Weakness Lingers As the Oversold Rebound Cools – The Market Breadth (July 30, 2021)

Stock Market Commentary

Welcome to the new world of “The Market Breadth.” I used the switch from AT40 (T2108) to AT50 (MMFI) as my market breadth indicator to improve the name of this blog series. The Market Breadth marks a change from a technical name that sounds like a Space X rocket to an English name directly relatable to enthusiasts of financial markets.

Weakness lingers as the oversold rebound cools. The warnings from early divergences in the oversold bounce played out last week in the form of big earnings disappointments in notable stocks. I expected the resulting drops in price to happen in the previous week, but of course these things are difficult to time. As a new month begins, fresh money could pour into the stock market and create upward drift. If not, I will brace for a trip back to oversold territory sooner than later!

The Stock Market Indices

The S&P 500 (SPY) drifted all week. The index was about as unremarkable as can be. The latest pronouncements from the Federal Reserve on monetary policy were even a non-event.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) lost 0.5% and trades just below its all-time high.

The NASDAQ (COMPQX) took the brunt of the poor post-earnings responses last week. The tech-laden index ranged widely from its all-time high to its 20-day moving average (DMA) (the dotted line below).

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% and returned to its 20DMA


The iShares Trust Russell 2000 Index ETF (IWM) managed to end the week on a bearish note despite squeaking out a small net gain over the previous Friday. Two days straight IWM faded from its overhead 50DMA resistance. Still, I was able to scratch out gains on two IWM call option positions.

The iShares Trust Russell 2000 Index ETF (IWM) dropped 0.7% and confirmed 50DMA resistance once again.

Stock Market Volatility

The volatility index (VIX) churned all week and failed three times to break through and/or close above the 20 level. Still, the VIX looks elevated relative to the summer lows. I see plenty of potential for another surge in the next month or so.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) once again faded from the 20 level. The VIX held on to a 2.9% gain.

The Short-Term Trading Call While Weakness Lingers

Above the 50 logo
The NEW Above the 50 Logo!
  • AT50 (MMFI) = 38.1% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) = 63.8% of stocks are trading above their respective 200-day moving averages
  • Short-term Trading Call: cautiously bullish

AT50 (MMFI) pushed through the week’s lingering weakness for a gain of two percentage points. My (new) favorite technical indicator dropped as low as 32.8% before closing the week at 38.1%. This bullish divergence from a churning S&P 500 bodes well for the coming week or so of trading. Accordingly, I remain cautiously bullish by default. Where I find lingering weakness, I will be inclined to look for reasons to buy (for swing trades) rather than press bets with sellers with shorts. The latest stock charts below point out a few exceptions.

Of course, I am effectively racing against what I think will be the next oversold period coming by the end of September.

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

Amazon.com (AMZN)

Back to the year-long trading range for Amazon.com (AMZN). A 7.6% post-earnings loss hurled AMZN well below its 50DMA and close to 200DMA support. Apparently, Amazon.com provided poor guidance. Pundits suggested that the new CEO purposely low-balled to create an easy hurdle for measuring his upcoming performance. Sure, this kind of sandbagging is supposedly common for a brand new CEO. However, my question then is why didn’t the market accordingly lower expectations for the earnings report? 🤷🏾‍♂️ I am willing to bet on AMZN rebounding back to 50DMA resistance in the next two weeks. I did not get an attractive price on a call spread on Friday and will try again this week.

Amazon.com, Inc (AMZN) lost 7.6% and sliced through 50DMA support.

Caterpillar, Inc (CAT)

I dared not make a bet on Friday’s earnings for Caterpillar (CAT). Since the stock was just above its 20DMA and a good distance from 50DMA resistance, I considered CAT to be in pre-earnings limbo. Buyers lifted CAT off 200DMA support, so now it theoretically becomes a buy on a close above Friday’s intraday high and certainly above the pre-earnings intraday high. Still, this is a tricky trade to the upside, and I will leave it alone. The simpler trade is shorting CAT on a close below its post-earnings intraday low.

Caterpillar, Inc (CAT) lost 2.7% post-earnings but bounced off its 200DMA.

Lowes Companies, Inc (LOW)

Lowes Companies, Inc (LOW) printed an impressive breakout the previous week. Accordingly, I primed myself to buy on a pullback from the over-extended position well above the upper Bollinger Band (BB). I thought an analyst downgrade the next day that created a complete reversal and near test of 50DMA support was a gift. However, LOW continued to drift lower for the week. As long as 50DMA support holds, I hold out expectations for a rebound. A bullish analyst could do the trick…

Lowes Companies, Inc (LOW) spent the week trying to hold 50DMA support after leaving behind a false breakout above its upper Bollinger Band

Logitech International (LOGI)

I ignored the warnings of a pre-earnings surge in put buying and got long Logitech International (LOGI) via a short put option. It was Monday, and I was still operating under the impression of the previous week’s mild earnings season. The stock tanked 10.3% the next day and delivered my first, and most important, wake-up call! So far, LOGI is not threatening 200DMA support. LOGI last closed below its 200DMA in March, 2020 when it traded in the low $40s. In other words, LOGI likely faces a very critical test right around the corner.

Logitech International (LOGI) lost 10.3% post-earnings but so far is holding 200DMA support.

Skywater Technology, Inc (SKYT)

Every now and then I put in a bid for an IPO. I think I can count the number of successes on the fingers of my two hands. Skywater Technology, Inc (SKYT) was a recent success. The company priced the IPO at $14, and I was pleasantly surprised with a decent first day gain of 27%. I held to avoid violating the flipping rules. In this case, the hold worked out well as SKYT eventually broke out the following month after the company’s first earnings report. I took profits there.

I continued to follow the stock right through earnings. Skywater Technology, Inc disappointed on guidance ahead of its second earnings report. SKYT crashed 45.4% after lowering guidance. The selling only stopped about a dollar above the IPO price. I started accumulating stock at $16 thinking the selling was overdone and perhaps exaggerated by the market’s bad mood that day. The next day’s rebound put me in the green, but I am holding in anticipation of continued reversal of the loss. I will hold through earnings as well. The SKYT is expanding capacity, so I am assuming future results will improve.

Skywater Technology (SKYT) plunged 45.4% post-earnings. Buyers are now nibbling on SKYT.

FedEx Corporation (FDX)

I see the effects of lingering weakness in FedExCorporation (FDX). The shipper fell 5.0% in sympathy with the poor response to UPS’s earnings. FDX tested for broke through 200DMA support three of the last four trading days. I like trading off Friday’s candle: long above the intraday high, short below the intraday low.

FedEx Corporation (FDX) struggled all week in sympathy with UPS and closed the week barely clinging to 200DMA support.

Spotify Technology (SPOT)

Earnings treated Spotify Technology (SPOT) poorly. The 5.7% loss looks like it confirmed the on-going downtrend from the February all-time high. Count SPOT as one of the many companies that continues to suffer divergence from the major indices and as weakness lingers in the stock market.

Spotify Technology (SPOT) almost tested the May lows with a 5.7% post-earnings loss.

Haverty Furniture Companies (HVT)

The top occurred in June for Haverty Furniture (HVT). The slice through 50DMA support in June was a major bearish signal. I only took note of HVT following earnings last week. Sellers continued their pressure from there. HVT will reconfirm its bearishness if it closes lower from here.

Haverty Furniture Companies (HVT) lost 4.8% post-earnings and closed the week clinging to 200DMA support.

BJs Restaurant (BJRI)

In my last (Above the 40) post I looked at the strong earnings responses in Chipotle Mexican Grill (CMG) and Dominos Pizza (DPZ) and wondered whether the performance represented a growing domination of bigger casual dining establishments. BJs Restaurant (BJRI) provided potential affirming news. BJRI has about 2% of the market cap of CMG. Like many trades on a reopening economy, BJRI topped out between March and April and is now on a downtrend. A 3.7% post-earnings loss further confirmed that downtrend and resistance from all three of the major moving averages.

BJs Restaurant (BJRI) lost 3.7% post-earnings and closed at a fresh 7-month low.

The Cheesecake Factory Incorporated (CAKE)

Weakness lingers in Cheesecake Factory Incorporated (CAKE). CAKE has almost triple the market cap of BJRI. Of course, that still makes CAKE a midget compared to CMG. Buyers stepped hard into CAKE on the previous week’s oversold rebound. A 13.2% post-earnings loss wiped out those gains in one fell swoop. Sellers made sure to end the week confirming a bearish 200DMA breakdown for CAKE.

The Cheesecake Factory Incorporated (CAKE) dropped 13.2% post-earnings and closed the week with a confirmed 50DMA breakdown and 6-month low.

Citrix Systems (CTXS)

I long forgot about Citrix Systems (CTXS). I guess the IT infrastructure software company is falling out of favor. CTXS topped over a year ago and has chopped lower ever since. A 13.6% post-earnings loss plunged CTXS into a near 2-year low. I might consider shorting CTXS on a rebound to or slightly above its lower Bollinger Band if the stock market is “far enough” away from oversold trading conditions at that time.

Citrix Systems (CTXS) plunged 13.6% post-earnings and touched a near 2-year low.

Monro, Inc (MNRO)

After May earnings, I expressed surprised that Monro, Inc (MNRO) did not fare better. After the 50DMA breakdown, MNRO churned in place. July earnings forced MNRO to take another step function lower. A 200DMA breakdown now hangs in the balance.

Monro, Inc (MNRO) plunged 11.0% post-earnings and confirmed 50DMA resistance. MNRO is now fighting to stay close to 200DMA support.

Paypal (PYPL)

Paypal (PYPL) is one of many stocks that peaked in February. However, unlike many of the February toppers, PYPL managed a rally that took the stock to a new (marginal) all-time high. PYPL went downhill from there, including a post-earnings tumble. Two days of post-earnings selling created a fresh 50DMA breakdown. Given PYPL’s ability to conquer two 50DMA breakdowns from March to May, I think the stock will soon rebound. PYPL needs fresh reassurances from analysts.

PayPal Holdings, Inc (PYPL) lost 6.2% post-earnings and suffered a 50DMA breakdown the following day.

Uber Technologies (UBER)

News dropped after hours on Wednesday of a large block of shares trading in Uber Technologies (UBER). Soon afterward news arrived that Goldman Sachs (GS) sold the shares on behalf of Softbank. Softback apparently needed money to paper over losses from its investment in Chinese ride-sharing company Didi Global (DIDI). While the CNBC story implied that the shares were not yet sold, UBER fell 3.1% and closed the week below its $45 IPO price.

UBER last traded below its IPO price in May and quickly rebounded. Overhead resistance from the 50DMA stopped the rally. Weakness lingers in UBER in the form of a July downtrend. Earnings are coming again next week. Softbank’s move and the fresh close below the IPO price makes me suspect UBER has more downside risk ahead. I placed a low risk, high potential reward trade in the form of a covered call position where I used the premium from the weekly $44 call to buy two $41 puts. If UBER rallies going into August 4th earnings, I might sell the long side of the position and add puts with a higher strike.

Uber Technologies (UBER) is once again trading under its IPO price as it closed the week at a 9-month low.

Zendesk Inc (ZEN)

Weakness lingers in popular SAS play Zendesk Inc (ZEN) with a bearish post-earnings 50 and 200DMA breakdown. While ZEN punched through the July low, the stock remains above all the prior lows since March. ZEN looks like a tricky trade. In oversold conditions, I would buy ZEN for a rebound to resistance. Far above oversold, I would fade ZEN on a rally into resistance. Chasing ZEN down with a short is a high risk move given the potential for a relief rally away from the lower Bollinger Band.

Zendesk, Inc (ZEN) fell 13.3% post-earnings and closed below its 200DMA for only the second time in 15 months.

Stock Chart Reviews – Above the 50DMA

Etsy, Inc (ETSY)

Etsy, Inc (ETSY) fell in sympathy with Amazon.com (AMZN). Unlike AMZN, ETSY held on to 50DMA support. However, given post-earnings tumbles and reversals from the likes of Facebook (FB), Pinterest (PINS), and Alphabet (GOOG), I doubt ETSY will survive this test of double support from the July low and 50/200DMAs. I eagerly await the market’s response to earnings on August 4th.

Etsy, Inc (ETSY) dropped 7.8% and closed right between its converging 200DMA and 50DMA. The loss left behind a double peak for June and July and plowed into a test of support of the July low.

Encore Wire Corporation (WIRE)

Almost three weeks ago, I pointed out I wanted to buy Encore Wire Corporation (WIRE) on a test of 200DMA support. The test came, WIRE survived, but I got cold feet with earnings right around the corner. Silly me. The chart below says everything. However, the large 10%+ fade from the post-earnings intraday high makes WIRE look very toppy.

Encore Wire Corporation (WIRE) gapped higher post-earnings but lost almost 10% from its intraday high. WIRE closed the week at a post-earnings low.

iShares U.S. Home Construction ETF (ITB)

In an interesting twist, home builders bucked the pressures of lingering weakness outside the few elite stocks pushing the major indices higher. Despite poor housing data reports in July, investors took heart with bullish earnings reports from various builders last week. The net effect drove iShares U.S. Home Construction (ITB) to a fresh breakout and 2-month high. I want to resist buying this breakout because I prefer seasonal trades on home builders. I will make a final trading decision after I write my next Housing Market Review.

iShares U.S. Home Construction ETF (ITB) confirmed a 50DMA breakout with Thursday’s 3.6% gain.

Martin Marietta Materials, Inc (MLM)

The material trade keeps throwing me for loops. A fresh infrastructure deal in Washington D.C. set materials companies like Martin Marietta Materials (MLM) soaring. MLM gained 4.0% and printed a 50DMA breakout ahead of earnings. However, post-earnings softness prevented MLM from confirming the breakout. With a fade from almost $380, I left MLM off the buy list. The potential upside in the near to intermediate term is just not worth the risk from waiting through all the churn.

Martin Marietta Materials, Inc (MLM) jumped 4.0% ahead of earnings on a fresh deal on infrastructure spending. Earnings cooled the excitement a bit.

Zoom Video Communications, Inc (ZM)

An analyst upgrade helped push Zoom Video Communications, Inc (ZM) into a 200DMA breakout. With a 34.7 price/sales ratio ahead of a reopening of global economies that absolutely will reduce the use of Zoom, I cannot fathom a strong reason to do more than speculate on ZM’s technicals. Sure enough, ZM stopped short of $400, the point of resistance from the July high, and sellers sent ZM right back to its 200DMA. Still, ZM survived 50DMA support in July so the benefit of the doubt favors upside for now.

Zoom Video Communications, Inc (ZM) ended the week on top of 200DMA support after sellers faded much of the gains from an analyst call.

Advanced Micro Devices (AMD)

The bullish post-earnings breakout on Advanced Micro Devices (AMD) primed me to buy. Surprisingly, buyers remained relentless on AMD for the rest of the week. Thus, I never found a satisfactory entry point. AMD is clearly a buy on the dips from here.

Advanced Micro Devices, Inc (AMD) soared three days straight post-earnings and closed the week at an all-time high.

Tesla, Inc (TSLA)

Earnings cleared the road for Tesla, Inc (TSLA). Sellers at first faded the stock back to 200DMA support. Buyers took over from there partially thanks to analyst upgrades. After missing on entry on Thursday, I jumped into a weekly $735/$720 calendar call spread on Friday. This position is a bit of a stretch. The fade from intraday highs took the position from a small profit back to flat.

Tesla, Inc (TSLA) confirmed 200DMA support although it faded from its intraday high

Be careful out there!

Footnotes

“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.

Active AT50 (MMFI) periods: Day #326 over 21%, Day #9 over 31% (overperiod), Day #1 under 41% (underperiod), Day #20 under 51%, Day #32 under 62%, Day #96 under 72%

Percentage of stocks trading above their respective 50-day moving averages (DMAs) according to TradingView.com (MMFI)
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 call spread, long TSLA calendar call spread, longer covered call UBER and puts, long SKYT, short LOGI put, long LOW 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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