The Gilmo Report

October 17, 2021

October 16, 2021 10:40 pm ET

Earnings season always brings a breath of fresh air to the market for the simple reason that it often results in individual stock moves that cut through all the noise. You can worry about inflation, interest rates, bond defaults in China, pandemics, re-openings, lockdowns, tapering, etc., but when it comes right down to it, all you need to do is focus on the individual stock set-ups. Earnings season is guaranteed to create many such set-ups, often resulting in high-velocity moves.

Which brings us to Alcoa (AA), the biggest earnings report of the week in my view, and its post-earnings set-up on Friday. The stock defined the meaning of high velocity Friday morning when it opened at 51.92, instantly set a low at 51.00, and then scooted higher from there. If you were into it, and paying attention, the buyable gap-up (BGU) was there for the taking, although the initial, instantaneous 92-cent drop within the very first minute of regular-session trade might have thrown you.



Industrial metals have been a key group in this current market environment, and in the process have presented many long and even short-sale opportunities along the way in 2021. My expectation is that with many industrial metals names set to report over the next couple of weeks, we could see more post-earnings excitement from this area of the market. With the Halloween season in full fling, these earnings reports may be good for some exceptional tricks and treats as AA was on Friday.

Among the other industrial metals names that I have focused on as both long and short candidates for most, if not all, of 2021, this is how the earnings reports are expected to come in: This coming week we are looking for Steel Dynamics (STLD) to report on October 19th, Nucor (NUE) and Freeport-McMoRan (FCX) both on October 21st, and Cleveland-Cliffs (CLF) on October 22nd. The following week, Teck Resources (TECK) is expected to report on October 27th, while U.S. Steel (X) and Cameco (CCJ) are expected on October 29th.

After filling their respective gap-up rising windows of two Thursdays ago in pullbacks earlier in the week, the major market indexes launched higher this past Thursday. There are those that will call the move on Thursday an “eighth-day follow-through.” The reality is that we were already looking at long ideas over a week ago on undercut & rally (U&R) and other potential set-ups in clouds and other areas of the market, including uraniums and solars. While some of these were U&Rs and MAU&Rs of the two-step or even three-step variety, they eventually caught traction.

And it is this type of action that helps drive the indexes higher well before the so-called follow-through day (FTD). The S&P 500 Index beat the NASDAQ Composite Index to the punch by clearing its 50-day moving average on Thursday. And if you want to call it a “follow-through day” I suppose you can do that, but I fail to see the utility of that type of blanket call as some sort of “all clear” signal to start piling into stocks. The set-ups were already percolating several days ago.




It was two weekends ago that I began discussing potential U&Rs in a number of individual stocks, but most of these U&Rs took a couple of days to gain traction. Note that this coincides almost exactly with the NASDAQ Composite Index spending three days on a three-step U&R through the prior August low. Thus, we can see the correlation in how the NASDAQ’s U&R played out vs. the U&Rs of many individual stocks at the same time.



Despite an allegedly soft Producer Price Index on Thursday, interest rates remained near current highs. I found rejoicing over the PPI to be somewhat over-hyped since the PPI printed 0.5% on the month-over-month number vs. expectations of 0.6% while year-over-year inflation came in at a record 8.6%. In my view, the pullbacks in interest rates were probably more of a sell-the-news type of thing than the start of a downside reversal.

The 10-Year Treasury Yield ($TNX) ended the week at 1.576% while the 30-Year Treasury Yield ($TYX) finished the week at 2.051%, with rates moving higher on Friday. The main point I would make with respect to interest rates is that if the current uptrend continues it may put some pressure on high-PE and high PE-expansion stocks like clouds and other tech/growth names.



Financials, however, are known to love higher interest rates. A slew of big-stock financials reported this past week, and some of the action was playable if one was nimble enough and understands basic OWL set-ups like the price and moving average U&Rs. Here are a few examples: J.P. Morgan (JPM) and Wells Fargo (WFC) both reported on Thursday before the open, and both broke to the downside. JPM, however, posted a U&R at the prior 162.79 late-September low as it also shook out slightly at the 50-day line near the open.

That was therefore both a price and moving average U&R (MAU&R) at the 50-day moving average, and actionable on both counts. JPM has now regained its 20-dema on a re-breakout attempt. Not necessarily a high-velocity move, however, but an easy one for beginners to play if one is new to this game of seeking out decent trades in stocks after they report earnings.

If one missed the buyable action on Thursday, this is technically actionable right here based on the re-breakout. In this case I might use the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide. If rates are headed higher, and the market is headed higher, then this may work.



Wells Fargo (WFC) on the other hand closed negative on Thursday but undercut its own prior 45.06 late-September low to post a minor U&R as it bounced off the intraday lows slightly, but enough to close at 45.31, 25 cents above the prior low. On Friday, it blasted right back up through its 10-dma, 20-dema, and 50-dma on a big-volume pocket pivot, which also becomes actionable using the three moving averages as a relatively tight selling guide.



Citigroup (C) also reported Thursday before the open and shook out at its 200-day moving average, good for an MAU&R long entry. It also posted a U&R at the prior 69.96 September low and a supporting pocket pivot at the 200-day line, all on the same day. That set up a move higher on Friday back above the 20-dema and then the 10-dma, but note the resistance along the prior highs.

If C can hold support at the 50-day line, then it may remain viable on the long side. The action here, however, is less robust than what we’re seeing in other financials so there is always the outside chance it could lag the group and head lower from here.



Goldman Sachs (GS) strikes me as the most robust of the big-stock financials after it reported earnings Friday before the open. The report was viewed quite positively, launching the stock higher on a clean buyable gap-up (BGU) move through the 50-day moving average. That was actionable using the 50-day line as your trailing stop once it cleared the line.



Solar names that I discussed in last weekend’s video report had a good week, but earnings are coming up fast for all four, Enphase (ENPH), First Solar (FSLR), SolarEdge (SEDG) and SunPower (SPWR). I’m not inclined to do anything with these ahead of earnings unless one is looking for a quick scalp in either direction.

ENPH is expected to report earnings October 26th but is not in an actionable position after Friday’s close. FSLR is expected to report on October 28th, but has been good for a small short-sale scalp off the double-top highs in the $108 price area.



SolarEdge (SEDG) is expected to report on November 2nd, which allows traders at least two weeks to catch a decent move, most likely to the downside since the upside has been fast and furious this past week. That has been the case over the past couple of days as SEDG has backed down from double-top highs in the $310 price area. That may remain the case for now, with the idea of looking for a pullback to the rapidly rising 10-dma or 20-dema as a tactical short.



SunPower (SPWR) is expected to report on November 3rd, and as I noted earlier in the week, was shortable at the 200-day moving average after a torrid rally with the rest of the group earlier in the week. I would continue to watch for rallies up into the 200-day line at 28.57 as potential short-sale entries whereupon the 200-dma becomes your tight covering guide.



Lithium names that I also discussed in my video report last weekend have also lost momentum after sharp upside moves earlier in the week. Three of the four names discussed, Albemarle (ALB), Lithium Americas (LAC), and Livent (LTHM) are expected to report earnings in the first week of November. Piedmont Lithium (PLL) reported earnings back on September 24th, so earnings roulette is not something to be worried about.

ALB cleared the 50-day line yesterday and held the line on a pullback Friday, so remains in a buyable position using the 50-dma as a selling guide. LAC and LTHM are up in breakout land but strike me as slightly extended, although one could look at LTHM as being a buyable breakout given the more constructive action vs. LAC’s stalling along the double-top highs. PLL is sitting on top of its 200-dma which could be treated as a long entry point using the line as a selling guide.



I would note, however, that Lithium Americas (LAC) and Livent Corp. (LTHM) look fairly constructive on their weekly charts, below. Whether they get moving higher ahead of their expected early-November earnings reports remains to be seen since they already had sharp upside moves this past week. Nevertheless, you can see a clear cup-with-handle breakout in LAC this past week.



Cameco (CCJ) is expected to report earnings on October 29th, two Fridays from now. The stock had its move this past week and is now hanging around double-top highs, although constructively so. The proper OWL entries occurred on the small shakeouts along the 20-dema on Monday and Tuesday before the stock launched higher in a big pocket pivot move.

CCJ has since run into near-term price resistance along the prior September highs, thus is in a double-top position. This is not necessarily bearish, although it can imply a small pullback off those highs in the $28 price area, and that is what we’ve seen over the past two trading days. As it has pulled back slightly, volume has contracted which in my view is constructive.

If I were looking to buy this ahead of earnings up here, assuming I was already working it on the long side earlier in the week along the 20-dema, I would watch for a constructive pullback from here that meets up with the rising 10-dma or 20-dema. If these moving averages can push up another buck or so, then it could set up perfect near-term support for CCJ on any pullback as it potentially tries to build a handle.



Coal producer Peabody Energy (BTU) is expected to report earnings on November 8th as it continues to chop around along its 10-dma and 20-dema. Another rally on Friday ran into similar resistance along the near-term price highs as was the case on Thursday. This doesn’t necessarily look all that appetizing, but the stock is continuing to hold at its 20-dema with the 50-day line lurking just below.

This may flop around a bit more, but I’d maintain an opportunistic approach here by watching for pullbacks to the 20-dema or, even better, the 50-dma as long entries from here. There are still more than three weeks remaining before BTU is due to report earnings. So that’s plenty of time for something to develop, including a move to higher highs.



The other coal producer I’ve discussed in recent reports, Arch Resources (ARCH), is expected to report earnings on October 26th, so I’m not inclined to do anything with the stock here beyond something of a more tactical nature. And speaking of tactics, the stock has been shortable on rallies into the $100 Century Mark, which it failed to hold earlier in the month.

On the downside, I view the 20-dema as the most viable line of near-term support, so when shorting the stock at the $100 Century Mark I would simply use the 20-dema as my downside price objective. Once the stock pulls into the 20-dema, if it does, then I’m perhaps more interested in looking at this as a long entry where the line serves as a tight selling guide. The third possibility would be the outside chance of a blistering move up through the Century Mark which would outright trigger a long entry based on Livermore’s rule where the $100 level then becomes your selling guide.



I suppose the nice thing about precious metals is that you never have to worry about playing earnings roulette with them since they don’t report earnings. Both metals pulled back on Friday, perhaps in response to the small rally in interest rates that day. Gold dropped -1.66% on Friday, sending the Sprott Physical Gold Trust (PHYS) gapping right down to its 10-dma at 13.89 as volume declined. This can be viewed as a long entry point using the 10-dma as a selling guide.

The white metal acted much more constructively on Friday as silver pulled back -0.54% and the Sprott Physical Silver Trust (PSLV) tucked into its 50-day moving average while volume dried up to -41% below average. Thus, we can view this as a secondary entry at the 50-dma which then serves as a very tight selling guide.



This week we’ll see big-stock NASDAQ names Netflix (NFLX) and Tesla (TSLA) report earnings on Tuesday and Wednesday after the close, respectively. These should be watched closely for actionable set-ups that might occur once earnings are out as I’m not inclined to do anything with any of these stocks ahead of their impending earnings reports.

The following week we’ll see earnings from Apple (AAPL), (AMZN), Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT). While I’m not inclined to do anything with these S&P Five stocks ahead of earnings, there has been some interesting action over the past couple of trading days in AMZN and MSFT.

AMZN posted a big-volume pocket pivot move up through its 20-dema, 200-dma and 50-dma on Friday after looking shortable just below the 200-day line on Thursday. MSFT, meanwhile, has made another move above the $300 Century Mark where it has floundered about previously. Not that I would be jumping on these stocks here, but the action is interesting with earnings expected in less than two weeks’ time.



Semiconductors remain a lagging group for the most part, with something like Applied Materials (AMAT) looking mostly like a short as it rallies up into moving average resistance at the 50-day line.



We can also see how doggy former semiconductor leaders KLA Corp. (KLAC), Microchip Technology (MCHP), Micron Technology (MU), and Western Digital (WDC) are acting as of late. Even with the market turning off the lows of a couple of weeks ago these big-stock semis haven’t responded much as they remain mostly dead in the water.



As I’ve noted in recent reports, if one is jonesing to own a semiconductor name, then just stick to the two big leaders, Advanced Micro Devices (AMD) and Nvidia (NVDA). Both stocks have recently regained their 50-day moving averages with AMD doing so on a big-volume pocket pivot move on Wednesday and NVDA on a five-day pocket pivot signature on Thursday.

Both stocks are near-term extended. AMD is expected to report earnings on October 26th, so we can sit back and wait for that as a potential catalyst for the stock one way or the other. NVDA isn’t expected to report until November 17th, so I’d watch for any constructive pullback back into or near the 50-day line as a possible lower-risk entry opportunity from here.



We’ll start to see cloud names that I follow report earnings over the next couple of weeks and then well into November. Many, like CloudFlare (NET), CrowdStrike (CRWD), ServiceNow (NOW), Snowflake (SNOW), Workday (WDAY) and ZScaler (ZS), for example, are well-extended from recent U&R or MAU&R long entry points that occurred several days ago. This was well before yesterday’s so-called market follow-through day. NET is the wildest of the lot, up 10 days in a row after posting a pocket pivot along the $115 prior lows two weeks ago. (BILL) is expected to report earnings on November 4th, and it is currently in an interesting position along the $300 Century Mark. A move through the $300 level on Thursday in a breakout attempt failed, bringing the stock in a little further on Friday. This could be considered buyable here if one wants to anticipate a possible successful move up through the Century Mark.

In that case, the Friday lows would have to serve as a selling guide. Otherwise, this may be one to keep an eye on for a decisive move up through the $300 Century Mark. That could trigger a long entry based on Livermore’s Century Mark Rule for the long side, whereupon the $300 level would become your selling guide.



DataDog (DDOG) is also expected to report earnings on November 4th, and it remains within buying range of a current base breakout, for those of you who are inclined to buy breakouts. I would look to use the top of the prior base at around $150 as a selling guide since the 10-dma and 20-dema are a bit too far below for my tastes. As the 10-day and 20-day lines move up, however, they may provide better support references if one tries to play this with the idea of catching a decent upside move before earnings.



When it comes to follow-through days, I recall Bill O’Neil’s caveat that “Not every follow-through day leads to a market rally, but every market rally starts with a follow-through day. Once a follow-through occurs, leading stocks breaking out then become your buy candidates.” Back when I ran money for him, I asked him point blank, “So what you really mean is that it all comes down to what the stocks are doing?

And so, it does. That is why I don’t believe FTDs are useful. In general, one can get a sense of when the market has become at least near-term oversold, and at that point, if prior index lows are being undercut to produce U&Rs in the indexes, then we might start looking for similar U&R or other Ugly Duckling type of action among individual stocks, well before an FTD shows up. In other words, I prefer to key on the stock set-ups

One does not have to come in heavy with big positions, although I tend to lean that way myself. One can simply gain small footholds and then leverage and build on that as the market rally continues. If the rally fails, then it’s a simple matter of bailing out once your tight selling guides are penetrated. Sometimes one can even bail out with a profit if one begins to see and sense that stocks keep faltering at meaningful and persistent overhead resistance on the way up off the lows.

From my perspective, therefore, one could have been getting long the market in individual stocks, as appropriate based on the set-ups as hand, and profiting nicely well before the Thursday FTD. Whether it holds up or not is not really my concern, since I already know where my selling guides are with respect to any long set-ups that were actionable prior to the FTD.

Meanwhile, I am content to focus on earnings season as we hunt for high-velocity, high time-value set-ups in stocks right after they report earnings, as was the case with AA on Friday and to a lesser extent the financials throughout the week. Things are set to heat up as we move into the heart of earnings season so be prepared because I can almost guarantee that more AA-like opportunities are yet to be had. That is all.

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.