Above the 40 (March 8, 2019) – A Newly Precarious Stock Market Scrambles for Support

AT40 = 54.1% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 38.8% of stocks are trading above their respective 200DMAs
VIX = 16.1
Short-term Trading Call: bearish

Stock Market Commentary


The above tweet begins the dilemmas that lay ahead for short-term trading after I first flipped bearish ahead of Thursday’s selling.

First, I downgraded my short-term trading call from cautiously bearish to bearish thanks to the minor 200DMA breakdown on the S&P 500 (SPY).

The S&P 500 (SPY) barely confirmed its 200DMA breakdown as buyers lifted the index off its intraday low for a 0.2% loss on the day.
The S&P 500 (SPY) barely confirmed its 200DMA breakdown as buyers lifted the index off its intraday low for a 0.2% loss on the day.

The NASDAQ (NDX) broke down below its 200DMA on the same day as the S&P 500. The tech laden index also made a minor confirmation of that breakdown.

The NASDAQ (NDX) barely avoided confirming its 200DMA breakdown with a rebound to a flat (-0.2%) close.
The NASDAQ (NDX) barely avoided confirming its 200DMA breakdown with a rebound to a flat (-0.2%) close.

Notice that both major indices have rising 50DMAs which promise to deliver more solid support than the 200DMAs. In other words, this current sell-off is likely to be relatively shallow.

At the same time of these breakdowns, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), has fallen so far, so fast, that my favorite indicator has created a trading environment that “feels” oversold. Just six trading days ago, AT40 finally fell out of the 80% overperiod. At the time, I called the moment a “small nick in the ever-lengthening overbought period.” Just two trading days prior, AT40 tumbled out of the overbought period and now trades at 54.1%.

Moreover, with buyers rushing into the breach caused by the opening gap, the volatility index, the VIX, quickly transitioned from a spike higher to a sharp fade lower. This trading action suggests sellers may have already exhausted themselves for now. I sat on my latest tranche of UVXY call options thinking the VIX could follow-through. That decision could end up costing me in the coming week.

The volatility index, the VIX, reversed sharply off its intraday high to close at a 3.3% loss.
The volatility index, the VIX, reversed sharply off its intraday high to close at a 3.3% loss.

I will try to resolve this dilemma by focusing bearish plays on fades at resistance and breakdowns below critical support levels and little to nothing in between. I provide some examples in the chart review below. The prospect of a (short-lived) rebound keeps me interested in a few plays on the long side with bullish setups.

I assume the intraday scramble from fear to hope was related to a shifting interpretation of the jobs report for February. The economy only created 20,000 net jobs in February even as the number of unemployed people dropped by 300,000 (including the return of Federal workers from the government shutdown). These headlines seemed to line the U.S. up for the same trouble burdening other major global economies. With buyers stepping in right at the open, the over-reaction in the pre-market futures trading quickly corrected. I am sure traders listened to narratives of “statistical blip” and “special circumstances given bad weather and the government shutdown.” Nevermind that the pundits providing the lofty consensus expectation of around 170,000 somehow could not take into consideration known factors like the weather and the government shutdown…

Stock Chart Reviews

Advanced Auto Parts (AAP)

Advanced Auto Parts (AAP) suffered a 200DMA breakdown last week. This bearish move throws fresh doubt on the viability of my position in O’reilly Automotive (ORLY).

Advanced Auto Parts (AAP) confirmed a 200DMA breakdown. AAP last traded below its 200DMA 13 months ago.
Advanced Auto Parts (AAP) confirmed a 200DMA breakdown. AAP last traded below its 200DMA 13 months ago.

Booking.com (BKNG)

Booking Holdings (BKNG) confirmed 200DMA resistance and suffered a 50DMA breakdown after earnings in February. The stock is a short on a new post-earnings closing low.

Booking Holdings (BKNG) has avoided a new post-earnings low, but the damage may be done with the 50DMA breakdown.
Booking Holdings (BKNG) has avoided a new post-earnings low, but the damage may be done with the 50DMA breakdown.

Chipotle Mexican Grill (CMG)

Chipotle Mexican Grill (CMG) continues to drift along with a slight upward bias. The stock is now forming another Bollinger Band (BB) squeeze. I will trade in the direction of its resolution. Note that the last BB squeeze resolved into a post-earnings breakout.

Chipotle Mexican Grill (CMG) is forming another Bollinger Band squeeze.
Chipotle Mexican Grill (CMG) is forming another Bollinger Band squeeze.

Foot Locker (FL)

I am noticing a number of stocks that gapped up strongly in celebration of earnings only to fade away under the pressure of sellers and profit-takers. Foot Locker (FL) is the latest victim. On Friday, it finished reversing its gap up. I covered FL as a potential “calm after the storm” play. Now that the stock filled its gap, I need to see some stabilization above 50DMA support to get interested in buying. The stock is a short on a close below the 50DMA.

Foot Locker (FL) dropped another 3.3% and finished reversing its post-earnings gap up.
Foot Locker (FL) dropped another 3.3% and finished reversing its post-earnings gap up.

Gap (GPS)

Gap (GPS) is another stock suffering a dramatic post-earnings gap and crap. Given the downtrend going into earnings, I am not interested in trying to play a rebound on this one at this juncture.

Gap (GPS) printed a post-earnings gap and crap and sellers have barely rested ever since. GPS sliced back through its 200DMA and looks ready to finish reversing the gap up with a test of 50DMA support.
Gap (GPS) printed a post-earnings gap and crap and sellers have barely rested ever since. GPS sliced back through its 200DMA and looks ready to finish reversing the gap up with a test of 50DMA support.

Splunk (SPLK)

Splunk (SPLK) followed through with its topping pattern. The selling became small but orderly last week. After my put spread closed at its target profit, I am now looking for signs of buyers trying to hold the line at 50DMA support.

Splunk (SPLK) suffered a 50DMA breakdown, but buyers quickly moved to stabilize the stock.
Splunk (SPLK) suffered a 50DMA breakdown, but buyers quickly moved to stabilize the stock.

Workday (WDAY)

Workday (WDAY) is trying to hold the line at 50DMA support after it suffered a rapid post-earnings decline. I would only play WDAY from the long side on a close above its lower Bollinger Band. I would short the stock on a new post-earnings low (and 50DMA breakdown).

Workday (WDAY) gently tapped 50DMA support and bounced back to flatline.
Workday (WDAY) gently tapped 50DMA support and bounced back to flatline.

iShares MSCI Turkey ETF (TUR)

I threw in the towel on my trade in iShares MSCI Turkey ETF (TUR). While the ETF still trades above its 200DMA, I consider the 50DMA breakdown an early warning sign that this trade is not going to work as desired. The narrative of slowing global growth makes TUR too risky to continue holding here.

Since confirming its 200DMA breakout at the end of January, The iShares MSCI Turkey ETF (TUR) has steadily drifted downward.
Since confirming its 200DMA breakout at the end of January, the iShares MSCI Turkey ETF (TUR) has steadily drifted downward.

Kroger (KR)

Kroger (KR) is under pressure again. A big post-earnings breakdown took the stock down to a 9-month low. The stock was consolidating into this breakdown, so I do not expect the stock to recover anytime soon. Indeed, sellers returned right away to the stock on Friday to punch in a new post-earnings low.

Kroger (KR) blues are back as a post-earnings loss broke the stock down from converged 50 and 200DMAs.
Kroger (KR) blues are back as a post-earnings loss broke the stock down from converged 50 and 200DMAs.

EB (Eventbrite)

Eventbrite (EB) was one of several recent IPOs whose extended consolidation captured my interest. The company’s earnings was pretty much a disaster with the stock closing at an all-time low. Needless to say, EB is now a broken stock and one to fade on a rally.

Eventbrite (EB) lost 24.6% post-earnings and closed at an all-time low.
Eventbrite (EB) lost 24.6% post-earnings and closed at an all-time low.

Lowe’s Companies (LOW)

Lowe’s Companies (LOW) was looking good after earnings even with an intraday low that at one point erased the entire gain on the day. Sellers have not stopped since then. When I lasted pointed to LOW I noted it as an example of a stock I considered trading on the bullish side of a test of rising/converged support at its 50 and 200DMAs no matter the signal from AT40. That time has already arrived. The easy stop (and potential flip to a short) is a close below 50DMA support.

The sellers have yet to relent on Lowe's Companies (LOW) post-earnings, but buyers finally tried to make a stand around 200DMA support and above 50DMA support.
The sellers have yet to relent on Lowe’s Companies (LOW) post-earnings, but buyers finally tried to make a stand around 200DMA support and above 50DMA support.

Twitter (TWTR)

Twitter (TWTR) is slipping away from its 50DMA after a failed attempt at a post-earnings recovery. TWTR is looking like a stock that will just stay stuck in an extended trading range. It is time for me to consider selling call options against my long position (see my post on Tesla (TSLA) trading strategies for an explanation of the approach).

Twitter (TWTR) suffered a setback at 50DMA resistance after a post-earnings recovery.
Twitter (TWTR) suffered a setback at 50DMA resistance after a post-earnings recovery.

Pulte Home (PHM)

Pulte Home (PHM) is still consolidating around its 50 and 200DMAs. I was hoping to play this stock as a late seasonal play (trading season ends sometime between now and April) but time is running out now.

Pulte Home (PHM) continues to pivot around converging 50 and 200DMAs.
Pulte Home (PHM) continues to pivot around converging 50 and 200DMAs.

Meritage Homes (MTH)

Meritage Homes (MTH) printed an impressive bounce off its converged 50 and 200DMA support. However, like PHM, the quickly expiring time for the seasonal home builder trade is keeping me from betting on a test of the recent high around $46.

Meritage Homes (MTH) rebounded sharply from its 200DMA support this week. The stock looks like it is stabilizing.
Meritage Homes (MTH) rebounded sharply from its 200DMA support this week. The stock looks like it is stabilizing.

Fedex (FDX)

Fedex (FDX) printed a bearish 50DMA breakdown last week. There is nothing but air underneath this stock, so I bought puts in anticipation of a resumption in selling.

Fedex (FDX) confirmed a 50DMA breakdown which puts the December low back in play.
Fedex (FDX) confirmed a 50DMA breakdown which puts the December low back in play.

Target Corporation (TGT)

Target Corporation (TGT) ran into a brick wall at 200DMA resistance. If buyers do not step up soon, TGT may soon suffer the same fate as Lowe’s Companies (LOW).

Target Corporation (TGT) gapped higher post-earnings but quickly failed to break through 200DMA resistance.
Target Corporation (TGT) gapped higher post-earnings but quickly failed to break through 200DMA resistance.

iShares 20+ Year Treasury Bond ETF (TLT)

The iShares 20+ Year Treasury Bond ETF rallied all week long. I accumulated TLT puts as a kind of hedge of stock market strength. I am assuming bond yields will trend higher again if signs of economic/market strength show up again. This is a small hedge on getting caught with bearish positions on a sudden upside surprise from, say, the US-China trade front.

The iShares 20+ Year Treasury Bond ETF (TLT) gained 0.4% and closed above its 50DMA again.
The iShares 20+ Year Treasury Bond ETF (TLT) gained 0.4% and closed above its 50DMA again.

Semiconductor Hldrs ETF (SMH)

The Semiconductor Hldrs ETF (SMH) made its own 50DMA breakdown but bounced back quickly. If a market bounce is in the cards, semiconductors look ready to lead the way higher.

The Semiconductor Hldrs ETF (SMH) rebounded from its intraday low to recover from a 200DMA breakdown.
The Semiconductor Hldrs ETF (SMH) rebounded from its intraday low to recover from a 200DMA breakdown.

Micron (MU)

Micron (MU) is one of those semiconductor stocks that looks ready to lead a market rebound if one is coming. If the stock continues higher on Monday, I will buy call options. I have added MU to my small basket of stocks to play from the long side. I have not yet figured out a good trading pattern, but, like Apple (AAPL), an aggressive stock buyback makes this stock an attractive swing play candidate with weekly call options.

Micron (MU) jumped off its intraday low in what may be a successful defense of 50DMA support.
Micron (MU) jumped off its intraday low in what may be a successful defense of 50DMA support.

First Solar (FSLR)

First Solar (FSLR) is shining in an otherwise bearish setup for the market. Like MU, I am eyeing going long here if the stock continues higher on Monday. FSLR looks like it made a strong and successful test of converging support…the stock just needs confirmation.

First Solar (FSLR) defended support at its 200DMA and closed with a 1.6% gain.
First Solar (FSLR) defended support at its 200DMA and closed with a 1.6% gain.

Stamps.com (STMP)

Stamps.com set up for a short after it failed resistance from the top of its lower Bollinger Band. I actually got a little ahead of the move and bought a put spread several trading days before the bearish confirmation.

Stamps.com (STMP) is weakening again as the upper part of its lower Bollinger Band formed tight resistance.
Stamps.com (STMP) is weakening again as the upper part of its lower Bollinger Band formed tight resistance.

The Kraft Heinz Company (KHC)

Big money investors are clearly not done dumping the Kraft Heinz Company (KHC). After a brief consolidation, the stock ran into resistance at the top of its lower Bollinger Band and dropped to a new all-time low.

The Kraft Heinz Company (KHC) continues to sag post-earnings. Last week, the stock made a new all-time low.
The Kraft Heinz Company (KHC) continues to sag post-earnings. Last week, the stock made a new all-time low.

El Pollo Loco Holdings (LOCO)

El Pollo Loco Holdings (LOCO) suffered significant technical damage post-earnings. The “chicken trade” came to a screeching halt with this breakdown. Normally, I would be angling to buy the dip, but this stock is flagging a warning signal for now.

El Polo Loco Holdings (LOCO) plunged below its 200DMA for a post-earnings 17.1% loss.
El Polo Loco Holdings (LOCO) plunged below its 200DMA for a post-earnings 17.1% loss.

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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 #44 over 20%, Day #42 over 30%, Day #41 over 40%, Day #40 over 50% (overperiod), Day #2 under 60% (underperiod), Day #3 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 T2108 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 call, long STMP put spread, long TLT puts, long FDX puts, long TWTR shares, long ORLY

*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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