The Gilmo Report

November 1, 2020

October 31, 2020 10:35 pm ET

The NASDAQ Composite Index ended the week at its lowest lows since the double-top gamma squeeze on October 12th that many took for a “follow-through day.” Since then it has been in a steady downtrend, which accelerated into the end of the week on higher selling volume. Note how the bounce on Thursday ran into resistance at the 50-day moving average before careening lower on Friday.

 

 

Thursday’s bounce may have seemed unlikely after Wednesday’s bloodletting, but from a technical perspective it was logical as the Dow undercut its prior 26537.01 low of late September and approached its 200-day moving average before bouncing into positive territory. It again tested the 200-day line on Friday where it held and set the context for a rally into the close. For now, the indexes are in a clear correction, notwithstanding any reaction moves from here.

 

 

In a slight divergence on Friday, gold and silver closed to the upside, with both futures contracts ending the week back above their respective 1874.20 and 23.58 early-August lows. Gold ended the week at around 1878 while silver closed at 23.71. This puts them back above those lows, which keeps them in U&R long entry positions, albeit tenuous ones at that.

If one does act on this as a long entry for either metal (I only show gold futures below), then if stocks continue selling off, one would then be looking for a divergence to set in as the metals move up and stocks move down. It’s not clear to me that this is necessarily going to be the case since Friday’s action was only one day of such divergence. However, risk can still be kept to a minimum in any case given the proximity of Friday’s closing prices to the early-August lows.

 

 

The S&P Five completed their third-quarter earnings report round on Thursday when Apple (AAPL), Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOG) all reported that day after the close. By the end of the Thursday after-hours trading session, four of the five were trading down while GOOG gapped up on Friday but stalled and reversed badly off its highs.

AAPL, AMZN, and FB appear to be in freefall while GOOG and MSFT don’t look all that appetizing on the long side either. They have, however, looked pretty good on the short side! 😉 For now, things are too extended on the downside to offer attractive short entries pending any weak rallies up into resistance from here.

 

 

Tesla (TSLA) looked like a short when I discussed it in my Wednesday report, and it played out that way on Friday as it gapped lower on increased selling volume. The weak-volume move up into three moving averages, the 10-dma, 20-dema, and 50-dma, set up a short entry at that point, and TSLA is now extending to the downside pending any weak rallies back up to the 50-day line from here.

 

 

When I discussed Netflix (NFLX) in my Wednesday report I was looking for any rally up to the 50-day moving average as a possible lower-risk, short-sale entry possibility. At the time it was sitting in a very tight little bear flag, and I didn’t hold out much hope for a rally into the 50-dma.

But thanks to news that NFLX was raising its prices, a rally up to the 50-day line materialized on Thursday. The stock held at the line on Friday, offering short-sellers a very juicy but lower-risk, short-sale entry right then and there. NFLX then broke to lower lows on Friday and is again extended on the downside.

 

 

While FB was slapped around after earnings on Thursday, we might say that Twitter (TWTR) was decimated after reporting earnings on Thursday. A -21.1% decline on Friday was as brutal as it looks on the daily chart, and for alert short-sellers the stock was in fact playable as a shortable gap-down (SGD).

TWTR opened up at 44.53, rallied as high at 45.18, and then rolled over on the 620-chart with a clean MACD cross to the downside. Now the stock is headed for a prior area of congestion where it might find support or perhaps undercut the lows of that congestion zone.

 

 

With FB and TWTR faltering, this leaves Snap (SNAP) as the leading social-networker since it is the only one still holding above its 10-dma while the other two slashed below their own 50-day lines on Friday. The stock is pulling right into the 10-dma but on above-average selling volume. If the market doesn’t continue lower, it’s possible it could hold support at the line.

If the general market heads lower, it’s also possible that a break below the 10-day line could trigger SNAP as a short-sale entry target. My guess is that general market context will figure in heavily in determining which resolution at the 10-day moving average is likely to occur. Play it as it lies.

 

 

Cloud stocks have been a fantastic group chart over the past several days. Last weekend some of the stocks were attempting to pull off U&R moves off their recent September lows. But all of those failed miserably and the stocks again triggered as short-sale entries both early in the week and on Thursday for those focusing on these names.

In the first cloud group chart, Salesforce.com (CRM) keeps moving lower after gapping below its 50-dma on Monday. The other three, CrowdStrike (CRWD), DocuSign (DOCU) and Okta (OKTA), offered short-sale entries on Thursday at overhead resistance either along their 20-dema or 50-dma or some combination of the two as I’ve annotated on the chart below. They are all now extended on the downside and attest to the uniform ugliness of the group.

 

 

In the second cloud group chart, Splunk (SPLK) was shortable along its 20-dema on Thursday and then triggered a secondary short entry at the 50-day line on Friday. Workday (WDAY) offered a lower-risk, short-sale entry at the 50-dma on Thursday and again on Friday morning before breaking to lower lows.

Zoom Video Communications (ZM) triggered as a short-sale entry at both the 20-dema and the $500 Century Mark on Thursday, and then again at the $500 level on Friday morning before breaking down to its 50-day line by the close.

ZScaler (ZS) offered a lower-risk, short-sale entry at the 20-dema on Thursday and then triggered a secondary short-sale entry at the 50-dma when it busted that moving average on Friday. All four of these names are, of course, now extended to the downside, but further illustrate the correlation of carnage in the clouds this past week.

 

 

Just to make my point, I’ll throw in one more cloud group chart where you can see the various short-sale entry points as these have moved lower. All four, Bill.com (BILL), Coupa Software (COUP), Shopify (SHOP), and ServiceNow (NOW), are either testing or have broken below Century Marks that they cleared for the first time not too long ago.

All four also ran into resistance on Thursday along their 10-day moving averages and have since moved lower with BILL, COUP, and SHOP all closing the week below their 50-day lines. These as well are extended on the downside and not in any actionable positions, while NOW sits just below its 20-dema which could be utilized as a short-sale entry spot using the line as a tight covering guide.

 

 

Stocks that were looking constructive last week, or even earlier this past week came apart quickly by week’s end. As one example, Broadcom (AVGO) last Friday closed tight right at its 20-day exponential moving average as volume dried up sharply. That was a typical voodoo pullback, but it ran into trouble quickly on Monday when the stock gapped down through the 20-dema that morning.

That was a short-sale trigger as a potential breakout failure type of situation, and by Wednesday AVGO had broken down below its 50-day line as well. A low-volume rally into the 50-dma on Thursday, thanks to a general rally in semiconductors on news that Marvell Technology Group (MRVL) was buying Inphi (IPHI), set up a lower-risk short entry in the stock as I discussed in Thursday’s video report.

AVGO then gapped down on Friday and churned around as it now sits along the prior base lows. Any further weak rallies into the 50-day line can initially be considered as lower-risk short-sale entries from here.

 

 

The news of MRVL buying out IPHI set the whole semiconductor group alight, with a bunch of rallies on Thursday that ended up offering lower-risk short-sale entries. These rallies coincided with the NASDAQ running into resistance at its 50-day moving average, and on Friday they all gapped the other way.

While Advanced Micro Devices (AMD) was already shortable a while ago along the 50-dma, we see that Nvidia (NVDA) and Qorvo (QRVO) were both shortable at their 50-day lines on Thursday before they gapped lower on Friday.

Qualcomm (QCOM) had broken below its 20-dema on Wednesday, and the MRVL for IPHI news sent it right back up through the line and up into the 10-day moving average on Thursday. But that also worked out as a lower-risk, short-sale entry opportunity at the 10-dma when QCOM gapped back below its 20-dema on Friday. It is now sitting just below its 20-dema, which can be worked as a possible lower-risk, short-sale entry using the line as a tight covering guide.

 

 

Marvell Technology Group (MRVL) put in a very interesting display of extremely volatile but playable pin-action on Thursday on the IPHI buyout news. It first gapped down to 36.08, traded down to 35.30 in the first five minutes of trade where it undercut three lows in the prior base at 35.94, 36.78, and 37, before turning back to the upside and heading for the 50-day line.

It then ran into intraday resistance at the 50-day line and turned lower. Thus, one could have played this as a long on the U&R at the open and then flipped short once it ran into resistance at the 50-day moving average.

 

 

Below you can see the five-minute 620-chart which shows the bullish MACD cross at the open as MRVL undercut the lowest low in the pattern at 35.94 and rallied back up through it five minutes later, triggering a long entry. Once the stock reached the 50-day line, a bearish MACD cross occurred, triggering a short-sale entry, and MRVL drifted lower from there.

Notice how the first bearish MACD cross at about 8:30 a.m. my time did not lead to a reversal. That’s likely because within the context of what was occurring on the daily chart, MRVL had not reached its 50-dma. It wasn’t until we could combine the move on the daily chart into the 50-day line with a bearish MACD cross on the five-minute 620-chart that a good short entry occurred.

 

 

Every group that I follow in this market has been slammed hard over the past week. Financials, industrials, homebuilders, cybersecurity, you name it, the action has been brutal across the board. The payments stocks, as I refer to them, expanded on their group ugliness into the end of the week. We saw PayPal (PYPL) and Square (SQ) slash below their 50-day moving averages on Friday.

They now join Global Payments (GPN), MasterCard (MA) and Visa (V) underneath the 50-day moving average. With Paycom (PAYC) the last holdout as it sits on top of its 20-dema ahead of its earnings report this coming week, we have to wonder whether this will soon breach the line and trigger as a short-sale entry at that point. Something to watch for in an otherwise decimated group.

 

 

Chewy (CHWY) played out as a quick three-day swing trade after setting up along the 20-dema as I initially discussed in last weekend’s report. That led to a trendline breakout on a pocket pivot move Wednesday, but ultimately this only added more proof to the premise that chasing strength in this market is simply a foolish way to operate.

Wednesday’s breakout quickly failed as CHWY reversed course, presenting a nice two-day short-sale scalp on the failed breakout and within the context of a weak general market if one was alert to it. The stock ended the week below where it started and is now back on top of its 50-dma.

 

 

With Tesla (TSLA) breaking down through its 50-day moving average, the Chinese EV names also ran into some trouble on Friday with the exception of Nio (NIO). NIO posted a continuation pocket pivot at the 10-day moving average on Thursday but came in slightly on Friday. In this position, only low-volume pullbacks would offer better entries, but with earnings expected on November 12th the stock strikes me as too extended to get involved with at this point.

Li Auto (LI), Niu Technologies (NIU) and Xpeng (XPEV) on the other hand don’t appear as strong or even as stable as NIO. In this environment, with the indexes in correction mode, I would simply stand aside and wait for any solid set-ups to develop before trying to get long any of these, especially with earnings likely approaching within the next two weeks.

 

 

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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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Everywhere I look there is selling carnage as far as the eye can see. 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. But the sweeping liquidation we’ve seen in many areas of the market is impressive, especially if one is a nimble short-seller.

As I wrote on Wednesday, “The bottom line for now is that I see nothing that anybody needs to get long right here right now, for obvious reasons.” Things were looking bad enough at that time, but the unraveling gathered momentum into the end of the week. At the very least, this does not make for a market that one needs to engage in on the long side unless one is looking for a quick scalp on a reaction bounce.

Even the sudden index rally in the last hour or so of the day on Friday where we saw the Dow move from a more than 500-point deficit to a 157.51-point deficit by the closing bell did little to rectify the situation as far as individual stocks were concerned. It may have simply been a function of month-end window dressing. In my view the door remains open for further general market downside as we move into November and Tuesday’s election.

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.