The Gilmo Report

November 8, 2020

November 7, 2020 4:29 pm ET

Heading into Friday the S&P 500 and Dow Indexes had posted their biggest three-day move since 1982. The move began on Tuesday, Election Day, and then posted the biggest post-Election Day rally in 120 years on Wednesday, and just kept going on Thursday, on three gap-up opens in a row.

Some fatigue set in as the NASDAQ Composite Index sold off early in the day on Friday but closed tight on heavy volume. The long lower tail on the price bar gives the impression of supporting action off the intraday lows. Had the index held in a tighter range or closed mid-range the action would have had more of a churning feel but objectively what we have is a pause after a blistering move off the Monday lows.

 

 

Some of you might have noticed there was a Fed policy announcement on Thursday, an odd day for the Fed to do so since its typical pattern is a Tuesday thru Wednesday meeting and then the announcement on Wednesday. Nothing new came out of the meeting since the Fed is already at 0% on interest rates, and no stimulus deal means no Fed monetization, at least for now.

Precious metals had already gapped higher on Thursday ahead of the announcement, with the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) both posting what can be interpreted as buyable gap-ups (BGUs). However, keep in mind that these gap-ups occur primarily on continuous overnight moves in the futures, which do not gap up.

In both cases that strategy would have worked on Thursday since the metals pushed higher again on Friday, with the GLD getting further extended from its 50-day line. In this position pullbacks to the 50-dma become potential entries on constructive weakness.

 

 

The iShares Silver Trust (SLV) also cleared its 50-day moving average on a BGU type of move Thursday. It pulled in slightly to test the 50-day line on Friday and held to close higher again. As with the GLD, pullbacks to the 50-day line from here would be the thing to look for as potential lower-risk entries.

 

 

Finding a way to get into a market that is jacking rapidly to the upside can require some creativity and resourcefulness. One example is found in Uber (UBER), which reported earnings Thursday after the close and immediately dropped to a low $39.50 in after-hours trading. Frankly, I didn’t think the earnings report would be much of an event either way, with the usual billion-dollar loss being reported.

But the drop to 39.50 in the after-hours brought the stock within range of the $39 intraday low of Wednesday’s buyable gap-up move, and a creative, resourceful trader might have decided to take a shot at that point. UBER opened Friday at 42.09, traded down to 41.67, and moved higher from there, closing the week at 44.87.

 

 

Another example is found in Marvell Technology Group (MRVL), which gapped above its 50-day moving average on Thursday. I wrote on Wednesday that, “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.”

Thursday morning MRVL gapped right above the 50-day moving average, like a high-jumper just clearing the bar. It triggered a moving average undercut & rally (MAU&R) long entry. It moved higher to end Thursday near its highs for the day, and then streaked to new highs on Friday as volume picked up again.

This is a remarkable straight-up-from-the-bottom move off the lows of Monday following a U&R move two Thursdays ago.

 

 

Then, of course, we also have our typical earnings-related set-ups in stocks that have reported this week, something that has perhaps been lost amid the incessant din of a disputed election, on Thursday and Friday. While these set-ups tend to be more concrete, they perhaps require less creativity and resourcefulness and more nimble trading feet.

Qualcomm (QCOM) reported earnings Wednesday after the close and blew their estimates away. It gapped up Thursday and opened at 145.82, came in to hit a low of 141.83 in the first five minutes of trade, and then turned higher from there. By the close, it had essentially churned around its opening price to close at 145.41, just 41 cents below its opening print of 145.82

Unless one was able to buy this buyable gap-up (BGU) near the 141.83 low, QCOM’s total price move on the day was defined by the overnight gap and nothing more. The stock held tight on Friday, and the closer to the 141.83 low of Thursday’s BGU price range one can buy it, the more actionable it is given that risk can be kept to a minimum by using Thursday’s low as your selling guide.

 

 

Qorvo (QRVO) was another post-earnings buyable gap-up on Thursday morning after reporting on Wednesday after the close. After an initial after-hours move to the $140 level, it came back in and ended the after-hours session roughly flat with Wednesday’s close. QRVO did not find its gap-up wings until Friday morning with a $139 print at the opening bell. It then quickly set a low at 138 and then immediately shot up to an intraday high of 152.37 in the first five minutes of the trading day.

QRVO then chopped around for the rest of the day and closed Thursday at 146.69. Using the 620-chart, it would have been possible to get on board the stock during the day on Thursday. But the intraday chop was certainly something to be content with. In this position, watch for pullbacks closer to the 138 intraday low of Thursday’s BGU price range as possible lower-risk entries from here.

 

 

Broadcom (AVGO) was buyable on Wednesday as it sat on the 50-day moving average, as I wrote that day, but a gap-up move on Thursday took it out of buying range. It is now back at its prior-October breakout high after pulling a deep, v-shaped re-breakout move over the past four trading days.

 

 

Advanced Micro Devices (AMD) continues to move higher following Wednesday’s MAU&R long entry trigger where it just cleared and held the 50-day line on strong volume. AMD remains extended and can be watched for pullbacks to the 50-day moving average as potential lower-risk entries.

 

 

Notice that the furious market rally off the lows of Monday that began the day of the election has included plenty of tech names. That’s because tech is an integral part of the market, and if tech goes higher, the market goes higher, while if tech goes lower, the market goes lower. Quaint concept of a rotation into “cyclical” leadership remains a sideline, at best.

In the old days, even certain areas of tech, like semiconductors, were considered cyclical with very specific applications to specific areas of the economy. Today, technology reaches into every nook and cranny of the economy and plays a significant role in so many different and formerly unrelated industries. As examples, retail, once a brick-and-mortar industry, is now tech-centric as e-commerce dominates. Media & entertainment, once concentrated on broadcast TV, in movie theaters, and in print, is now mostly distributed through the internet.

There are many more such examples, but the bottom line is that tech’s influence in the economy is so overwhelming that as tech goes so goes the market. Thus, I don’t see how the market goes higher without tech having some sort of leadership role. Therefore, it makes sense to continue focusing on these names in any continuing market rally, as the action this week clearly underscores.

This, of course, brings us back to the biggest of the big tech leaders, the S&P Five. On the group chart below, we can see the sharp rebound in Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT) playing a major role in the market’s fierce rebound this past week, which is no surprise.

These became extended very quickly, and so far, only AAPL and AMZN have pulled in close enough to their 50-day moving averages to be buyable. The other three, FB, GOOG, and MSFT have continued to streak higher, just like the market. No surprise there.

 

 

Tesla (TSLA) turned with the market earlier in the week, which is no surprise, but initially ran into some resistance along the 50-day moving average on Wednesday. However, that move was quickly righted as the stock regained the 50-dma on Thursday, triggering the MAU&R long entry I discussed watching for in Wednesday’s report. It then held the line on Friday as volume declined to -64% below average, more than low enough to call a buyable voodoo pullback into the 50-day line while using it as a tight selling guide.

 

 

The blistering market rally has also dragged Netflix (NFLX) back above its 50-dma. It worked very nicely as a short at the 50-dma two Fridays ago, and then again this past Wednesday, reversing both times but to a lesser degree the second time. On Thursday, NFLX was hoisted above the 50-dma and held the line on a retest Friday.

While I tend to think NFLX is one of the weaker members of the big-stock techs, technically, it is buyable along the 50-day line which also serves as a tight selling guide.

 

 

Earnings season remains a source of sharp movement in individual stocks. Appian (APPN), Hubspot (HUBS), CloudFlare (NET), and The Trade Desk (TTD) all reported earnings after the close Thursday and all four gapped up Friday in buyable gap-up moves. Of the four, APPN and TTD has the strongest moves, while HUBS closed mid-range and NET closed nearer to its intraday lows.

We’ll see if these four BGUs hold up, but potentially they can be bought on any pullbacks closer to their Friday intraday lows as follows: APPN – 79.53; HUBS – 357.58; NET – 61.70; and TTD – 725.30. All four, however, remain well out of range of these lower-risk buy areas.

 

 

Of course, there is still the earnings roulette aspect to earnings season, and this showed up in the action of cloud names Alteryx (AYX), Bill.com (BILL), and New Relic (NEWR) after they reported earnings on Friday. Both AYX and NEWR were shortable gap-downs (SGDs) but are now well extended on the downside.

BILL had spun around on Friday as it gapped down to 105.88 at the open, traded down to a low of 101 in the first 15 minutes of the trading day and then stabilized to move back up near its opening price. It then collapsed again late in the day and closed right at its 50-dma and the $100 Century Mark on heavy selling.

If BILL can hold the line and the $100 level, then this could present an opportunistic long entry using the two levels as selling guides. Otherwise, a breach of both levels would trigger this as a Century Mark short-sale target at that point, so play it as it lies.

 

 

The four cloud names in the group chart below, Salesforce.com (CRM), CrowdStrike (CRWD), DocuSign (DOCU) and Okta (OKTA), are all expected to report earnings on the first three days of December. All three look pretty much the same on their charts, as they are extended from screaming upside moves off last week’s lows where they were all lurking in U&R Land.

In fact, we can see that CRM, CRWD, and DOCU did post U&R moves off last week’s lows on Monday or Tuesday, while OKTA’s action at the time was less clear. Regardless, all four stocks have shot higher in strongly correlated moves over the past week. Only constructive retests of their 50-day moving averages would bring them back into buyable range.

 

 

Other clouds I’ve discussed in recent reports, like Coupa Software (COUP), ServiceNow (NOW), Shopify (SHOP), Splunk (SPLK), Workday (WDAY), Zoom Video Communications (ZM) and ZScaler (ZS), all have charts that look very similar to the group above. Of these, only SPLK is in a potentially buyable position as it pulls into its 50-day line.

I can’t say that SPLK’s pullback looks all that appetizing since it occurred on higher selling volume. However, the volume was slightly less than average, so not overwhelmingly negative. If SPLK can hold the 50-dma, then it would remain a viable long entry this coming week.

 

 

Snap (SNAP) and Twitter (TWTR) remain a tale of two stocks. SNAP pulled in slightly on Thursday and early on Friday to help “correct” its prior wedging action along the rising 10-dma. Given the furious upside market action, a pullback to the 20-dema was certainly not going to happen, and the stock pushed to higher highs on Friday.

TWTR, on the other hand, rallied into its 50-dma on Thursday and then again on Friday where it reversed at the line and headed lower. That was a short-sale entry point at the line. For now, rallies into the 50-day line remain potential short-sale entries until and unless TWTR can regain its 50-dma.

 

 

Chinese electric vehicle names have been what you might call “volatile to the upside” over the past week or so, but this volatility can work both ways at the right junctures. Li Auto (LI), Niu Technologies (NIU) and Xpeng (XPEV) all reversed sharply off their peaks on Friday while Nio (NIO) held tight. All four are extended and can be watched for pullbacks to their 10-day moving averages as potential secondary long entry points.

Also be aware that these companies are expected to report over the next two weeks. LI and XPEV have unconfirmed earnings release dates on November 13th and 12th, respectively, while NIO has released a firm earnings report date of November 17th. NIU has an unconfirmed earnings release date on November 23rd. Again, only NIO’s earnings report date is confirmed, the others are not.

 

 

One name in the EV space that may be interesting to keep an eye on Monday morning is our old friend Workhorse Group (WKHS). The company is expected to report Monday morning before the open and has now pulled back to the top of its original IPO base and area of price congestion.

Last week it undercut the 15.56 low of August 24th and has rallied back up through that low since then. If it weren’t set to report earnings on Monday, I might consider testing the stock here as it pulls a little Wyckoffian Retest along the 10-day line. But with earnings expected to kick off the week, I prefer to sit back and see if anything actionable materializes after earnings are out.

 

 

Elsewhere in the EV space, lithium producer Livent (LTHM) reported earnings Thursday after the close and traded slightly to the downside at the open on Friday. Members may recall that I discussed the stock back in early October when it and Piedmont Lithium (PLL) were moving after PLL announced a sales deal with Tesla (TSLA).

Since then, I know some of you have acted on the U&R that LTHM posted along the lows of its recent base back in late October. But it isn’t clear to me that one would have wanted to hold that heading into earnings. LTHM missed on earnings but beat on revenues when it reported, leading to the indecisive open.

LTHM announced a little later that it had entered its own partnership with TSLA and that ignited what turned into a 15.9% upside blast. Technically, it remains out of buying range, but can be watched for pullbacks closer to the 12.50-13.00 price area.

 

 

With LTHM out of reach, at least near-term, we can take a look at its cousin, fellow lithium producer, Piedmont Lithium (PLL). PLL is the one with the TSLA deal, so I was a bit surprised to see it come in on Friday, although that may have been due to a perception that LTHM was stealing some of its TSLA partnership thunder.

The pullback, however, brings PLL into a potentially actionable long entry position based on Tuesday’s successful U&R through the prior 22.22 low of September 30th. PLL closed Friday at 22.51, just six cents above the 10-day line and 29 cents above the prior 22.22 low. This puts it in a lower-risk long entry position using the 22.22 low as a maximum selling 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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After the sharp three-day move off last week’s lows, the market held up well on Friday despite an early morning sell-off. The test now is how well the indexes hold up here near their September highs. All the major market indexes are now well above their 50-day moving averages, which would be your first major support reference level.

Meanwhile, what you have with respect to most individual stocks is a bunch of v-shaped moves off the lows of last week. Very few powerful breakouts have occurred aside from stocks that reported earnings this past week and gapped up to new highs. In most cases, however, the v-shaped jacks off last week’s lows are nothing special within the context of what are for the most part choppy price ranges.

Some may also find the record-setting rally (largest post-election day rally in 120 years and the largest three-day market rally since 1982) that started on Tuesday to be confusing in terms of an election-related rationale. Tuesday night, when Trump appeared to be surging, futures rallied hard with NASDAQ 100 futures pushing up over 500 points. Later in the evening, when Trump’s surge appeared fleeting, futures came in, but by the next morning when Biden had surged ahead futures were up sharply again.

Some NYSE floor denizens cited the unwinding of a large Blue Wave short position that was anticipating a Democrat sweep of the House and Senate which did not happen. If that theory is true, then I imagine we’ll find out soon enough once the unwinding of this alleged Blue Wave short ends.

Then there’s the simple idea, and one that seems logical to me, that the market senses more QE coming. The clue here may be the strong surges off the lows in alternative-currencies that we’ve been seeing. Gold and silver sprang back to life this week, while Bitcoin has rallied about 75% since early September, when the market corrected 10% in three days off the peak.

We’ll see more earnings reports this week in names I’m following, which I will discuss in the weekend video report. That will remain a focal point for potentially actionable set-ups this coming week. In the meantime, whatever the theories and “reasons” for the election rally, we can just keep things on a concrete level by continuing to operate based on the set-ups we see in real-time.

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.