The Gilmo Report

September 14, 2022

September 14, 2022 6:49 pm ET

An impetuous four-day rally off the lows of last Wednesday ran into a solid brick wall yesterday when the Consumer Price Index foiled any ideas of a downside surprise with an upside surprise instead. Talk about bait and switch. Core CPI came in at 0.6% vs. expectations of 0.3%, while non-core CPI, which includes gas prices, came in flat vs. expectations of a -0.1% decline.

If nothing else, the four-day rally helped to show why I threw out that old three-day rule from the first book I wrote on short-selling titled, How to Make Money Selling Stocks Short (John Wiley & Sons, 2004). As I noted in my last report, bear market reaction rallies can last any number of days, the duration of which is ultimately determined by market context, underlying conditions, and even news flow, as it was yesterday.

The CPI news sent the major market indexes gapping back below their 50-day moving averages, with the higher PE-expansion techs on the NASDAQ Composite Index taking the brunt of the selling. By the close the S&P 500 was off -4.32% for the day while the NASDAQ Composite led on the downside with a -5.16% decline.

This morning the core Producer Price Index rose 0.4% vs. expectations of 0.3%, and the prior month’s number was revised to 0.3% from 0.2%. The inflation dragon is alive and well, and the Fed will have to tarry forth again next week with a big interest rate increase. This keeps the 10-Year Treasury Yield ($TNX) on a course for the June highs at 3.483%, ending today at 3.412%.



Today the market spent the morning flopping around before things started to loosen up on the downside as we pushed into the latter part of the day. Despite turning negative in the final hour of trade, the indexes avoided any further selling on the day, however, and recovered to close positive in a small range as volume receded. So far, a one-day reprieve from yesterday’s carnage, but little more.



Despite yesterday’s big gap-down at the open, it wasn’t necessarily hard to find actionable short-sale entry set-ups. Just focusing on the biggest four NASDAQ names was enough to catch some of the short-side action.

For example, Apple (AAPL) reversed at its 50-day moving average on a big outside reversal yesterday. That triggered a short-sale entry at the line which now serves as a covering guide. (AMZN) gapped below its 20-dema and then sliced through the lower 10-dma and 50-dma, triggering further short-sale entries. Short entries are possible here along the underside of the 50-dma which serves as a covering guide.

Alphabet (GOOG), and Microsoft (MSFT) act like close cousins after running right into their 20-demas on Monday where they were shortable. They then gapped lower yesterday, triggering additional short-sale entries as they crossed below their 10-day moving averages.



Netflix (NFLX) and Tesla (TSLA) were both whacked yesterday right along with the general market, but today showed some interesting action. NFLX shook out at its 50-day moving average, so posted a moving average U&R at the line which then serves as a selling guide. At the same time, it has rallied into the 20-dema where it may run into shortable resistance, so play it as it lies.

TSLA was moving on more favorable electric vehicle news flow today and posted a pocket pivot as it shot back above its 200-day moving average. This also takes it right back up to the highs along which it was shortable over a month ago before breaking down with the market.

If you like the stock, then this is technically buyable using the 200-dma as a selling guide. If it fails at current price resistance in the 305-310 area and reverses back below the 200-day line, then that would function as a short-sale entry trigger where the 200-dma would then become your covering guide.



TSLA’s pocket pivot party was joined by another EV-related name, Blink Charging (BLNK), a maker of electric vehicle charging stations, as it posted a pocket pivot coming off its 50-day line. That pocket pivot carried through the 10-dma, 20-dema, and finally the 200-dma by the close. In this position, this can be tested on the long side using the 200-day line as a tight selling guide.



Energy drink producer Celsius Holdings (CELH) reversed back below its 10-dma and 20-dema yesterday on a gap-down move, triggering a short-sale entry at that point. This morning it headed right for the 50-day moving average and turned on the five-minute 620-chart, so could have been covered there.

It ended the day back above the 10-dma and 20-dema and can again be watched for any reversal back below the two moving averages as a potential short-sale entry trigger. I suppose those who still believe the market is merely an “uptrend under pressure” continue to harbor the illusion that we are in the midst of a glorious new bull market and CELH is THE big leader.

If you are one of those people, then you could consider buying the stock here using the 10-dma and 20-dema as a selling guide and flip-point back to the short side if it reverses back through the moving averages.



Enphase (ENPH) refused to bust its 10-dma and 20-dema yesterday despite the brutal market carnage. As I noted in a Monday blog post, support at the 10-dma or 20-dema in a stock that has a straight-up-from-the-bottom breakout may find support in the middle of the prior base if the 10-dma or 20-dema are present.

In such a case, the pullbacks to the 10-dma/20-dema can be buyable for at least swing-trades. ENPH did one better by pulling a classic re-breakout move today on above-average volume. Frankly, if the general market environment were more favorable, I would consider this a desirable long-side target.

If the market remains weak, however, the odds of this re-breakout working diminish. If one has faith in this re-breakout, it can be bought with the idea that it should hold support at the 10-dma and 20-dema. If not, then it is a simple matter to flip short on any break below the 10-dma/20-dema.



SolarEdge (SEDG) is also attempting a re-breakout maneuver here as it pushed to higher highs today on weak volume. It again tested the 50-day moving average today and rallied off the line. This is interesting since on Wednesday I noted that “If one is feeling bullish about the stock, then this pullback can be treated as a long entry using the 50-day line as a selling guide.”

Surprisingly, that’s how pullbacks to the 50-dma have worked out for SEDG as long entries, just as the pullbacks to the 10-dma/20-dema have worked out on the long side for its cousin, ENPH. In this current position, however, SEDG is extended on the upside and certainly not in a lower-risk long entry position.



With ENPH I discussed this idea that stocks which posted breakouts coming straight up from the bottom of the base can often pull back into the base and find support at the 10-dma or 20-dema. That same idea appears to apply to solar installers Sunrun (RUN) and SunPower (SPWR), both of which broke out last week after coming straight up from the lows of their respective bases.

Both have stocks that flopped around the left-side peaks of those bases where they can start to look like double-top, short-sale (DTSS) entries, but each time have held support. Note that over the past two days both RUN and SPWR have held support at or near their 10-day moving averages as they drop back into the base.

What I find interesting here is that despite the general market carnage, both stocks are holding their recent breakouts as they consolidate in constructive fashion. One would have expected that if the general market breaks hard, these stocks will play out as DTSS set-ups for sure, but that has not happened.

If the general market continues to lower lows, then these may eventually play out as base-failure or DTSS set-ups. For now, however, these have been buyable on pullbacks close to their 10-dmas, such that if the market were to turn back to the upside, I would look to get long these with the idea of using the 10-dmas as selling guides. Fascinating, 360-degree stuff, to be sure.



First Solar (FSLR) continues to hold support at its 10-dma for now. As with the other solars, its resilience during yesterday’s sharp market break was impressive. It remains in an extended position for now as I would now look for the 20-dema to provide more meaningful moving average support as it catches up to price.



Canadian Solar (CSIQ) was downgraded last week and consequently posted a base-failure type of short-sale set-up as it busted the 20-dema. The stock found its feet yesterday amid the big market sell-off and today wedged up into the 20-dema on very weak volume.

That would put it in a shortable position here using the 20-dema as a covering guide. If it can quickly regain the 20-dema, then we would be looking at a moving average undercut & rally (MAU&R) where the 20-dema then becomes a tight selling guide.



Array Technologies (ARRY), which makes pivoting platforms for utility-scale solar panels, has a similar look to CSIQ. It triggered a short at the 20-dema yesterday and today held along the lows of its current four-week base. Weak rallies into the 20-dema could offer short-sale entries from here, but as with CSIQ any move back up through the 20-dema could trigger an identical type of MAU&R long entry.



Uranium producer Cameco (CCJ) is another energy-related name that continues to hold up as the market comes under selling pressure. So far it has refused to bust its 10-dma, and I would say that if it did, I might be interested in an aggressive short-sale entry within the context of further general market downside.

Otherwise, a pullback to the 20-dema might offer a more opportunistic long entry spot within the context of a market that holds up from here. As I’ve said before, thematically I find CCJ compelling as a newfound emphasis on nuclear energy is being seen among governments around the globe.



My expectation is that while oil prices have come down and gasoline prices have declined sharply, we will see higher oil prices heading into year-end. To this end, the U.S. Oil Fund (ETF) is holding up on last week’s undercut & rally long entry along the lows of its current base, which as I noted over the weekend defines the neckline of what also looks like a head & shoulders formation.

The USO is holding support at the 200-day moving average following last week’s U&R and I would look for it to settle in along the line. That might bring it into another lower-risk long entry position using the 200-day line as a tight selling guide.



In the precious metals space, something is going on with silver and it may be related to massive outflows of physical silver from the London Bullion Market Association (LBMA). This in turn may be related to the physical scarcity of silver and alleged large short positions in the white metal held by large banks. You’ve heard the story before, the question is whether it is beginning to carry some weight in real-time

The relative action of silver and gold as measured by the daily charts of the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) shows a stark near-term divergence between the two metals. This comes following U&Rs in both two weeks ago along their respective July lows at 13.21 and 6.20.

Note that while the PHYS is coming back in sharply as it busts its 50-dma the PSLV is holding support at its own 50-day line. Both posted potential bottom-fishing buyable gap-ups on Tuesday but did not hold. However, the PSLV closed today at 6.76, only three cents below Tuesday’s 6.79 BGU intraday low.

I think this BFBGU in the PSLV is buyable here using the 50-day line rather than the 6.79 BGU intraday low as selling guides. Silver tends to be volatile, so it may have been asking too much of the PSLV to hold Tuesday’s BFBGU, but not so much for it to hold the 50-day line yesterday.



If the positive divergence in silver holds up, then keep a close eye on the silver miners. These gapped up with silver on Tuesday, but aside from Compania Minas Buenaventura (BVN) which is holding tight, they did not hold up. Mining stocks have a tough time holding up in a general market sell-off, which has certainly been the case for these since Tuesday’s gap-up moves.

I would watch these pullbacks in First Majestic (AG), MAG Silver (MAG), and Pan-American Silver (PAAS) as potential opportunistic entries near or around moving average support. I would also want to see the general market refrain from crashing since in a favorable stock environment the mines will leverage any upside move in silver. If not, then silver may be on its own.



The main issue with the short side of the market right now is that to fully participate in yesterday’s break one either had to be right on the money early in the day or short ahead of the CPI number. Otherwise, at this stage, the patterns are quite messy.

You get a sense of this looking at the charts of Broadcom (AVGO) and KLA Corp. (KLAC). Over the weekend AVGO was sitting well above its 50-day line but when it gapped through the line yesterday it was also shortable at the 50-dma and 20-dema at the open. If then broke lower from there and today shook out at 10-dma support. Call that an MAU&R if you like using the 10-day line as a selling guide.

KLAC was a short at the 200-day line as I noted over the weekend, and one could have shorted that on Monday. It then gapped down yesterday but was extended right at the open. Like AVGO, it shook out at 10-dma support so is also a possible MAU&R at the 10-day line. These might lead to shortable rallies back up into the 50-day lines of both stocks, so can be watched for this.



The daily chart of the VanEck Semiconductors (SMH) ETF typifies the situation for moves in semiconductor names as it was shortable at the 20-dema on Monday but is now extended on the downside. Unlike AVGO and KLAC, it did not shake out at the 10-day line today and instead closed just below the line as semiconductors mostly dangle in No-Man’s Land.



The big CPI print yesterday followed by the upside surprise in the PPI has the crowd thinking crash here. While I consider that to be a very real possibility, it may be that in the short-term it is too obvious. We still have the Fed meeting next week, where many are now looking for a full percentage point interest rate increase.

With things in a near-term oversold condition, and quadruple-witching options expiration coming up on Friday, things may remain a bit muddled. That is why this report is a short one, as I don’t see a lot that I need to do right here, right now. Especially after making big money on the short side yesterday where things certainly got a bit piggy on a 1200-point plus Dow breakdown.

There is also some strangely constructive, percolating action in certain areas of the market, like solars, as well as the odd divergence in silver. Do these create near-term long opportunities in the face of any short-term market bounce that crosses up a crowd that is convinced a crash is imminent? That is a reasonable question to ask, as I see it.

Sure, things look ugly, and they could get uglier. In the short-term, is this a just a bit too obvious? Today represented a lull in the action, which would be the perfect cue for something unexpected to occur. For now, I’m playing with light feet and an open mind as we see how things develop as we push through a quadruple-witching OpEx on Friday and the Fed next Wednesday.

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 unique requirements for a U&R other than the price action. It is 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.