Tricky Trading Quickly Took Stocks from Strength to Weakness – Above the 40 (February 26, 2021)

Stock Market Commentary

The stock market got quite tricky last week. A day after buyers re-established control, sellers returned with a sustained fury. The selling on Thursday reflected the stock market’s split personality while the follow-up selling on Friday seemed broader. The pressure on the the stock market looks like an ominous setup for March which actually happens to be one of the stock market’s most benign months for drawdowns. This push and pull of short-term prospects promises to keep the market tricky with volatile twists and turns.

The Stock Market Indices

The S&P 500 (SPY) went from a picture-perfect confirmation of support at its 50-day moving average (DMA) (the red line) to a quick retest of the same support line. Sellers took the index down 2.5% and 0.5% on subsequent days.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) quickly returned to an important test of 50DMA support.

The NASDAQ (COMPQX) was not as fortunate as the S&P 500. The tech-laden index sliced right through its 50DMA support on a 3.5% loss. A relief rally to end the week took the NASDAQ back to 50DMA resistance with a 0.5% gain.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) suffered a 50DMA breakdown and a sagging lower Bollinger Band (BB) suggests more downside is around the corner.


The iShares Trust Russell 2000 Index ETF (IWM) faded from a test of its all-time high with a 3.5% loss. Buyers and sellers fought to a near stalemate on Friday. Despite a fade from 20DMA resistance (the dotted black line), IWM remains in a better position relative to the S&P 500 and the NASDAQ. I passed on taking small profits on my IWM calendar spread and now sit on the long side of the position with a shred of hope for salvaging residual value. Talk about a tricky trade…

The uptrend in the iShares Trust Russell 2000 Index ETF (IWM) has lived off 20DMA support since November. The current selling threatens that reliability.

The Select Sector SPDR Trust Financial (XLF) suddenly earned the ire of sellers. After bouncing from 50DMA support in January, XLF gained on 15 of 17 trading days. Two days of selling put a bold question mark on the last all-time high. XLF lost 1.9% two days in a row.

Select Sector SPDR Trust Financial (XLF) remains well above uptrending 20DMA support despite two straight days of high-volume selling.

Stock Market Volatility

The volatility index (VIX) soared 35.4% on Thursday as strong selling sent the fear gauge stratospheric. Friday’s selling was not enough to keep the volatility faders at bay, and the VIX lost 3.2%. The VIX travelled from Thursday’s high to a low of 25.2. Since large one-day gains in the VIX are not sustainable, the odds favor the volatility faders in the coming week. If the VIX manages to beat the odds, I will interpret such a feat as particularly ominous. Tricky trading ahead promises to keep the question marks on the VIX loud and active.

The volatility index (VIX) continues to cling to the 20 threshold.
The latest surge in the volatility index (VIX) was impressive, but it still came far short of previous peaks since September.

The Short-Term Trading Call for A Tricky Stock Market:

  • AT40 (T2108) = 51.6% of stocks are trading above their respective 40-day moving averages (3-week low)
  • AT200 (T2107) = 84.4% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation) (near 3-month low)
  • Short-term Trading Call: cautiously bearish

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, closed at 51.6% as stocks faced broad pressure. Even the longer-term indicator of AT200 (T2108) notably faltered by hitting a 3-month low. I assumed the buying strength on Wednesday would send the stock market back to overbought territory and my short-term trading call back to neutral. Instead, I am left quite comfortable sitting on my cautiously bearish short-term trading call. This time, tricky market churn did not force a change in the short-term trading call.

The currency market is screaming risk-off. The Australian dollar versus the Japanese yen (AUD/JPY) reversed sharply off Wednesday’s strength. While the stock market selling on Friday was milder than Thursday’s selling, AUD/JPY suffered mightily on Friday. Until proven otherwise, the two days of intense downward pressure suggests a sudden exhaustion of risk-on sentiment.

The Australian dollar versus the Japanese yen (AUD/JPY) broke out to a new 26-month high.

Stock Chart Reviews – Below the 50DMA

Apple Inc. (AAPL)

Apple (APPL) helped lead the way downward to this point. The market is slowly but surely cashing in on a lot of big cap tech. On-going pressure in market darling and favorite AAPL could poison the well of sentiment in the broader market. AAPL is stuck in a firmly bearish position with a confirmed 50DMA breakdown and a recent close at a 2-month low.

Apple Inc. (AAPL) continues to struggle as the stock faded back toward a 2 1/2 month low.

Salesforce.com Inc. (CRM)

Sellers moved swiftly on Salesforce.com (CRM) post-earnings. While the stock is “only” at a 6-week or so low, the stock decisively punched through 50 and 200DMA supports (the 200DMA is the blue line in the chart below). Given CRM’s heralded status in the software space, new lows will likely further dampen market sentiment in (big cap) tech.

Salesforce.com Inc, (CRM) lost 6.3% post-earnings and sliced through both 50 and 200DMA supports.

Home Depot (HD)

After going nowhere for 7 months, post-earnings trading finally tipped over Home Depot (HD). The big box home improvement and hardware retailer lost 2.7% post-earnings. The stock went on to confirm 50 and 200DMA breakdowns. HD ended the week with a 1.2% gain off an 8-month low.

Home Depot (HD) got a relief bounce of 1.2% off an 8-month low.

Best Buy (BBY)

Electronics retailer received another post-earnings beating. This time around the trading was particularly tricky. After gapping down to 200DMA support, buyers almost closed the entire gap. Sellers won the day by pushing BBY all the way back through 200DMA support and a 9.3% post-earnings loss. Sellers followed through on Friday by landing BBY right on the $100 level.

BBY now faces an important test of the lows from December. First, a relief rally is likely as the stock is over-extended below its lower Bollinger Band (BB) (the solid black line).

Best Buy (BBY) confirmed a 50DMA breakdown, but the stock remains solidly stuck in an extended trading range.

Dominos Pizza (DPZ)

Earnings mistreated another market favorite, Dominos Pizza (DPZ). DPZ lost 7.0% and closed at prices last seen in early April. It looks like the imminent end of the pandemic is also signaling an end to the lockdown pizza-eating binge for Dominos? DPZ rebounded from over-extended conditions with a 2.2% gain on Friday. Note how DPZ failed at is 200DMA and then 50MDMA lines of resistance ahead of earnings. Moreover, DPZ has not been the same since it tumbled off its all-time high with a 7.0% post-earnings loss in early October.

Since the last earnings report, Dominos Pizza (DPZ) has suffered a major bout of weakness and selling.

Watch for another timely appearance by the CEO from Dominos on Mad Money with Jim Cramer. The trading action after such an interview should be quite telling.

Papa Johns International Inc (PZZA)

On the other size of pizza town, Papa Johns International Inc (PZZA) also suffered a post-earnings loss. However, the 11.6% post-earnings plunge and follow-through still left a rising 200DMA line of support intact. Suddenly, the chart of PZZA looks much better than DPZ. Is PZZA finally taking share?

Papa Johns International Inc (PZZA) is testing 200DMA support after a poor post-earnings response

Lululemon Atheltica (LULU)

Stocks trading below their 200DMAs are still rare in this market, so when I find one, I take careful note…especially when the stock is/was a market darling. Lululemon Altheltica (LULU) peaked in September and failed to challenge that all-time after a rally ended in December. Now, arrows point downward.

Lululemon Athletica (LULU) bearishly broke through 200DMA support soon after a 50DMA breakdown.

Zoom Video Communications (ZM)

Earnings are coming this week for Zoom Video Communications. I will carefully watch the post-earnings trading action. Is the imminent end to the pandemic going to remove the market’s willingness to pay a sky-high premium for this premiere video conferencing company? ZM’s 200DMA held as support last week. Sellers finally took a rest on Friday as ZM lifted 2.4%.

Zoom Video Communications (ZM) is wedged between 50DMa resistance and 200DMA support.

Ping Identity Holding Corp (PING)

A whopping 28.0% post-earnings plunge took Ping Identity Holding Corp (PING) below double supports. The software company provides network authentication solutions for enterprise customers. PING remains well above the post-earnings lows from November, but it looks ready to test those lows.

Ping Identity Holding Corp (PING) broke down below its 50 and 200DMAs post-earnings.

iShares 20+ Year Treasury Bond ETF (TLT)

Inflation fears and skepticism were all the rage last week. The speed of the rise in rates is apparently unsettling markets a bit. The iShares 20+ Year Treasury Bond ETF (TLT) tumbled all week until Friday’s massive relief rally of 3.3%. I used that rebound to reload on TLT puts. I duly noted a record poor auction of the 7-year Treasury bond on Wednesday.

The iShares 20+ Year Treasury Bond ETF (TLT) rebounded sharply off a 13-month low for a 3.3% gain.

Stock Chart Reviews – Above the 50DMA

AirBNB Inc (ABNB)

The end of the week was not all doom and gloom. Recent IPO and current darling story AirBNB (ABNB) survived its first earnings report with a 13.3% gain. Holding these lofty valuations is impressive for any company in the travel and leisure industry in the current economy.

AirBNB (ABNB) rebounded post-earnings with a 13.3% gain.

Workday (WDAY)

The choppy trading continues in human resources software company Workday (WDAY). Post-earnings selling took WDAY right back to 50DMA support. I am watching to see whether WDAY sets up a buying opportunity by bouncing from this support.

Workday (WDAY) lost 2.9% post-earnings while managing to cling to 50DMA support.

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 #93 over 20%, Day #77 above 30%, Day #75 over 40%, Day #18 over 50% (overperiod), Day #2 under 60% (underperiod), Day #6 under 70%

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 IWM calendar spread, long SPY put spread, long TLT put, long IWM calls

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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.

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