The Gilmo Report

September 25, 2022

September 24, 2022 1:22 pm ET

The primary advantage of the OWL approach is that it seeks to decipher the market’s message through the interpretation of individual stock set-ups. Since it is stocks that underlie the indexes, it is they who offer the first clues.

Mythical concepts about how many percentage points the indexes have to be up on how many days after a near-term low before one can call a market turn, along with other macro-indicators, opinions, and interpretations of current news events are dispensed with altogether.

If you are able to let the market tell its own story on the basis of the individual stock set-ups, you are more likely to stay on the right track than if you adhere rigidly to some macro-indicator or one-size-fits-all rule. This market seems to ebb and flow in a manic manner like no other I have experienced, and so being able to follow the flow, even if it is manic and fast-paced, through the changing and evolving set-ups is critical to success. Wednesday was certainly a good example of that as I discussed in my report of that day.

Sentiment, as I have noted in recent reports, is a poor barometer of market direction in the near-term. The fact that retail investors, as measured by the American Association of Individual Investors (AAII) sentiment surveys, are almost as bearish as they were at the bottom of the 2007-2008 bear market certainly has not kept the indexes from making lower lows in 2020.

I show this as a monthly bar chart so you can see the intra-month peak in March of 2009. Perhaps we are headed there and will see peaks in bearish sentiment like we have never seen before. It would certainly be a fitting conclusion to the Great Everything Bubble Bear of 2022.

 

 

The current market evidence tells us that extreme bearish sentiment, in other words, how retail investors are feeling, is not necessarily useful as a predictor of near-term market direction. Nevertheless, as the market continues to come down hard, short-sellers should start to think about how they are going to cover short positions in an optimal manner in advance.

Sharp market breaks are often followed by sharp, face-ripping, oversold rallies, so lingering too long on the short side can be troublesome. Have a plan and be ready to execute your plan if you have not, in some cases, done so already.

Certainly, as one who loves to play the short side of the market, getting caught in an oversold bounce such as that we saw in the middle of September 2008, near the start of a massive and sharp new bear market leg, would be my worst nightmare. Then there was the two-day oversold rally in mid-October, which would also qualify as a short-seller’s worst nightmare.

While complacency on the long side is often considered to be cautionary, complacency on the short side can be fatal. That is why we obey our stops, and we Respect the Pig. When things get piggy on the short side, and we begin to see extended downside moves breaking prior price lows we must adopt an alert posture and begin planning for the process of taking profits optimally.

 

 

With the indexes making lower lows and individual stocks becoming extended on the downside, I strongly suggest focusing on this more as forced selling overcomes the market and the major market indexes start to break to fresh lows. Rather than gloat over the piggy short-sale environment we have been slopping around in and before you start thinking about how to spend your newly minted short-sale profits, review your covering plan for short-sale positions.

Things to consider would be where the logical cover points are on a chart based on undercut & rally points, or where major price or moving average support are found on the way down. One can also use simple profit objectives for each position. If the market gives you the 20% you were looking for when you started shorting stock XYZ, take it, or set a reasonable trailing stop that preserves a worthwhile chunk of the gains.

Referring back to the 2008 daily chart above, you will notice that the first big oversold rally in the NASDAQ Composite Index during that massive fall bear leg that started in September occurred after the index undercut a prior low from mid-July 2008. If we are in the earlier stages of a new bear market leg lower, then this may be something to watch for as the indexes approach or undercut the June 2022 lows.

So far, neither the NASDAQ nor the S&P 500 has reached the prior June lows. The broader NYSE Composite Index and the narrow 30-stock Dow have pierced the June lows, however, and they did so on Friday. The NASDAQ and the S&P are not too far behind, and we can watch for undercuts of the June lows this coming week.

 

 

By Friday, if it was not nailed down, it was getting sold as all of our short-sale target stocks start to get extended on the downside following multi-day price cascades lower. One of the few things that was not breaking to lower lows on Friday was silver, but we finally saw the Sprott Physical Silver Trust (PSLV) give up its 50-day moving average.

As I have said, when forced selling hits the market, it will take everything down with it, and silver was no exception on Friday. On its face, the PSLV action is bearish, although there is always the chance of a shakeout if, for any reason, we see stocks stabilize next week. That may be a big if, but we will let it play out as it will and then play it as it lies.

 

 

Meanwhile, gold ended the week at its lowest weekly lows since the August 2020 peak. The weekly chart of the Sprott Physical Gold Trust (PHYS) shows that we have now reached pre-pandemic levels around $1650 in the yellow metal with no turn in sight so far.

 

 

Short-sale target stocks have come apart over the past two days and are now quite extended on the downside. Energy drink peddler and textbook Punchbowl of Death (POD) short-sale set-up Celsius Holdings (CELH) triggered another short-sale entry at the 50-day line on Thursday and drifted slightly lower on Friday.

One member asked about using a gap-fill of the August 1st gap-up move as a near-term cover point, and that can certainly be used if one so desires. It worked reasonably well on Friday, and in this position, CELH is only shortable on weak rallies back up into the 50-day line from here.

As an exercise, can you spot the fractal head and shoulders formation in CELH? That fractal H&S makes up the right side of the larger POD formation, all of which can be seen on the weekly chart, not shown. It has made for an interesting study since the market peak in mid-August.

 

 

POD short-sale set-up Impinj (PI) finally came to fruition on Thursday when it busted the 10-dma and 20-dema, triggering a short-sale entry at that point. It then went on to bust the 50-day line later that day and on Friday, and spun lower in a big range before closing just below the mid-point of the daily price bar. As with CELH, only weak rallies up into the 50-day line would bring it into short-sale range again.

 

 

Solars were smashed along with most everything else, triggering copious short-sale entries over the past 2-3 days. Solar installers Sunrun (RUN) and SunPower (SPWR) had triggered short-sale entries by Wednesday and Thursday and by Friday RUN posted a U&R cover point at the prior 30.82 September 2nd low.

SPWR found support right at its 10-week moving average on the weekly chart, not shown, as it pulled down close to its 50-day line on the daily chart. That was therefore a cover point. We would now watch for weak rallies into the 20-dema by SPWR and into the 50-dma by RUN as potential short-sale opportunities from here as these are now extended on the downside.

 

 

Solar energy storage names. Enphase (ENPH) and SolarEdge (SEDG) both triggered fresh short-sale entries on Thursday. ENPH triggered at the 20-dema while SEDG triggered yet another short-sale entry at the 200-dma. SEDG had already triggered a short-sale entry at the 20-dema on Wednesday.

SEDG is extended to the downside as it pushes below the early-September lows. ENPH, meanwhile, closed Friday just below the 50-day moving average so is technically in a fresh short-sale entry position using the 50-dma as a covering guide. My preference, however, would have been to enter at the 20-dema on Thursday as it is somewhat extended overall at this point.

 

 

First Solar (FSLR) was again shortable at the 10-day moving average on Thursday and it then tested the 20-dema from there. On Friday, the stock dipped below the 20-dema but by the close managed to hold 26 cents above the line. If it busts the 20-dema again then it would potentially trigger a short-sale entry using the line as a covering guide.

 

 

Other solars I have discussed in recent reports, Array Technologies (ARRY) and Canadian Solar (CSIQ), were shortable earlier in the week and the prior week along their 20-demas. Both busted their 50-day lines on Wednesday to trigger additional short-sale entries and have pushed lower from there. Both stocks are now extended on the downside such that only rallies back up into the 50-day lines would offer optimal short-sale entries from here.

 

 

Uranium producer Cameco (CCJ) was a short at the 20-dema on Thursday per my comments in Wednesday’s report. The stock split wide open on Friday before finding support at the 200-day moving average. That put it in a textbook cover position, and it then bounced slightly by the close. Weak rallies into the 20-dema would potentially offer opportunistic short-sale entries from here if the stock is able to rally further.

 

 

Big-stock NASDAQ names Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), and Microsoft (MSFT) reflect the busted nature of the market after Friday’s sell-off. All four trended lower throughout the week and all four are extended to the downside. Not much here in terms of fresh short-sale set-ups at this stage, that much is certain!

 

 

It is easy to see that the names I have discussed in recent reports have provided excellent short-sale targets over the past few days, proving my point that one need not range far and wide for the purpose of creating a large list of short candidates. A small handful of key names is all you need, and those discussed in this report so far have worked well in this regard.

We can add big-stock NASDAQ names Netflix (NFLX) and Tesla (TSLA) to that short list. NFLX triggered a short-sale entry at the 20-dema on Thursday while TSLA triggered an aggressive short-sale entry at the 10-day moving average on Thursday morning which was then followed by a short entry trigger at the 200-dma.

TSLA went on to gap below its 50-day moving average Friday as it looks set to test the early September lows. Meanwhile, NFLX closed just below its 50-day moving average where it is in a short-sale position using the 50-dma as a covering guide.

 

 

Electric vehicle charging station names Blink Charging (BLNK) and ChargePoint (CHPT) have also worked well as short-sale target stocks over the past several days. BLNK is in freefall after triggering short-sale entries along several moving average on Tuesday. It is now headed for its July 26th low at 17.16 which may serve as a cover point if it does not rally back up above its September 6th low at 19.01 first.

CHPT has declined for six straight days. Along the way it triggered short-sale entries at the 10-dma and 20-dema on Tuesday, the 20-dema on Wednesday, the 50-dma on Thursday, and finally the 200-dma on Friday. It closed the week at 14.75, just above the early-April low at 14.22.

Any of these lows could serve as U&R types of cover points, but I would also note that both stocks are more than 20% below initial short-sale entry points from earlier in the week. Thus, if one were using a 20% profit objective as a cover signal, one is staring it in the face after Friday’s action.

 

 

Fertilizers CF Industries (CF), Mosaic (MOS), and Nutrien (NTR) were all shortable along their respective 10-day and 20-day moving averages on Wednesday as I noted in my report that day. All three split wide open on Friday with big gap-down breaks right through their 50-day moving averages. Yes, we could even say these patterns now stink to high heaven, and only rallies back up toward the 50-day lines would bring them back into shortable range from here.

 

 

There has literally been nowhere to hide if one is long this market. I would assume, however, that Gilmo members are NOT long this market, and any who are playing in this market have been working the short side.

Travel-related names that I mentioned in my last report, American Airlines (AAL), Booking Holdings (BKNG), Walt Disney Co. (DIS), Hilton (HLT), Las Vegas Sands (LVS), and SeaWorld Entertainment (SEAS) illustrate the no-place-to-hide character of the market sell-off this past week. In my video reports of the prior week, I also discussed a larger, inclusive group of travel-related names as potential short-sales into news rallies at that time.

There really is not much to say at this point except that for short-sellers who hit them right, they would have worked out well. But we should also acknowledge that everything was getting dumped by the end of the week as forced selling swept over the market so anybody selling short was a sudden genius after the Fed meeting. There is no shortage of these ugly breakdowns to be found in the charts at this point.

 

 

Iridium Communications (IRDM) played out in interesting fashion on Thursday and Friday. I discussed the stock as a late-stage, failed-base (LSFB), short-sale set-up at the 20-dema in my Wednesday report and it dropped down to the 50-dma on Thursday. The thing is, it held support at the 50-day line and bounced on strong volume for a pocket pivot.

That pocket pivot took the stock right into the 20-dema where it then played out again as a short-sale entry. On Friday, it sealed the deal when it busted the 50-day line and triggered a second short-sale entry using the 50-dma as a covering guide. That would remain the case on any weak rallies back up into the line from here.

 

 

As you might have guessed, semiconductors that I mentioned in my last report, Applied Materials (AMAT), Advanced Micro Devices (AMD), Broadcom (AVGO), Intel (INTC), KLA Corp. (KLAC), Microchip Technology (MCHP), Micron Technology (MU), Nvidia (NVDA), and Qualcomm (QCOM), continued trending lower right into Friday.

All of these names have been in extended downtrends since mid-August. They all rallied with the market off the June lows before rolling over with the market in mid-August when the S&P 500 reversed at 200-day moving average resistance. There is nothing left here in terms of short-sale set-ups as semiconductor stocks plumb to lower lows.

 

 

All the short-sale set-ups that showed up earlier in the week made my cup runneth over in my reports. By the end of the week, however, the short side is somewhat out of phase as my cup now runneth dry when it comes to fresh, optimal short-sale set-ups and entries.

Of course, that is a rich person’s problem at this point. The market looks severely oversold, and we have undercuts of the June and July lows by the NYSE Composite and Dow Jones Industrials Indexes. Just for good measure, note that the small-cap Russell 2000 Index has also undercut prior July lows and just missed posting a full U&R along those lows on Friday.

 

 

As we can see, the indexes are in positions where a natural reaction rally, even a short one that fails quickly, could ensue if we simply do not crash lower. On an individual stock basis, I note that many of our short-sale target stocks are now extended on the downside and some even triggered short-sale cover signals on Friday. If I am focused on the individual stock set-ups, then the likelihood of a reaction rally is certainly higher now than it was earlier in the week.

This is something to keep firmly in mind if you are still holding short positions. As the daily chart of the NASDAQ Composite from September and October 2008 shows at the start of this report, even brutal bear market down legs do not go down in a straight line. If you ignore textbook short-sale cover signals and fail to exercise vigilance, then you do so at your peril.

If you have done a reasonably good job of putting yourself in a position to get lucky on the short side over the past few weeks as the S&P 500 has broken down from mid-August resistance at its 200-day line and individual stocks have split wide open, you are likely feeling piggy. And I have only one thing to say in that regard: Respect the Pig.

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.

____________________________________________________________