Fades and Breakdowns Contradict The Calm of the S&P 500 – Above the 40 (May 7, 2021)

Stock Market Commentary

The stock market is a cauldron of contradictions and divergences. Breakdowns below key support levels abound. Stocks suffer post-earnings fades even after companies report strong results, especially in both beaten up growth stocks and resilient big cap tech. Yet, the S&P 500 just rises above the steady erosion of market breadth with all-time highs. The fades and breakdowns contradict this calm of the S&P 500 and provide a stark dichotomy of fortunes. The history of such divergences suggests that resolution will feature more synchronized selling sooner than later. My favorite indicators of market breadth holds keys to recognizing the potential resolution.

The Stock Market Indices

A fresh all-time high for the S&P 500 (SPY) defies my expectations for a May pullback (not the same thing as “sell in May and go away“). The index ended the week with a 0.7% gain and a close above its upper Bollinger Band (BB).

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) broke out to a new all-time high and even looks ready for another ride along its upper Bollinger Band (BB)

The NASDAQ (COMPQX) represents a small part of the contradiction with the S&P 500. A gap down on Tuesday seemed to confirm a double-top with peaks in February and April. Yet, sellers failed to seal the deal as buyers saved support at the 50-day moving average (DMA) (the red line below) three days in a row. Friday’s 0.9% gain confirmed 50DMA support. If the tech-laden index survives this thrashing with a new all-time high, it will invalidate the double-top. At that point, I will need to put fresh bullish tinting in my stock market glasses.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) gained 0.9% and confirmed 50DMA support. Still a potential double top looms overhead.


The iShares Trust Russell 2000 Index ETF (IWM) has resigned itself to pivoting around its 50DMA while the S&P 500 and NASDAQ diverge. Accordingly, the IWM likely holds a key to the direction of the resolution of the stock market’s contradiction: breakout bullish, breakdown bearish.

The iShares Trust Russell 2000 Index ETF (IWM) showed fresh signs of life with a 1.3% gain as it continues to pivot around its 50DMA.

Stock Market Volatility

The volatility index (VIX) held its own in the previous week. Last week it imploded in one fell swoop on Friday. The VIX lost 9.2% and suddenly looks ready to make a bullish run at new lows. In other words, the VIX is playing the role of contrarian to the underlying erosion in the stock market.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) plunged 9.2% and confirmed an inability to close over the important 20 threshold.

The Short-Term Trading Call Amid Fades and Breakdowns

  • AT40 (T2108) = 59.7% of stocks are trading above their respective 40-day moving averages
  • AT200 (T2107) = 78.3% of stocks are trading above their respective 200-day moving averages (TradingView’s calculation)
  • Short-term Trading Call: neutral

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, finished the week almost exactly where it finished the previous week and the week before that. The fades and breakdowns in the stock market keep the buyers stymied and prevent my favorite technical indicator from following the S&P 500 higher. I chose the “below 50DMA” charts below as a stark sample of the carnage under the surface of the S&P 500’s calm. When I see these charts, my intuition tells me to flip the short-term trading call to (cautiously) bearish. After all, I am still looking for a pullback in May.

Still, I prefer some kind of confirmation that a pullback is actually imminent. Neither the VIX nor the all-time highs in he S&P 500 are cooperating. At current levels, the S&P 500 needs to break below 4116 to trigger a bearish call independent of AT40. Per rule, I will get bearish if AT40 manages to challenge and fail at the 70% overbought threshold.

AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, carries its own subtle warning. This longer-term indicator remains high at 78.3%. However, at one point last week, AT200 dropped to a 6-month low. AT200 is on a steady downtrend since hitting its peak three months ago. In other words, the fades and breakdowns are slowly but surely taking their toll on the most important trendlines for stocks.

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

iShares Expanded Tech-Software Sector ETF (IGV)

I am leading with the iShares Expanded Tech-Software Sector ETF (IGV) as a good example of the theme for expensive growth stocks. The end of March’s growth tantrum created a promising 50DMA breakout in April. However, IGV fell far short of its former high before the momentum ran out. Last week, IGV sliced right through 50DMA support. The selling was forceful enough to close IGV below its lower Bollinger Band (BB) for three straight days. Buyers finally stepped in as IGV approached its 200DMA support. The rebound created a bottoming hammer. Buyers confirmed that hammer the next day with a 1.0% gain, but sellers returned with a fade that defended 50DMA resistance. IGV is right back in the middle of limbo. Note the window for churning between the 50 and 200DMAs is much smaller than March.

The iShares Expanded Tech-Software Sector ETF (IGV) confirmed a bottoming hammer pattern with a 1.0% gain, but it also faded from 50DMA resistance.

MongoDB (MDB)

Database software company MongoDB (MDB) looks like it is breaking down for a fresh sell-off. MDB recovered from March’s 200DMA breakdown, but sellers successfully defended 50DMA resistance multiple times in April. A second 200DMA breakdown briefly closed MDB below the March lows. Buyers gapped up MDB on Friday but sellers faded them off the intraday highs.

After confirming a 200DMA breakdown, MongoDB (MDB) is struggling to hold onto the March lows as support.

Appian Corporation (APPN)

Like so many expensive software companies, Appian Corporation (APPN) is currently tumbling off lofty heights. APPN’s all-time high of $235.24 in January represented a 272% gain in less than three months. APPN now trades for less than a third of its all-time high with a 10.8% post-earnings loss adding insult to injury. AAPN has declined for 7 straight days including a bearish 200DMA breakdown.

Appian Corporation (AAPN) fell 10.8% post-earnings and closed at a 6-month low.

Twilio (TWLO)

Twilio (TWLO) gapped up for a 7.7% gain after February earnings. That was TWLO’s all-time high. A 30% decline later, and TWLO traded below its 200DMA for the first time in a year. TWLO lost 9.4% on a post-earnings response that created the 200DMA breakdown.

Twilio (TWLO) faded after an attempted rebound from the previous day’s post-earnings 200DMA breakdown.

Invesco Solar ETF (TAN)

My former trading mentor pointed out that Invesco Solar ETF (TAN) topped out in the two weeks around President Biden’s inauguration. That double-top turned into a triple top in February. My expectations for an imminent resumption of the upward momentum helped to blind me to that simple observation of a classic sell-the-news event. Now TAN looks bottomless after a confirmed 200DMA breakdown.

Invesco Solar ETF (TAN) confirmed a 200DMA breakdown and closed at a 6-month low.

SolarEdge Technologies (SEDG)

Diversified solar company SolarEdge Technologies (SEDG) is on a long-term run-up. SEDG bottomed just under $13 in early 2017. Now, SEDG trades 39.7% below its all-time high thanks to a 16.0% post-earnings loss which also created a 200DMA breakdown. The stock looks ready to test the post-earnings lows from last November.

Solaredge Technologies (SEDG) suffered a 16.0% post-earnings drop and is trying to stabilize at 6-month lows.

Intel (INTC)

My first attempt at a between earnings trade in Intel (INTC) is on life support. INTC looked like it finally stabilized last week but trading looks lackluster. If INTC languishes its way to a test of 200DMA support, I will pull the trigger one more time on INTC call options.

Intel (INTC) spent the week consolidating and stabilizing well above 200DMA support.

Maxar Technologies (MAXR)

Maxar Technologies (MAXR) provides “earth intelligence and space infrastructure solutions“. A massive 25.9% post-earnings loss sliced MAXR right through its 200DMA for the first time in almost a year. I am surprised buyers stepped back into the stock so quickly: MAXR rebounded 12.8% in the past two days. I am looking to short on confirmed 200DMA resistance or buy on a confirmed 50DMA breakout. In between the stock is trapped in a declining wedge/triangle pattern.

Maxar Technologies (MAXR) plunged 25.9% post-earnings and is now attempting a rebound back to 200DMA resistance.

Datadog (DDOG)

Datadog (DDOG) is one of the expensive software companies that I have traded. I held through the recent earnings event with a covered call position. I was surprised by the extreme volatility. Ahead of earnings, DDOG plunged 7.0% to an 11-month low. Post-earnings DDOG jumped as much 11.8% before sellers faded the stock to an 8.3% gain. The close was important as it returned DDOG to the confines of an 11-month trading range. I am looking for an eventual retest of 50/200DMA resistance.

Datadog (DDOG) gained 8.3% post-earnings and bounced off an 11-month low.

Fastly (FSLY)

A 50DMA breakdown and then a post-earnings test and eventual failure of 200DMA support made me suspect Fastly (FSLY). The stock valiantly held a consolidation pattern starting in mid-March. However, confirmed 50DMA resistance ahead of earnings provided a fresh warning sign. FSLY’s 27.1% post-earnings plunge demonstrated the risks embedded in expensive stocks priced for complete perfection. Fastly guided Q2 revenues slightly lower and tried to appease investors by holding a line on 2021 full-year guidance. Those small tweaks were apparently intolerable. Sellers managed to fade the entirety of FSLY’s bounce on Friday.

Fastly (FSLY) collapsed 27.1% post-earnings and closed near a 52-week low.

Lyft (LYFT)

Earnings for Lyft (LYFT) were heralded as strong. After a small post-earnings gain, sellers went right into fade mode. LYFT ended up losing 6.3% on the day. I am looking to buy around 200DMA support which roughly corresponds to the 2021 low. For now, Labor Secretary Marty Walsh’s support for classifying some gig workers as full-time employees is delivering overhang to the stock. LYFT lost 9.9% on April 29th when that news broke.

Lyft (LYFT) looks poised for a test of 200DMA support after a major post-earnings fade helped to push the stock to a 3-month low.

Upwork (UPWK)

The shine is dulling on Upwork (UPWK). The stock pivoted around 20 and 50DMAs during the growth tantrum, but earnings delivered a 4.6% loss and a breakdown from the trading range. Buyers look ready to defend the stock at least for a little while. I like a trade here with a tight stop below the recent lows at $37.

Upwork (UPWK) further confirmed a 50DMA breakdown after the market reacted to earnings. Sellers are now giving way to bargain hunters.

CyberArk (CYBR)

Many cybersecurity stocks still prove unable to stay aloft. CyberArk (CYBR) finished reversing its big December run-up with an 11.7% post-earnings plunge. Following the bounce from Thursday’s intraday low, CYBR is a buy for a run back to 200DMA resistance. The stop sits, of course, below the low at $113.

CyberArk Software (CYBR) confirmed a 50DMA breakdown after a poor response to earnings. CYBR closed the week with a gap up to a 3.7% gain.

Qualys (QLYS)

Cybersecurity software company Qualys (QLYS) gave up its December surge after a 10.6% post-earnings loss and 50DMA breakdown. So even with a post-earnings gap and crap creating a fade from the 50DMA, QLYS looks relatively stable. Like DDOG I played this with a covered call position.

Qualys (QLYS) is trying to stabilize after a post-earnings fade

Zillow Group (ZG)

Even with limited inventories of homes in the total market, somehow real estate services company Zillow Group (ZG) soared into a parabolic (post-earnings) top in February. After that top, ZG lost 44.0% to the May post-earnings low. I am now eyeing closely whether ZG can punch through 200DMA resistance. I want to short a failure and buy a breakout.

Post-earnings, Zillow Group (ZG) confirmed a 200DMA breakdown with a bottoming hammer pattern. The week closed with a gap up to 200DMA resistance and a 4.6% gain.

Redfin (RDFN)

Real estate services company Redfin (RDFN) has a story similar to Zillow Group. RDFN suffered an even worse 200DMA breakdown post-earnings. I am not looking for a trade yet on RDFN because a lot of buying power remains to get RDFN back to its 200DMA. After that milestone, downtrending 50DMA resistance sits too closely above.

Redfin Corporation (RDFN) rebounded 8.6% and avoided confirming a 200DMA breakdown post-earnings.

Etsy (ETSY)

For most of 2021, Etsy (ETSY) churned in a trading range. A 14.6% post-earnings loss broke ETSY from the range and created a 200DMA breakdown. ETSY last traded below its 200DMA 13 months ago. ETSY last looked this precarious in 2019. I am watching closely how the stock responds to its 200DMA as resistance.

Etsy Inc (ETSY) gapped up to a 5.0% gain and avoided confirming a 200DMA breakdown post-earnings.

Roku (ROKU)

Sellers tried to get proactive by taking Roku (ROKU) down to and through its 200DMA ahead of earnings. Buyers bounced ROKU off the 5-month low in response to earnings. However, sellers managed to fade ROKU well off its intraday high. I am watching ROKU for its next break from the downtrend unfolding between the 50 and 200DMAs.

Roku (ROKU) rebounded 11.6% post-earnings and held 200DMA support. Yet the stock still faded sharply off intraday highs.

U.S. Concrete (USCR)

Earnings took U.S. Concrete (USCR) right through its 50DMA support. The breakdown ended a regular trading pattern, but I bought right into the carnage with USCR trading well below its lower-BB. U.S. Concrete held to its full year targets so I felt comfortable with the buy. I am hoping to hold on as a now cheaper play on the rally in commodities and materials. However, I will not hesitate to lock in profits at the first sign of trouble. A fresh 50DMA breakout should put USCR firmly back into bullish territory.

U.S. Concrete (USCR) gained 5.1% and avoided confirming a 50DMA breakdown post-earnings.

Zoom Video Communications (ZM)

Zoom Video Communications (ZM) was one of the pandemic-driven, expensive growth stocks that peaked early in the cycle. Given the recovery from the September post-earnings gap and crap, it was harder than usual to see the peak in ZM in October. Even the indictment of the evening star topping pattern did not seal the deal in my head. ZM even recovered from a vicious gap down and breakdown in early November. The stock managed a fresh 50DMA breakout before earnings once again took ZM down. The September gap finally filled in the March growth tantrum.

Last week, ZM made fresh lows. The stock now trades 48.0% below its all-time high. Given the periodic bursts of buying interest, it is easier to fade ZM rallies than to chase it downward. I am looking for stiff resistance at converging and downtrending 20 and 50DMAs. Note that even at these levels, ZM still trades at 33 times sales, down from the 101 times sales in October.

Zoom Video Communications (ZM) trades at 8-month lows and almost half its all-time high set last October.

Stock Chart Reviews – Above the 50DMA

Martin Marietta Materials Inc (MLM)

I continue to like Martin Marietta Materials (MLM) as a strong materials play for the inflating economy. I held through February earnings and did so again for May earnings. MLM exceeded expectations with a 5.3% post-earnings pop. The stock received minor follow-through with a new all-time high on Friday.

Martin Marietta Materials Inc (MLM) jumped 5.3% post-earnings and closed the week at a new all-time high.

General Motors (GM)

A negative reaction to Ford (F) earnings sent General Motors (GM) down 3.2% ahead of its own earnings. The 50DMA breakdown looked ominous. GM rebounded post-earnings and looks set to continue grinding along with its slowly sloping 50DMA.

General Motors (GM) survived earnings with a confirmation of 50DMA support.

International Business Machines (IBM)

While expensive growth stocks in high-tech languish, International Business Machines (IBM) enjoys some rare upward momentum. IBM gapped up 3.8% post-earnings and has barely looked back since then. I am not interested in buying IBM here, but I now see it as a beneficiary of rotations out of expensive growth to cheap “value.” Note how IBM barely budged during the growth tantrum and instead consolidated after its January post-earnings disappointment. That consolidation provided the first hint of a bullish change in sentiment.

Although International Business Machines (IBM) finished the week with a gap down and 2.0% loss, it is out-performing the NASDAQ over the last three months or so.

Dominos Pizza (DPZ)

The market does not seem to know what to think about Dominos Pizza (DPZ). Last earnings, DPZ gapped down in what looked like a confirmation of fresh bearish momentum. However, after bottoming in early March, DPZ barely looked back. The straight shot includes the recent post-earnings rally. DPZ closed the week just under its all-time high from October. I am looking for a breakout to reaffirm the bullishness of the recent move.

Dominos Pizza (DPZ) finished wiping away memories of March’s post-earnings gap down with a May post-earnings pop.

Restaurant Brands International (QSR)

I finally sold Restaurant Brands International (QSR) after earnings last week. This reopening play had a decent run even if not nearly as strong as the more exciting reopening stocks. The “chicken trade” that attracted me to QSR remains strong, especially in the form of the periodic chicken sandwich wars. Still, at an over year and a half high, I think I have received sufficient returns on the recovery trade here. Now I go back to looking for the next dip.

Restaurant Brands International (QSR) went back to churning after earnings pushed the stock to a fresh year and a half high.

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 #126 over 20%, Day #110 above 30%, Day #108 over 40%, Day #3 over 50% (overperiod), Day #20 under 60% (underperiod), Day #39 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

Grammar checked by Grammar Coach from Thesaurus.com

Full disclosure: long UVXY calls, long SPY puts, long TAN, long MLM, long GM, long QLYS, long DDOG, long USCR, long INTC 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.

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