Stock Market Commentary
Many stocks rebounded sharply from intraday lows on Thursday. The flurry left behind key bullish signals. Buyers did not disappoint on Friday. They delivered strong follow through on the latest bullish signals even as sections of the market suffered targeted carnage. Indeed, the ability to ignore the targeted carnage was itself another bullish signal. As the first quarter comes to a close, the repositioning of money managers likely created the seeds for the second quarter’s buying opportunities.
The Stock Market Indices
The S&P 500 (SPY) gapped higher and barely looked back the rest of the day. The 1.7% gain took the index to an all-time high by the slimmest of margins. Buyers fully confirmed the bullish signals from the previous day including the rebound away from 50DMA support (the red line in the chart below).
The NASDAQ (COMPQX) still has work to do. Its rebound the previous day only took the tech-laden index to flat on the day. The follow-through of buyers only took the NASDAQ to 20DMA resistance (the dotted line in the chart below).
The iShares Trust Russell 2000 Index ETF (IWM) closed right on top of 50DMA resistance. The 1.8% gain on the day was impressive. Still, buyers need to nudge the index a little bit higher to re-establish the previous bullish posturing of small caps.
Stock Market Volatility
The volatility index (VIX) is sagging more and more to the downside. Friday’s fade took the VIX from just over 23 to just under 19. The VIX closed exactly at its low for the week which in turn is a 13-month low. The stock market is closing in on finishing a full reversal of the VIX’s pandemic-related surge.
The Short-Term Trading Call Despite Targeted Carnage
- AT40 (T2108) = 54.6% of stocks are trading above their respective 40-day moving averages
- AT200 (T2107) = 83.4% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation)
- Short-term Trading Call: cautiously bullish
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, crept upward to 54.6%. The higher close confirmed that Thursday’s initial plunge was indeed “close enough” to oversold. The S&P 500’s marginal all-time high and the VIX’s 13-month low provided additional confirmation. Once IWM closes above its 50DMA resistance, I will be confident enough to go from “cautiously bullish” to bullish for my short-term trading call.
Targeted carnage erupted in the stock market in parallel with the bullish signals. I describe the drama in more detail below. The unfolding drama provides great fodder for shorts and put options. However, the extremes will come to an end soon if they have not yet. With more selling pressure and overhang removed from the stock market, buyers will get even more freedom to run.
Stock Chart Video Reviews
Stock Chart Reviews – Below the 50DMA
Lithium Americas Corp (LAC)
On January 19th, Lithium Americas Corp (LAC) soared 30.6% to an all-time high. LAC jumped at the chance to cash in. The company priced a secondary stock offering the next day at $22/share. The stock lost 17.1% that day. Per the rules of trading around a secondary offering, the stock triggered an “avoid” signal. Indeed, LAC has not been the same since. Participants in the offering are 33.9% underwater as a declining 20DMA guides the stock lower. Buyers at the end of last week put up a lukewarm defense of the March lows. I am looking to buy a successful defense of the uptrending 200DMA.
iShares MSCI Emerging Markets ETF (EEM)
The iShares MSCI Emerging Markets ETF (EEM) jumped 2.6% to close the week. Two days earlier, EEM went negative for the year. A declining 20DMA remains overhead as ominous resistance. The overall poor trading action is a bad sign for risk sentiment. EEM over 50DMA resistance will clear the air.
JinkoSolar Holding Co., Ltd. (JKS)
Solar panel supplier JinkoSolar Holding Co., Ltd. (JKS) broke through 200DMA support twice in March. A two day rebound took JKS back to what is now converged 20/200DMA resistance. The current struggles starkly contrast with an incredible 1-month run from September to October to all-time highs. Clearly, that move exhausted buying interest as JKS went into a 4-month trading range from there. Stubborn weakness could eventually drive JKS to a full reversal of the gains from that run-up.
MongoDB (MDB)
Database software company MongoDB confirmed a 200DMA breakdown with a 2.5% loss. MDB last traded under this critical trendline 11 months ago. MDB is a short until it can close above its 200DMA again. The stock trades at a still nosebleed 30.5 price/sales and still earns a negative EBITDA. As long targeted carnage descends upon expensive growth stocks, MDB will continue to struggle.
Rio Tinto (RIO)
Inflation-friendly plays like iron ore company Rio Tinto (RIO) woke up at the end of the week. RIO jumped 4.0%. While the sotck did not test its 200DMA, I want to follow the buyers. I am already long BHP Group (BHP) call options, so I did not chase RIO on Friday.
Sea Limited (SE)
Singaporean digital entertainment company Sea Limited (SE) sold off alongside other growth stocks. Like so many, a declining 20DMA guides the stock lower. With little apparent interest from buyers, SE looks poised for an eventual test of 200DMA support.
The Trade Desk, Inc (TTD)
Digital advertising technology company The Trade Desk, Inc (TTD) tested its uptrending 200DMA support twice this month. Friday’s confirmation may finally represent a sustainable bottom. However, like many other stocks, a declining 20DMA looms overhead as ominous resistance.
ViacomCBS (VIAC)
Broadcaster and media giant ViacomCBS (VIAC) triggered falling dominoes when it announced the evening of March 22nd a massive combined $3B secondary stock offering. (This offering now represents 10% of VIAC’s market cap). The stock dropped 9.1% the next day off its all-time high. The next morning, ViacomCBS announced an $85/share price for the offering. This 6.8% discount to the previous day’s closing price signaled weakness in demand and sellers took over from there. VIAC closed down another 23.2% and confirmed the lack of interest in sending ViacomCBS all that cash at these lofty prices. Needless to say, the rules of trading around a secondary stock offering flashed big red warning signs in the wake of this poor trading action.
I never understood why stocks like VIAC enjoyed such a tremendous run-up. Finally, a CNBC Fast Money segment helped me realize that the euphoria could represent over-exuberance about the growth in streaming. The market essentially acted like the streaming market offers near limitless profits. I got ready to get bearish on these stocks the very next morning. For context, here is a key quote from Rich Greenfield of Lightspeed Partners: “Raising capital is what these companies need to do because the streaming wars are going to be so expensive and so challenging, having a lot of capital is going to be very important for anyone who is trying to do battle…”
VIAC promptly gapped down to its 50DMA the next day so I shifted to other media targets: Discovery (DISCA) and Fox Corporation (FOX). I had no idea I stepped into what apparently became a margin call, forced liquidation event presumably triggered by VIAC’s opportunistic stock offering. CNBC reported from other sources that Archegos Capital got the dreaded tap on the shoulder: “Some of the severe selling pressure in select U.S. media stocks and Chinese internet ADRs on Friday was due to the forced liquidation of positions held by the multibillion dollar family office, Archegos Capital Management, according to a source with direct knowledge of the situation.”
Seeking Alpha provided more extended coverage. Importantly, the piece connected the liquidation event to the severe decline in Chinese tech names that I pointed out in an earlier post.
VIAC fell as must as 40.0%. The selling only ended after the stock approached its 200DMA support. I took profits on my positions amid the targeted carnage. This was a lesson in following the smoke signals and following the immediate trend.
Discovery (DISCA)
Discovery (DISCA) suffered a similar targeted carnage as VIAC. DISCA fell as much as 40.0% on the day before settling for a 27.5% loss. After observing VIAC pull off the near picture-perfect technical bounce above, I figured the targeted carnage in these media/broadcasting stocks was coming to an end. I avoided VIAC given the outstanding secondary which will likely need a significant repricing. Instead, I bought an April/May $55 calendar call spread on DISCA. I figure that the repair work will take some time, and the 50DMA will serve as strong resistance on the way back up. Along the way, implied volatility should decline and hurt the short April calls a lot more than the May call options. Accordingly, I could close out the position for a profit well ahead of the May expiration even on a modest DISCA gain from current levels.
Baidu (BIDU)
Buyers stepped in with force at the lows on Baidu (BIDU) and other Chinese tech names. News of a margin call potentially driving the extreme selling must have caught the interest in those who know such explosions leave buying opportunities in their wake. Accordingly, BIDU stopped selling right above its 200DMA support (imagine that). BIDU went from a 14.9% loss to a 2.0% gain in about 3 hours.
Invitae Corp (NVTA)
A week ago I pointed out promising news from Invitae Corp (NVTA) related to a new commercial lease the company signed in San Francisco, CA. Unfortunately, NVTA promptly fell through 200DMA support with a 12.5% loss as growth names suffered from targeted carnage. Again, I assume this particular targeted carnage is about quarter-end positioning. As NVTA tested its March lows the next day, I took profits on my near worthless short April $45 call. That call options was part of a covered call position (also known as a buy-write). As a result, I have now taken profits on two short NVTA call options. Thus, my loss on the NVTA shares does not hurt quite as badly. To the downside, I will add shares around $28 which served as support last summer.
Twitter (TWTR)
Six weeks ago, I lamented missing out on the latest rally in Twitter (TWTR). TWTR now trades 15% below those levels. A 50DMA breakdown finished a complete reversal of TWTR’s post-earnings gain. TWTR gained 13.2% the day after reporting earnings on February 9th. Despite the declining 20DMA, I am looking to get long TWTR one more time on a confirmed breakout above 50DMA resistance.
Stock Chart Reviews – Above the 50DMA
Boeing (BA)
A week ago I laid out the case for getting back into Boeing around $250. Fortuitously, BA dropped below my target before I could start a position. On the break toward 20DMA support, I bought a $265 call option. I added another call option after BA finished reversing the parabolic move from earlier this month. This speculative position will only pay off if buying interest suddenly reignites in the coming holiday shortened week. The pullback in Boeing demonstrates once again the dangers and unsustainability of parabolic moves.
Nordstrom (JWN)
Big box luxury retailer Nordstrom (JWN) caught my attention again. In mid-March, JWN sprinted straight up for two days to a 23-month high. Sellers took over from there and took JWN through 50DMA support. Friday’s recovery puts JWN on my buy list.
Lennar Corp (LEN)
Home builder Lennar (LEN) motivated me to keep the seasonal trade in home builders active. The subsequent pullback was a great buying opportunity. I bought a calendar call spread expecting LEN to churn a bit before resuming its upward momentum. The churn lasted just 4 days. As a result, my calendar call spread hit its target profit point. However, I wanted to hold calls going into April expiration. With LEN sprinting to a new all-time high, I am looking to buy into the next pullback.
United States Oil Fund (USO)
The rolling interruption in the stock market’s reopen trade created up some good buy-the-dip opportunities. I am slowly but surely rebuilding positions in commodity and materials names. Naturally, I am now eyeing oil itself. The United States Oil Fund (USO) twice tested 50DMA support last week and survived. Since I already rolled into call options in Valero (VLO), I am content to wait for USO to pop above 20DMA resistance before adding it to my trading positions.
Vuzix Corp (VUZI)
The secondary bug caught up with high-flyer Vuzix (VUZI). The company announced its stock offering the evening of Thursday, March 25th. Subsequently, Vuzix announced a pricing of $20.50/share. VUZI promptly dropped 13.2% on the news. However, the stock still closed well above the offering price. Per the secondary trading rules, VUZI is a buy here with a stop below the offering price. I first made the case for VUZI in late January based on the breakout to an all-time high. The stock made a double from there in two months, so I am sure Vuzix became really eager to cash in.
Yelp Inc (YELP)
Yelp Inc (YELP) pulled back last week to a picture-perfect test of 50DMA support. While Friday’s follow-through was marginal, it was good enough to flash a buy signal.
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 #113 over 20%, Day #97 above 30%, Day #95 over 40%, Day #2 over 50% (overperiod), Day #7 under 60%, Day #26 under 70%
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%). Source: FreestockCharts
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long UVXY calls, long SPY put spread, long VLO calls, long BA calls, long EEM calls, long BHP calls, long DISCA calendar call spread, long NVTA
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!
*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.