Sellers Followed Through On Resolution of Bearish Divergence – Above the 40 (January 29, 2021)

Stock Market Commentary

After the recent bearish divergence resolved to the downside, the stock market rebounded sharply. Volatility was over-extended and my favorite breadth indicator plunged at an extreme rate. In that context, the stock market’s subsequent bounce made sense as relief from extreme conditions. The sellers followed through on the resolution of bearish divergence by generating breakdowns below important support levels. Ironically, the selling across the major indices masked the on-going battle royale between regime change and a bubble. Important vestiges of the micro-bubble performed well to close the week.

The Stock Market Indices

The S&P 500 (SPY) rebounded on Thursday with a 1.0% gain but faded from its intraday high to remain below its 20-day moving average (DMA). That close preserved the bearish trading action and sellers followed through with a 1.9% loss for the index. Buying into the close failed to prevent a marginal, but still bearish, 50DMA breakdown. The S&P 500 is now down 1.1% for the young year.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) lost 1.9% and closed a hair below 50DMA support.

The NASDAQ (COMPQX) experienced a weak rebound on Thursday. Sellers went right back to work on Friday and did not stop until the tech-laden index closed below its uptrending 20DMA support for the first time since last November 3rd. While the NASDAQ’s primary uptrend broke, a test of 50DMA support remains a ways away. Accordingly, the NASDAQ is still up 1.4% year-to-date.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) lost 2.0% and closed below 20DMA support.


The iShares Trust Russell 2000 Index ETF (IWM) also broke down below its 20DMA support. IWM lost 1.5% and closed at a three week low. Like the NASDAQ, IWM is still up year-to-date. IWM is greatly out-performing with a 4.8% gain so far this year.

iShares Trust Russell 2000 Index ETF (IWM) lost 1.5% and closed below its 20DMA.

The Select Sector SPDR Trust Financial (XLF) went negative for the year on Wednesday. Its next day rebound stretched into the gap. Friday’s 2.0% loss created a fresh 50DMA breakdown and a 1.8% loss year-to-date. The XLF’s reversal of its last breakout looks more dramatic than the S&P 500’s reversal.

Select Sector SPDR Trust Financial (XLF) lost 2.0% and broke 50DMA support for the second time in three days.

Stock Market Volatility

I claimed in my last Above the 40 post that Wednesday’s volatility surge was unsustainable. Sure enough, the volatility index (VIX) gapped down the next day and lost 18.9%. However, the VIX gapped higher on Friday and closed with a 9.5% gain. The VIX had a wild day as it rallied back to Wednesday’s close before faders took over from there.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) gained 9.5% despite faders pounding down from intraday highs.

The Short-Term Trading Call: Assessing the Follow-Through

  • AT40 = 41.1% of stocks are trading above their respective 40-day moving averages
  • AT200 = 84.8% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation).
  • Short-term Trading Call: cautiously bearish

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped to 41.1%. The move preserved my cautiously bearish short-term trading call as the S&P 500 confirmed its 20DMA breakdown with a 50DMA breakdown. The relative elevation of the NASDAQ and IWM imply the stock market has room to run to the downside.

Friday’s selling pressure was enough to push another small percentage of stocks below their longer-term 200DMA support lines. AT200, the percentage of stocks trading above their respective 200DMAs, closed at a 2-month low. AT200 finished reversing its latest (albeit modest) breakout. Like the NASDAQ and IWM, AT200’s elevation – it sits at 84.8% – implies the stock market has plenty of room to the downside. In other words, the longer-term bull market rally can remain well intact even as this sell-off widens further. AT200’s gap up on November 9th from 61.6% to 71.6% provides a natural downside target for a bearish period in the stock market. By that point, AT40 should be in oversold territory.

An expanding list of 50DMA breakdowns underlines the short-term (cautiously) bearish trading call.

Stock Chart Video Review

Stock Chart Reviews – Below the 50DMA

Advanced Micro Devices (AMD)

I am usually looking for opportunities to buy Advanced Micro Devices (AMD). The last 50DMA breakdown was an exception. AMD broke support again, this time after reporting earnings. By all accounts, earnings were very strong. I heard the siren song of “fundamentals” and bought the headlines in the form of a covered call position (expiring this coming Friday). I expect AMD to churn for a while and plan to sell short several calls before this position ends.

Advanced Micro Devices (AMD) lost 2.2% as post-earnings selling continues with a confirmed 50DMA breakdown.

Discover Financial Services (DFS)

Credit card company Discover Financial Services (DFS) made an all-time right at earnings. The selling pressure has barely stopped ever since. DFS is part of a weakening financial sector. DFS is a short if it confirms the 50DMA breakdown with a close below last week’s low.

Discover Financial Services (DFS) lost 2.7% without confirming the recent 50DMA breakdown.

Levi Strauss & Company (LEVI)

The IPO for Levi Strauss & Company (LEVI) was a surprise and a strange one for such an old and venerable company. I am NOT surprised the first day of trading was near peak value. Blue jeans are not a growth industry, especially now in the pandemic.

In November, LEVI finally closed back above its IPO price of $17. The post-earnings selling ended LEVI’s attempt to hurdle its post-IPO open price of $22. LEVI is a short with a stop above the 50DMA.

Levi Strauss & Company (LEVI) lost 5.0% on a 50DMA breakdown as post-earnings selling continues.

Lululemon Athletica (LULU)

The stock for athletic gear company Lululemon Athletica (LULU) has been all over the place. After almost eight months of wide swings, LULU has effectively gone nowhere. Now, LULU faces an important test of 200DMA support. A 200DMA breakdown makes LULU a short.

Lululemon Athletica (LULU) is trying to hold 200DMA support.

Match Group Inc (MTCH)

I still have no position in Match Group Inc (MTCH). Now, with a 50DMA breakdown, I continue to wait and see. I am not interested in shorting MTCH because of what I think is a very strong business proposition and model in this day and age. A test of 200DMA support will get me very interested.

Match Group Inc (MTCH) lost 1.1% a day after surging 7.6% as 50DMA resistance held.

Charles Schwab Corp (SCHW)

I am still surprised at all the recent weakness in the shares of trading platforms and brokers. A narrative is growing about pressures from the frenetic trading in micro-bubble stocks. For example, Robinhood explained it limited trading in a few of these stocks because capital requirements from Wall Street clearinghouses surged 10x. These burdens must impact other brokers as well.

Charles Schwab Corp (SCHW) dropped deeper into bearish position with a 50DMA breakdown on Friday. SCHW is already down 15.5% from its all-time high and back to an important point of consolidation from December. As a result, the stock could easily snap back before selling resumes. As with any stock breaking 50DMA support, SCHW flips to bullish on a reversal and 50DMA breakout.

Charles Schwab Corp (SCHW) lost 4.1% ona 50DMA breakdown.

Whirlpool (WHR)

Appliance manufacturer Whirlpool (WHR) was a company featured as a buy to play a housing bubble. I was skeptical of the entire narrative. Since that September post, WHR is up 7.1% despite strong post-earnings selling pressure the last two trading days. WHR is a short but only to the bottom of the current trading range. Moreover, support from the uptrending 200DMA is coming on fast.

Whirlpool (WHR) lost 4.9% on a 50DMA breakdown and second day of heavy post-earnings selling.

Stock Chart Reviews – Above the 50DMA

AMC Entertainment Holdings Inc (AMC)

Last week, AMC Entertainment Holdings (AMC) made a strong bid for membership in the micro-bubble. On Wednesday, AMC soared 301%. The following day, AMC lost 56.6%. It closed the week with a 53.7% rebound. As of January 15th, short interest was 38.1% of float.

AMC flashed buy signals both on its preceding 200DMA breakout and the confirmation the following day. I did not take the move seriously because I already wrote off AMC. The good news in the price surge is that if AMC can figure out how to execute a secondary stock offering at these prices, the company could stash enough cash to stay alive to welcome the other side of this coronavirus pandemic.

AMC Entertainment Holdings Inc (AMC) rebounded 53.7% a day after losing 56.6%.

Alphabet (GOOG)

Alphabet (GOOG) goes into earnings this week clinging to a breakout. On January 20th, GOOG surged a convincing 5.4% to break out to an all-time high. The stock is now back to where it opened on that day. I will be watching earnings closely for the next trading signals.

Alphabet (GOOG) lost 1.5% after rebounding off 1810 for the second day of three.

Apple (AAPL)

Earnings marked a top for Apple (AAPL) this time around. The stock lost 3.5% and then 3.7%. It closed the week below 20DMA support. Despite my bearishness on the the market, I executed the weekly AAPL call trade anyway. I will of course look to unload at the next rally/rebound.

Apple (AAPL) lost 3.7% as post-earnings selling continues.

Microsoft (MSFT)

Earnings also marked a kind of top for Microsoft (MSFT). MSFT gapped up the day following earnings but faded to near flat. Sellers knocked MSFT back down on Friday and made sure to seal the deal on a 0% post-earnings performance. In the middle of the action, I decided to play the breakout with a weekly calendar call spread. The short side expired worthless, so I now have the long side to use as a kind of hedge against bearish positions I pick up this week.

Microsoft Corp (MSFT) lost 2.9% as it reversed right back to its pre-earnings close.

Caterpillar Inc (CAT)

My hopes and expectations for a big post-earnings jump in Caterpillar (CAT) smacked right into the current bearish turn in market technicals. CAT sold off into earnings and lost 0.8% post-earnings. Like many other industrial names, CAT is clinging to important support, in this case its 50DMA. The stock reversed the previous breakout and is essentially flat for the year.

Caterpillar Inc. (CAT) is hugging support at its 50DMA.

Vir Biotechnology (VIR)

I talked about Vir Biotechnology (VIR) as a big miss in my last Above the 40 post. Opportunity immediately appeared the day after with VIR selling off as much as 29.3%. I chased the stock with two tranches. On Friday, VIR rebounded 9.9% from the close, and I took profits. That ride was much wilder than I like (although I should not have been surprised!). Accordingly, I am stepping back for now in deference to my short-term bearish trading call. I am watching for more stabilization before returning. Recall that JP Morgan punished VIR with a $30 price target in the wake of results from its Phase 1 trial of a hepatitis B drug. I have yet to see follow-on analyst actions.

Be careful out there!

Footnotes

“Above the 40” (AT40) uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to measure breadth in he stock market. Breadth indicates the distribution of participation in a rally or sell-off. As a result, AT40 can identify extremes in market sentiment that are likely to reverse. Above the 40 is my alternative name 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 #75 over 20%, Day #59 above 30%, Day #58 over 40%, Day #1 under 50% (underperiod ending 1 day over 50%), Day #3 under 60%, Day #6 under 70%

Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%). Source: FreestockCharts
Percentage of stocks trading above their respective 200-day moving averages (DMAs) according to TradingView.com (MMTH)

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long UVXY shares, long SPY put spreads, long CSX covered call position, long AAPL calls, long MSFT calls, long CAT calls

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*Charting notes: FreeStockCharts stock prices are not adjusted for dividends. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day.

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