Above the 40 (October 26, 2018) – Yo-Yo Trading Action Takes the S&P 500 Closer to Declining 200DMA Signal

AT40 = 9.7% of stocks are trading above their respective 40-day moving averages (DMAs) – (as low as 7.6%) 8th day of oversold period following 4-day oversold period
AT200 = 25.2% of stocks are trading above their respective 200DMAs (as low as 22.5%)
VIX = 24.2 (as high as 27.5)
Short-term Trading Call: bullish

Commentary
The stock market was all over the place on Friday. The S&P 500 (SPY) gapped down, made a low around 11am Eastern, rallied to an intraday high two hours later, sold off for two hours but did not make a new intraday low, and then churned higher into the close. It was true head-turning, yo-yo action.


via GIPHY

In the end, the stock market demonstrated more deterioration even as the volatility index, the VIX, stayed flat with Thursday’s close. The S&P 500 (SPY) gapped down enough to almost wipe out the entire rally from the previous day. The index just barely missed a new closing low for this selling cycle although it did print a new intraday low. The NASDAQ exhibited similar trading action, but it was able to close higher than its open. The intraday high almost got flush with the previous day’s close. The Invesco QQQ Trust (QQQ) acted the same as the NASDAQ as both were driven by the post-earnings action of index giants Alphabet (GOOG) and Amazon.com (AMZN).


The S&P 500 (SPY) barely escaped a new closing low for this oversold period. The 1.7% loss was as bad as 2.8% at the intraday low.
The S&P 500 (SPY) barely escaped a new closing low for this oversold period. The 1.7% loss was as bad as 2.8% at the intraday low.

The NASDAQ lost 2.1% and faded from its intraday high that touched the intraday low from the previous oversold period.
The NASDAQ lost 2.1% and faded from its intraday high that touched the intraday low from the previous oversold period.
The Invesco QQQ Trust (QQQ) lost 2.6% but at one point almost closed its entire gap down.
The Invesco QQQ Trust (QQQ) lost 2.6% but at one point almost closed its entire gap down.

Despite all the churn on the day, the volatility index, the VIX, still managed to close flat. Its intraday high came up just short of the intraday high of the previous oversold period.
Despite all the churn on the day, the volatility index, the VIX, still managed to close flat. Its intraday high came up just short of the intraday high of the previous oversold period.

The iShares Russell 2000 ETF (IWM) gapped down just like the other major indices, but its intraday high DID close the entire gap before sellers took IWM to a 1.1% loss on the day.


The iShares Russell 2000 ETF (IWM) gapped down at the open and found a bottom right at the edge of its lower Bollinger Band (BB). The ability to close the entire gap down was impressive given the selling across the market.
The iShares Russell 2000 ETF (IWM) gapped down at the open and found a bottom right at the edge of its lower Bollinger Band (BB). The ability to close the entire gap down was impressive given the selling across the market.

AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped as low as 7.6% before closing at 9.7%. The majority of stocks in the stock market are broken in the short-term. The damage is now so thorough I am afraid that the oversold period will only end after 40DMAs catch up with price…that is, 40DMAs will decline to meet the pricing action. AT200 (T2107), the percentage of stocks trading above their respective 200-day moving averages (DMAs), underlined the technical damage with a low of 22.5% before rebounding to 25.2%. The majority of stocks have cracked their long-term uptrends. Like the S&P 500 (SPY), some of these stocks are starting to suffer declining 200DMAs.


AT40 (T2108) plunged to new lows for this selling cycle and also sliced right through the lows of the previous oversold period.
AT40 (T2108) plunged to new lows for this selling cycle and also sliced right through the lows of the previous oversold period.

AT200 (T2107) highlights just how much worse this oversold period is than the previous one. Stocks have not broken down so thoroughly since early 2016.
AT200 (T2107) highlights just how much worse this oversold period is than the previous one. Stocks have not broken down so thoroughly since early 2016.

Overnight Thursday (October 23rd), the currency markets were flashing new dangers in the form of the Australian dollar (FXA) versus the Japanese yen (FXY). Overnight, AUD/JPY plunged and broke the important September low and hit a near 2-year low. It happened to bounce back sharply from that low and thus pulled back the alarms for Friday’s trading in the U.S. market. That rebound also guided my trading actions for Friday.

Once again, the market opened up an opportunity for me to execute the oversold trading strategy as the VIX spiked along with a plunge in the S&P 500 (SPY). I bought call options on SPY and prepared to hold over the weekend. However, the rebound from the intraday lows was fast enough to give me a quick double on those call options. Per the rule to take profits on a quick double in options, I sold. The yo-yo action gave me another opportunity to buy SPY calls which I took albeit in a smaller tranche (preparing for the potential to buy even lower).

I did not add to my ProShares Ultra VIX Short-Term Futures (UVXY) put options as the bid/ask never dropped low enough. I am looking for a fresh spike in the VIX to a new (intraday) high over the last oversold period as my next fade point. I know it seems odd to keep trying to fade the VIX when it still has an upward bias, but I have my rules in place for a reason. Buying put options is a sufficient hedge for further VIX increases because of the double benefit of a drop in the price of the underlying stock and the increase in implied volatility that drives the puts’ premium higher. For example, I quickly sold my Goldman Sachs (GS) put option at the open. My other bullish hedge going into Friday’s expiration was going short a call spread on Netflix (NFLX); that position expired harmless. My current partial hedge is a fist full of put options on Roku (ROKU) which confirmed a 50DMA breakdown, is working on closing its gap up from August, and is still almost 10% above its 200DMA.

With the oversold period stretched into essentially 12 days, the second derivative of the stock market is picking up yet more momentum. My desire to hedge is so active that I am building a “fade on rally” list in parallel with my growing buying list for the oversold period. The 200DMA for the S&P 500 (SPY) has fallen for three straight days. This is an increasingly bearish sign that takes the market to two days away from triggering the “200DMA Signal.”


The countdown to triggering the 200DMA Signal for the S&P 500 has begun: 2 more days to go.
The countdown to triggering the 200DMA Signal for the S&P 500 has begun: 2 more days to go.

Source of data: Yahoo Finance. Source of analysis: downloadable Excel spreadsheet

First of all, this table shows how important, and RARE, it is for the 200DMA on the S&P 500 to decline for five or more days. This kind of decline has only happened ONCE since the big top ahead of the financial crisis, and it took the flash crash of August, 2015 to set things off. The S&P 500 went on to recover all its losses only to descend into a steeper sell-off in early 2016. From there, the index recovered enough to set a new all-time high in July, 2016 and was off to the races from there after one more bump during the 2016 Presidential election. Just as the 200DMA Model predicts, most of the pain of the 2015 to 2016 selling happened at the point of the first 5-day decline in the 200DMA. Until I see contradicting evidence, I am assuming the S&P 500 is about to follow a similar pattern.

For reference, the S&P 500 is down 9.2% from its all-time high. If the 200DMA Signal triggered at current levels, the index would trade about one percentage point below the average 10.4% drawdown by the time of the trigger.

CHART REVIEWS

Advanced Micro Devices (AMD)
Sellers continued to take chunks out of AMD post-earnings. The stock lost another 8.5% after an intraday low that tested 200DMA support. The stock also finished reversing all the gains from the massive July, 2018 breakout. The whopping 46.1% collapse from the 52-week high forms what is a lower high on the longer-term chart; the first (all-time) high occurred in 2000 around $47 and the second (lower) high occurred in 2006 in the low 40s.

These kinds of dramatic collapses after parabolic moves makes me go back and examine the narrative the allowed people to justify the higher prices. I think an August 23rd segment where CNBC’s Jim Cramer explained why AMD is a better investment than Intel (INTC) could be one of the classics for studying the exuberance of parabolic moves: “CEO Dr. Lisa Su is a miracle worker.” Since then, AMD is down 21.9%; INTC is down 2.7%. AMD is still up 71.5% year-to-date. INTC is down 1.0% year-to-date with a 2.7% dividend yield. I like AMD for a buy if it can confirm the 200DMA support with a new post-earnings closing high.


Cramer: AMD is a better semiconductor pick than Intel from CNBC.


Advanced Micro Devices (AMD) finished reversing all its gains from the July breakout on the heels of a massive post-earnings collapse.
Advanced Micro Devices (AMD) finished reversing all its gains from the July breakout on the heels of a massive post-earnings collapse.


“We’re pretty happy with how the business is shaping up, especially around new products…the product story is doing quite well.”

AMD’s Lisa Su on quarterly earnings and her forecast for next year from CNBC.

Amazon.com (AMZN)
AMZN had a rough post-earnings trading day, but there is room for hope for a short-term bounce. The stock gapped down but bottomed in about 5 minutes. It bounced later from that intraday bottom and rallied into its gap down. Still, the stock lost a whopping 7.8% and closed below its 200DMA for the first time in 2 1/2 years. I recalled my AMZN post-earnings trading model which triggers a buy at the open and a hold for as long as two weeks. Accordingly, I bought a calendar call spread with the short side expiring this coming Friday and the long side closing the following Friday.


Amazon.com (AMZN) gapped down below its 200DMA post-earnings. The 7.8% loss sits right between an intraday high that managed to touch the low of the previous trading day and an intraday low that almost hit 1600.
Amazon.com (AMZN) gapped down below its 200DMA post-earnings. The 7.8% loss sits right between an intraday high that managed to touch the low of the previous trading day and an intraday low that almost hit 1600.

Chipotle Mexican Grill (CMG)
CMG surprised me. I was bracing for a large post-earnings 200DMA breakdown given what I assumed is an environment of higher input costs and labor shortages. Instead, the stock likely confirmed 200DMA support with its 3.4% post-earnings gain. The stock could be good for at least a rally to 50DMA resistance.


Chipotle Mexican Grill (CMG) popped for a 3.4% post-earnings gain. With a slight close above its declining 20DMA, CMG actually confirmed 200DMA support.
Chipotle Mexican Grill (CMG) popped for a 3.4% post-earnings gain. With a slight close above its declining 20DMA, CMG actually confirmed 200DMA support.

Alphabet (GOOG)
GOOG had an astounding post-earnings trading day. The stock gapped down 5.6% at the open and then buyers stepped in with force. A 5-minute surge was faded back to the intraday low before buyers managed to take GOOG as high as a 0.8% GAIN. Still, the stock is still working on a confirmed 200DMA breakdown.


Alphabet (GOOG) was particularly wild post-earnings. Buyers immediately took GOOG off its gap down open and at one point issued GOOG a GAIN on the day. The intraday high matched the intraday highs of the last trading days.
Alphabet (GOOG) was particularly wild post-earnings. Buyers immediately took GOOG off its gap down open and at one point issued GOOG a GAIN on the day. The intraday high matched the intraday highs of the last trading days.

Proofpoint, Inc. (PFPT)
I want to take advantage of this sell-off to rebuild positions in cyber security stocks. The post-earnings selling in PFPT may have initiated the attractive discounts that I want. I duly noted how buyers immediately took PFPT off its intraday low and closed the stock near its high of the day.


Proofpoint, Inc. (PFPT) suffered a 15.6% post-earnings loss but managed to close at its intraday high (just under the December, 2017 low).
Proofpoint, Inc. (PFPT) suffered a 15.6% post-earnings loss but managed to close at its intraday high (just under the December, 2017 low).

ETFMG Prime Cyber Security ETF (HACK)
My first return to cyber security stocks will likely be through HACK. PFPT was a handy reminder of the substantial single stock risks still involved with trying to pick through this space. HACK still has a 10.0% year-to-date gain.


The ETFMG Prime Cyber Security ETF (HACK) confirmed a 200DMA breakdown with a near 7-month low.
The ETFMG Prime Cyber Security ETF (HACK) confirmed a 200DMA breakdown with a near 7-month low.

Intel (INTC)
I thought I would be able to start my next between earnings trade in INTC at lower prices. Much to my surprise, INTC rallied post-earnings. This pop runs counter to the abiding narrative of a slowdown in the semiconductor industry, so I am not in a rush to chase INTC higher. My last between earnings play fizzled thanks to the October sell-off.


Intel (INTC) defied pessimism in semiconductors with a 3.1% post-earnings gain. The stock neatly faded from downtrending 50DMA resistance.
Intel (INTC) defied pessimism in semiconductors with a 3.1% post-earnings gain. The stock neatly faded from downtrending 50DMA resistance.

Financial Select Sector SPDR ETF (XLF)
The stubborn weakness in financials must concern investors now that the general stock market is also weakening. Last week, XLF closed at a fresh 13-month low.


The Financial Select Sector SPDR ETF (XLF) lost 1.4% to close right around its 13-month low.
The Financial Select Sector SPDR ETF (XLF) lost 1.4% to close right around its 13-month low.

Health Care Select Sector SPDR ETF (XLV)
XLV is one of the few indices/ETFs valiantly maintaining 200DMA support. I might try a trade above Friday’s intraday high under the assumption that such a move confirms 200DMA support.


The Health Care Select Sector SPDR ETF (XLV) lost 1.1% but survived a second straight test of 200DMA support.
The Health Care Select Sector SPDR ETF (XLV) lost 1.1% but survived a second straight test of 200DMA support.

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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 #8 under 20% (oversold), Day #13 under 30%, Day #20 under 40%, Day #25 under 50%, Day #41 under 60%, Day #94 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)
Weekly 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 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 UVXY puts, long SPY calls, long AMZN calendar call spread,

*Charting notes: FreeStockCharts.com stock prices are not adjusted for dividends. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day. FreeStockCharts.com currency charts are based on Eastern U.S. time to define the trading day.

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