry at that point should it occur.

 

 

Advanced Micro Devices (AMD) picked up a buy recommendation and a $96 price target from Goldman Sachs (GS) today, rallying up through its 50-dma and closing just above the line on above-average volume. This can be treated as a long entry position like AVGO, using the 50-day line as a tight selling guide. Otherwise, as with AVGO, a reversal back below the line could trigger this as a short-sale entry at that point if it occurred.

 

 

 

Both Qorvo (QRVO) and Qualcomm (QCOM) reported earnings today after the close with mixed results. QRVO is trading roughly flat in the after-hours as I write, while QCOM is gapping up to the 146-147 level after closing today at 128.97. If this after-hours move holds, then QCOM is set to open up well above the upper border of the chart below, so keep a close eye on this tomorrow to see what, if any, actionable set-up(s) might occur.

 

 

QRVO, meanwhile, is trading in the highlighted area of the chart below, just below 135. This one can also be watched closely to see what kind of actionable set-up(s) might arise. I use the term “set-up(s)” with the idea that sometimes a stock can start out as one type set-up (e.g., a buyable gap-up) but end the day as another type of set-up (e.g., a shortable gap-up) if it reverses and fails during the day.

 

 

Marvell Technology Group (MRVL) has continued to hold above last week’s undercut & rally (U&R) move through the prior September base lows and moved higher today with the rest of the semiconductors. Today’s move came on strong volume but only carried as far as the 10-dma.

If the market moves higher from here, and I would imagine that most semiconductors would move higher with it within the context of a Biden presidency, then watch for a move through the 50-dma as a potential MAU&R long entry trigger at that point while using the line as a tight selling guide.

 

 

Twitter (TWTR), not shown, remains in a beaten-down state while Snap (SNAP) continues to hold along its 10-day moving average. The stock is still in an extended position, and I would tend to favor looking for a pullback to the 20-dema as a more opportunistic entry if I can get it.

Given that SNAP is wedging up along its rising 10-dma on very weak volume, a pullback seems possible. That’s primarily why I favor looking for a deeper pullback as a potential lower-risk entry opportunity given the stock’s currently extended state.

 

 

The passage of Proposition 22 in California which allowed app-based drivers to be classified as contractors rather than employees sent Uber (UBER) gapping to the upside in a buyable gap-up move that was also a cup-with-handle breakout. The stock gapped up and opened at 40.66 before coming in to set an intraday low at 39.

UBER then moved higher from there to close at 40.99, not too far above where it started the day. This could become buyable on any pullback closer to the $39 intraday low, so that can be watched for.

 

 

Among the payments-related stocks, I noted that Global Payments (GPN) and PayPal (PYPL) have rallied into their 50-day lines. GPN looks the weakest here as it stalled today at the 50-dma on heavy volume, while PYPL streaked right into the 50-dma without clearing the line on strong volume. Both names can be watched here as possible short-sale targets/entries at their respective 50-day lines while using them as tight covering guides.

 

 

I wrote about three weeks ago that the Chinese electric vehicle names were the last thematic plays I could find at the time, and that has remained the case since then. But what a thematic play they have turned out to be! All four of the auto EV names, Li Auto (LI), Nio (NIO) and Xpeng (XPEV), have been on a tear over the past week, with the leader, NIO, going near-term parabolic.

Of the four, the two that have offered lower-risk entries over the past three days have been XPEV and smart E-scooter maker Niu (NIU). The first was buyable along the 20-dema on Monday and Tuesday, while the latter was buyable along its 10-day line. Both have moved higher since and the whole group of four is now extended again.

 

 

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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 brutal selling carnage last week got so ugly that it engendered a visit from the Ugly Duckling that set off a three-day rally this week. As I wrote over the weekend, “Admittedly, some things are so beaten down at this point that they may be in a position to at least make half-hearted attempts at reaction bounces.”

Right now, that’s what we have. In cases where the bounces have resulted in strong, actionable Ugly Duckling type OWL set-ups, then these can be used as potential long entries in anticipation of further general market upside. In other cases, where the set-ups are on the short side, then I see no reason why these can’t be tested as such with the idea of flipping long if overhead resistance (generally at the 50-dma in the applicable examples above) is cleared.

Overall, the current market situation strikes me as perhaps a bit seat-of-the-pants since it’s not clear what the primary underlying drivers will be once the election noise fades away. Therefore, the key, as usual, is to focus on the set-ups and be ready to move in either direction depending on how things play out as the election results and their impact on the economy, the future of QE, and the future of the virus as it relates to further lockdowns and government stimulus all gains clarity.

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.