AT40 = 57.2% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 56.8% of stocks are trading above their respective 200DMAs
VIX = 11.2 (was as high as 13.2)
Short-term Trading Call: cautiously bullish
Commentary
It took three days for the volatility faders to show up again. Nerves in volatility trading stretched for a third day with the VIX trading as high as 13.2 and a 18.3% gain. The VIX ended the action with a fraction of a percent to call a gain.
Always wary of the fleeting gains in going long volatility, I locked in a double on my call options on ProShares Ultra VIX Short-Term Futures (UVXY). While this gain on my latest tranche of UVXY calls was gratifying it ended a losing streak in place since September. The month was surprisingly placid and laid consistent waste to my once every two week UVXY hedges. It was a marked contrast to the small profits I eked out in August and the beginning of September.
The surge in volatility was large enough to flag a major sell-off. Yet, the S&P 500 barely lost 1% at its lowest point on the day. The index closed with a 0.5% loss. The recovery was important for my trading call. As I indicated in my last Above the 40 post, I planned to flip the short-term trading call all the way to cautiously bearish if the S&P 500 closed below last week’s low. As the chart below shows, the S&P 500 turned in a close call!
Given the major fade of volatility, I am inclined to believe that sellers have exhausted themselves. However, the underlying weakness in the market remains. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped from 62.8% to 57.2%. This level is still far from oversold (20%) or “close enough” to oversold (low 30%s). The new bearish turning point is now a close for the S&P 500 below today’s intraday low (2,544). AT200 (T2107), the percentage of stocks trading above their respective 200-DMAs, dropped to a 1 month low.
I find it instructive to note how another bearish divergence resolved into a sell-off. It was shallow (again) but sharp enough to “feel” significant. This time around I changed my approach from trying to anticipate the timing of the imminent selling and instead prepared to buy in the wake of that selling.
The NASDAQ and the PowerShares QQQ ETF (QQQ) each tumbled similarly. The intraday recovery for QQQ was a bit more convincing.
The selling was strong enough to push the Financial Select Sector SPDR ETF (XLF) into its own bearish engulfing topping pattern. I promptly closed out my XLF call options to preserve my remaining profits on the position.
STOCK CHART REVIEWS
Chipotle Mexican Grill (CMG)
CMG was my biggest pain of the day. Earnings finally arrived, and the response was far uglier than I feared. I was hoping $300 established itself as a relatively strong support. Instead, it will likely now serve as resistance. I will once again stop out of a small position in shares. Per plan, I did not attempt a pre-earnings play with options (a simple put spread would have been quite profitable!).
International Business Machines (IBM)
Investors greeted IBM’s earnings last week with great cheer. It was enough to erase the loss from July’s earnings and challenge the April gap down all in one swoop. The shine came off big-time this week as IBM has suffered three days of sharp losses. Its bullish 200DMA breakout is over and now I wonder whether it will close its up gap to earn an award for relief rally of the year.
Caterpillar (CAT)
The day’s selling was even strong enough to take CAT off its post-earnings perch. At its low of the day, I thought CAT was on its way to filling in its incredible up gap. The stock remains quite stretched as it sits on its upper-Bollinger Band (BB).
Whirlpool (WHR)
Despite continued momentum in housing stocks, WHR stumbled mightily post-earnings. A second day of post-earnings selling stretched the stock further below its lower-BB. This selling looks like it confirmed a top in WHR as the stock separates downward from a head and shoulders type of pattern (not shown in the chart below).
3M Company (MMM)
MMM defied the sellers and gravity as the stock pushed further beyond its upper-BB. The post-earnings surge and follow-through makes MMM a buy on the dip…whenever THAT happens!
In other news, O’Reilly Auto Parts (ORLY) got hammered in after hours post-earnings trading. The 7% loss will no doubt take down peers and throw into question the nascent comeback for these stocks.
— – —
FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!
“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.
Active AT40 (T2108) periods: Day #420 over 20%, Day #234 over 30%, Day #34 over 40%, Day #33 over 50% (overperiod), Day #1 under 60% (underperiod ending 28 days above 60%), Day #8 under 70%
Daily AT40 (T2108)
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%)
Weekly AT40 (T2108)
*All charts created using freestockcharts.com unless otherwise stated
The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.
Related links:
The T2108 Resource Page
You can follow real-time T2108 commentary on twitter using the #T2108 or #AT40 hashtags. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag.
Be careful out there!
Full disclosure: long CMG shares, short CAT call spread
*Charting notes: FreeStockCharts.com uses midnight U.S. Eastern time as the close for currencies. Stock prices are not adjusted for dividends.
I got stopped out of VIX 3 days before the spike which was irritating. The time decay on that is just terrible. The problem is that there are not any natural producers of VIX to sell and VIX futures way out, say 2 years. Unlike in say oil where you can buy futures or options 2,3 years out and the time decay is good on these.
With the US dollar, I am good going to use myself as a contrarian indicator. I had a major urge to bail on my short USD positions so I wonder if it has made a temporary top. I am surprised there is much movement from the dec fed hike which should be very priced in. So we may have some trend followers overdoing the move.
I think the reflation/USD weakness meme will take hold again. Global PMIs are getting very good. US PMI’s at 60 recently have likely peaked in the short term. That will put a structural bid for EM stuff and be causing supply/demand/flow imbalance. The only fly in the ointment is if SPX craps it’s pants and there is significant risk off. Otherwise I don’t see where further bids for USD will come from.
Great pricing on NZD currently. Almost irresistable. I have my starter position and am waiting for volume and price signals to put on some leverage
Play VIX spikes is always very tricky since the VIX-products have a natural gravitational pull that is nearly relentless.
The dollar strength could be traders looking well past a December hike. They may be trying to speculate on new policies coming as a result of Trump’s replacement for Yellen. I think the market is way ahead of itself on that one. So I agree that the dollar will fall back at some point, but for now, momentum is with the dollar. And don’t forget the euro’s continued weakness makes the dollar relatively more attractive overall as well.
Once we get into November, I am not sure what the catalyst for a sell-off could be. Earnings have been fine. Sellers will likely hibernate until the new year when folks want to take profits that won’t get taxed until 2019….
I was thinking that also, could be anticipation that Yellens successor could not possibly be more dovish than Yellen. But if she hikes in Dec, they will be out for a while until inflation ticks up. Recent Inflation doesn’t really justify a hike in Dec, but I think she needs to get it out of the way to clear the deck for a successor I.e not be seen as passing on a hard task, shirking responsibility etc. beyond Dec though I have a hard time imagining they can hike again next year without inflation picking up. If they do hike then the yield curve will be very flat and 2 hikes would probably invert it so it is hard to imagine they move unless inflation picks up. And if inflation picks up, one would think commodities would do well, hence I’m inclined towards commodity currencies as a play, particularly NZD.
It is just amazing how futures pricing just picked up from 40% to 80% probability of a dec hike around 4 weeks ago, a little before the current dollar rally. I’m
Not sure if it was something a FOMC member said or whether they started planting that in their sources but it gets priced in very quickly in implied short rates and from there the dollar. The implied probability from short rates is a leading indicator before central bank meetings it seems, particularly the fed.
Shucks! I completely missed that change in the futures. That would have been my sure sign to go all out long on the US dollar. No coincidence thn that the dollar index bottomed in mid-September? Of course, the euro’s wobbles helped too.
I’ll be interested to see what the reaction will be to the UK hiking. Implied probability is for a hike so if Carney does not deliver, that will be ugly. If he does deliver, that will be interesting too. I am tempted to short GBP to balance out my nzd long and be dollar neutral, short gbp.nzd
What are the specific odds? I think either way, the pound is a short – just safer to do it after the BoE meeting. 🙂