A Stock Market Resigned to Chopping and Churning – Above the 40 (May 21, 2021)

Stock Market Commentary

Last week delivered another key test of support levels for the stock market. The major indices passed their individual tests, but the week ended with no resolution. Bulls and bears are battling between short-term ranges that are chopping and churning traders. With the stock market resigned to this kind of chop, patient trades off key technical levels become bread and butter plays. The longer the chop and churn drags on, the more powerful the break from these ranges should become. Moreover, individual stocks that are diverging from the chop, whether from the downside or the upside, become the most interesting trades.

The Stock Market Indices

The S&P 500 (SPY) survived the edge of a real sell-off only to return right back to that edge last week. This time the index broke briefly below its support line at its 50-day moving average (DMA) (the red line below). The intraday low touched the low from the edge of a real sell-off and rebounded right away. The S&P 500 created a hammer-like bottoming pattern and buyers continued with a 1.1% gain the next day. Still, buyers could not close out the week above the 20DMA (the dotted line below). Amazingly, the S&P 500 has traded on or away from this trendline 5 out of the last 6 trading days. Moreover, the chop and churn on the index has created a pivot around the 4150 level since early April. I reset my lower bound trigger for bearishness below what now looks like a double bottom around 4060.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) is in churn mode between its 20 and 50DMAs

The chop and churn on the NASDAQ (COMPQX) has kept the tech-laden index locked in a trading range since mid-December. However, I am only now seeing the trading range with the emergence of the 50DMA as a pivot line. The uptrending 200DMA is now at the bottom of this presumed trading range. Friday’s trading failed to break the NASDAQ free of converged 20/50DMA resistance.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) faded from converged resistance at its 20 and 50DMAs


The iShares Trust Russell 2000 Index ETF (IWM) has known chop and churn for almost the entire year. Last week’s trading was no different. After failing at 50DMA resistance, IWM dropped one day and mildly rebounded back to 50DMA resistance. Again, I see no trade on IWM until the index of small caps breaks the spell of this trading range – whether to the upside or the downside.

The iShares Trust Russell 2000 Index ETF (IWM) faded slightly from its converged 20 and 50DMA pivots.

Stock Market Volatility

The volatility index (VIX) pulled off its own version of chop and churn. A new range has formed above the key 20 level. When the VIX spiked toward 26 on Wednesday, I joined the volatility faders by buying a small number of shares in ProShares Short VIX Short-Term Futures ETF (SVXY). I flipped it right away the next day as I prefer to be net long volatility as a protective measure.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) quickly faded from its latest burst higher but somehow managed to remain above 20.

The Short-Term Trading Call Amid the Chop and Churn

  • AT40 (T2108) = 50.7% of stocks are trading above their respective 40-day moving averages
  • AT200 (T2107) = 76.4% 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, closed the week slightly lower than the previous week. My favorite technical indicator is chopping and churning between 40% and 60% with the occasional poke below and above the range. I remain wary as a primary downtrend remains in place on AT40.

A neutral short-term trading call is the perfect choice for rangebound, chop and churn trading even as I continue to distrust the underlying health of the stock market.

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

Jumia Technologies (JMIA)

I wish Jumia Technologies (JMIA) would settle down into some chop and churn. Instead, the “Amazon of Africa” keeps following its 20DMA downward. I remain committed to JMIA long-term and am back to accumulating a new position, including selling calls against shares and selling puts short. I was not fast enough to add shares in the wake of a big gap down post-earnings.

Jumia Technologies (JMIA) pulled off a big comeback from a post-earnings gap down but overhead resistance looks tough around all three major trendlines.

KB Home (KBH)

The seasonal trade in homebuilders has likely come to an end (I will make a final call in my next Housing Market Review). KB Home (KBH) is part of a growing cohort of home builders in the middle of some kind of breakdown. KBH made a valiant recovery from March’s post-earnings gap down, but the stock now trades right back to those immediate post-earnings levels. Friday’s gap and fade sets up KBH for a fresh swing downward.

KB Home (KBH) continues to break down from a 50DMA breakdown. Friday’s 1.9% loss looks like the start of a fresh leg down.

Carmax (KMX)

Used car prices jumped the most on record in April. The 10.0% jump was a third of the entire increase of the Consumer Price Index (CPI). This jump follows last August’s 5.7% month-over-month jump and last September’s 5.3% month-over-month gain, now the 3rd and 5th highest such gains on record. A confluence of factors are working to limit supply at a time when demand remains high: for example, limited new car production from a chip shortage and slower turnover of rental car fleets.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average [CUSR0000SETA02], retrieved from FRED, Federal Reserve Bank of St. Louis, May 22, 2021.

Higher prices did not help the stock of Carmax (KMX). In fact, KMX suffered a 7.1% post-earnings loss on April 1st. In a month, KMX managed to rebound to a new all-time high just to come tumbling back down with a quickness. KMX looks poised to test its 200DMA support for the first time since last October.

Carmax (KMX) recovered from a post-earnings breakdown in April only to suffer a sustained 50DMA breakdown this month.

Monro (MNRO)

With sky high car prices, I figured an auto repair shop like Monro (MNRO) should do well. Car owners should be repairing more and buying less. However, MNRO hit a ceiling at a 16-month high and confirmed a 50DMA breakdown ahead of earnings. MNRO dropped into the chop and churn trap and is working on a near 4-month trading range.

Monro (MNRO) suffered a 5.9% post-earnings loss but buyers stepped in to end the week with a 2.8% gain.

Stock Chart Reviews – Above the 50DMA

Toll Brothers (TOL)

The topping out of home builders caught Toll Brothers (TOL) in the middle of a near parabolic run-up. The chart below shows a signature of buyer’s exhaustion: a fade from the highs above the upper Bollinger Band (BB) that ended in a negative close. This pattern unfolded in March with buyers finally stepping in again at the 50DMA. This time around, buyers have yet to restart momentum from the 50DMA.

Toll Brothers (TOL) clings to 50DMA support after gapping below it midweek.

iShares Silver Trust ETF (SLV)

I made the fresh bullish case for iShares Silver Trust ETF (SLV) after a 200DMA breakout last month. SLV dipped one more time to its 200DMA before sustaining a rally. I took profits on my call options last week as SLV closed in on the high before SLV’s March sell-off. On Friday, SLV managed to rebound away from 20DMA support. Accordingly, the rally may still have a green light to go again.

The iShares Silver Trust ETF (SLV) is trending upward since hitting the March and 2021 low.

SPDR Gold Shares (GLD)

The current rally in SPDR Gold Shares (GLD) looks stronger than silver’s. Buyers have enthusiastically rolled into GLD for most of May. GLD also printed a double bottom in March which provided a more solid launching pad. I never added call options to my core holding of GLD shares. I will do so on a successful test of 200DMA support.

SPDR Gold Shares (GLD) confirmed a 200DMA breakout this week and closed at a 4-month high.

Whirlpool Corporation (WHR)

As a maker of household appliances Whirlpool Corporation (WHR) often follows along with the trade in housing-related stocks. Like TOL, WHR threw up a signature topping pattern ahead of the current pullback to 50DMA support. Buyers defended 50DMA support two days in a row. As a result, I am looking to buy on a push above the 20DMA that should confirm support.

Whirlpool Corporation (WHR) bounced perfectly off 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 #136 over 20%, Day #120 above 30%, Day #7 over 40%, Day #1 over 50% (overperiod), Day #30 under 60% (underperiod), Day #49 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 JMIA, long GLD

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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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