AT40 = 14.6% of stocks are trading above their respective 40-day moving averages (DMAs) (day 2 oversold)
AT200 = 31.4% of stocks are trading above their respective 200DMAs (near 2-year low)
VIX = 29.1 (range from 27.7 to 41.1)
Short-term Trading Call: bullish
Friday’s classic battle between buyers and sellers delivered a (short-term?) market reset – a potential point where sellers have thrown out just about everything they no longer want, and where buyers feel like merchandise is too cheap to pass up. The S&P 500 (SPY) bounced in picture-perfect style off support at its 200-day moving average (DMA). The NASDAQ and the PowerShares QQQ ETF (QQQ) bounced sharply off their lows but did not quite complete a test of 200DMA support. The iShares Russell 2000 ETF (IWM) struggled with its 200DMA support last week; on Friday, it punched through for the second time only to bounce back strong.
Of these indices, the NASDAQ and QQQ are most likely to break last week’s low in the next near-term sell-off as the key 200DMA supports technically remain untested. However, it should take a swell of stubborn selling pressure to push these indices, and the other major ones, down from their lower-Bollinger Bands (BB) once again during oversold trading conditions.
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped as low as 8.6% before closing at 14.6%. AT40 last traded that low during the January, 2016 sell-off. It is indicative of the broad-based selling and widespread market fear that held AT40 to its second day in oversold territory (below 20%).
AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, closed at 41.4% after going as low as 34.7%. While this level did not penetrate last August’s intraday low, the current breakdown in T2107 effectively re-established the downtrend that was in place from September, 2016 to the small breakout last month. This trend bears watching once a market (relief?) rally gets underway as it could represent a hard cap for the market for some time to come.
The volatility index, the VIX, remains the center of attention. The fear gauge got as high as 41.1 before fading to a close of 29.1. This was the third fade out of the last 5 trading days. So while the VIX remains high, the willingness of fear to stay aloft appears to be weakening. Fear looks ready to cede control to a market reset.
I did not get the gap down that I wanted to switch me to an aggressively bullish trading strategy, but the S&P 500’s bounce off its 200DMA while in oversold conditions was good enough for a few buys. The 5-minute chart of the S&P 500 shows that sellers chose a steady and gradual approach to dumping more stocks overboard after they got higher prices in the first 2 1/2 hours of trading.
I did nothing for the first hour of trading, wary because the market failed to deliver a washout moment. After that wait, I focused on the S&P 500 and individual stocks at key support and resistance. I bought a calendar call spread on SPY, added calls to an existing position, and loaded up on shares. I sold the shares at the close because I suspected I was carrying too much risk given the lack of a clear washout moment. If a retest of 200DMA support happens, I will get incrementally more aggressive. Of course, if selling continues from there, then I will have to consider the impact of the potential bearish turn of events on my trading strategies. Still, with the market deeply oversold, I do not expect a 200DMA breakdown without first a relief rally that exhausts the fresh buying powder of bulls.
I added to my Intel (INTC) call options. I also gulped hard and kicked off another round of weekly calls for Apple (AAPL). I still think AAPL’s 200DMA breakdown is bearish for the stock (and will help weigh on the market), but I am looking for another test of the 200DMA as resistance. My only shares on an individual stock came with Open Text (OTEX) which bounced off 50DMA support and completed a reversal of its bullish post-earnings gap up.
Again, I was not nearly as aggressive as I would have liked given the lack of a true washout event. If the market keeps rallying without such a washout, I will then look for the buyers to demonstrate some convincing show of force after AT40 exits oversold trading conditions.
On the short side, I locked in profits on my BHP Billiton (BHP) put options (per my expectation of a top in iron ore, I will fade the next rally). I ADDED a short on iShares Nasdaq Biotechnology ETF (IBB) as it retested its 200DMA as resistance. I like holding this short for a while as a small hedge on my bullish positioning. I am eyeing Caterpillar (CAT) for a retest of 50DMA resistance around $155 or $156 before reinitiating puts as another partial hedge. I made a huge flyer on a Tesla (TSLA) out of the money put. I call this “collapse insurance.” The stock suddenly looks very bearish post-earnings as buyers have failed to do their typical step into the breach upon the first signs of selling. On Thursday, I watched in surprise as a call option I bought around TSLA’s 50DMA melted away.
The chart reviews below cover some of the above-mentioned stocks and more.
Open Text Corporation (OTEX)
iShares Nasdaq Biotechnology ETF (IBB)
U.S. Concrete, Inc. (USCR)
United Parcel Service, Inc. (UPS)
Best Buy (BBY)
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“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 #2 under 20% (oversold), Day #5 under 30%, Day #6 under 40%, Day #6 under 50%, Day #7 under 60%, Day #13 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.
The AT40 (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 CAT calls, long TSLA call and put, long OTEX shares, long SPY calendar call spread and calls, short IBB shares, long INTC calls, long AAPL calls, long UVXY puts, long SVXY calls
*Charting notes: FreeStockCharts.com uses midnight U.S. Eastern time as the close for currencies. Stock prices are not adjusted for dividends.