A Downward Drift Broke Overbought Conditions in the Stock Market – Above the 40 (February 18, 2021)

Stock Market Commentary

The new low in volatility that appeared to breathe new life and promise to the overbought period fizzled out. The major indices experienced a downward drift, and the general market struggled to hold onto overbought conditions. The trading drift finally broke below the overbought threshold.

The Stock Market Indices

The S&P 500 (SPY) lost fractionally the last three days. Each day, buyers picked the index off intraday lows. The resulting drift makes the S&P 500 look reluctant to depart with its all-time high.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) lost 0.4% after rebounding off its intraday low.

The NASDAQ (COMPQX) suffered a more convincing drift downward. The selling was enough to generate a test of uptrending support at the 20-day moving average (DMA). The buying off the intraday lows created a near picture perfect test.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) lost 0.7% after bouncing off 20DMA support.


The iShares Trust Russell 2000 Index ETF (IWM) dropped enough to approach its 20DMA support. Buyers were much less reluctant to buy off the low, and IWM lost 1.6% on the day. Given the 20DMA defined the run-up since early November, this test is very important even as it looks relatively benign.

The iShares Trust Russell 2000 Index ETF (IWM) lost 1.6% after a mild rebound off 20DMA support.

Financials took on the rare position as out-performers. The Select Sector SPDR Trust Financial (XLF) gained two days straight before today’s 0.6% pullback off the all-time high. The week started with a clean breakout, so I am looking to see whether that gap fills.

Select Sector SPDR Trust Financial (XLF) is back in all-time high territory.

Stock Market Volatility

Last Friday, the volatility index (VIX) looked ready to crack the 20 level. Instead, the VIX gapped up 7.4% to start the week and is drifting higher. Given firm support between the 20 and 21 levels, this rebound very well could be the start of yet another (brief and sharp) surge for the VIX.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) hung on to a 4.6% gain after volatility faders pushed it well off tne intraday high.

The Short-Term Trading Call: A Drift Back to Bearishness

  • AT40 = 65.8% of stocks are trading above their respective 40-day moving averages (ending 6 days overbought)
  • AT200 = 89.9% 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, pivoted around the 70% overbought threshold for two days before a clean drop to 65.8%. Per the AT40 trading rules, the end of the overbought period triggered a bearish trading call. The call is conditioned with “cautious” in deference to my on-going expectation for churn in the trading call. Moreover, the indices remain above important uptrending support at their 20DMAs. The VIX is the main indicator suggesting that more selling could be around the corner. Regardless, I think having a more bearish mindset going into March makes sense in anticipation of exhaustion from micro-bubbles drifting weakness more broadly into the stock market.

The currency market is not cooperating with a bearish call. The Australian dollar versus the Japanese yen (AUD/JPY) sits comfortably at 2+ year highs and looks ready for a fresh run-up. As a result, sentiment looks firmly in the “risk-on” camp. A break below the recent congestion would be the start of ending that bullish sentiment.

The Australian dollar versus the Japanese yen (AUD/JPY) is bullishly following along its upper Bollinger Band (BB).

Stock Chart Reviews – Below the 50DMA

{Note I am trying some new formatting in the TradingView.com charts. I want to emphasize trends over daily price moves. Moreover, I changed the candle behavior to stay consistent with FreeStockCharts: a hollow body indicates a closing price higher than the opening price, and a closed/full body indicates a close lower than the open. Feedback welcome as always!}

Apple (AAPL)

Another week, another failure for the Apple weekly call trade. Apple (AAPL) cleanly broke through 50DMA support on Wednesday and confirmed the breakdown with a 0.9% loss the next day. While the hammer-like bottoming pattern looks encouraging, the weekly call play comes to an end until AAPL can return to a more bullish position above its 50DMA. Indeed, this breakdown has the look of a leading indicator of selling to come for the broader stock market.

Apple (AAPL) printed a bottoming hammer after selling pressure finally pushed the stock over the edge of 50DMA support.

Stock Chart Reviews – Above the 50DMA

Maxeon Solar Technologies Limited (MAXN)

A freak extreme snow storm in Texas brought scrutiny and controversy to alternative energy. Widespread power outages ignited a blame game in the state with the failure of wind power farms catching some of the attention. Solar energy apparently somehow got caught in the crossfire. Accordingly, the selling pressure looks like a classic buying opportunity. So despite my general short-term bearishness, I reserve an exception for alternative energy given my longer-term bullishness in the sector.

Maxeon Solar Technologies Limited (MAXN) spun off from SunPower (SPWR) last August. The Singapore-based company could be a take-over target in the future if the sector remains hot. In the meantime, a negative reaction to SPWR earnings likely helped pressure MAXN this week. I am looking to buy a test of 50DMA support and/or a fresh close above the 20DMA.

Maxeon Solar Technologies Limited (MAXN) is in correction mode with a 25% pullback off its all-time high.

By the way, Norway already figured out how to keep its wind power farms operating through the Winter…

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 #88 over 20%, Day #72 above 30%, Day #71 over 40%, Day #13 over 50%, Day #10 over 60% (overperiod), Day #1 under 70% (underperiod ended 6 days overbought)

DAILY AT40 (T2108) chart
WEEKLY AT40 (T2108) chart
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 and calls, long SPY put spread, long AAPL calls and calendar call spread

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day.

2 thoughts on “A Downward Drift Broke Overbought Conditions in the Stock Market – Above the 40 (February 18, 2021)

  1. Regarding frozen Texan turbines: as I write these words, Alaska, Ontario, Minnesota, and northern New England are using wind turbines in winter conditions that make Texas’s cold and snow look comfortable. It’s a simple matter of adding a lubricant heater to each turbine, which Texas power generation companies didn’t do despite explicit instructions from their regulator the last time this occurred, nearly a decade ago. By far the biggest contributor to Texas’s power and residential heating problems is frozen natural gas lines.

    There is a strong correlation between oil-and-gas company campaign contributions and Texan politicians blaming sustainable energy sources (and, ridiculously, the regulators who were ignored by the turbine owners).

  2. And thus the difficulty….how can you rationalize spending all that money for a storm event that happens once every ten years or whatever the sparse underlying distribution is? It makes a LOT of sense in places where snow and freezing temperatures are expected every Winter and for long stretches. I was just bemused that 21% of the power capacity was blamed for 100% of the problem. But that’s what makes opportunity!

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