Pattern Trading Wins Another Week – The Market Breadth

Stock Market Commentary

Pattern trading uses consistent bets on repeated behaviors in financial markets. Over the course of time, pattern trading delivers profits from the diligent application of rules based on standard, technical setups in stock charts. The persistent uptrends and trading ranges in this pandemic stock market have delivered a surprisingly long stretch of recognizable behaviors for pattern trading. Last week provided a classic round of wins for pattern trading.

The Stock Market Indices

The S&P 500 (SPY) bounced perfectly off its lower Bollinger Band (the black line in the chart below). The stubborn uptrend in the index has created consistent wins for pattern trading with bets on rebounds from the 50-day moving average (DMA) (the red line below) and/or the lower Bollinger Band (BB). Sellers have absolutely failed to create a significant break in the S&P 500 in almost a year….and those two breaks were brief.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) rebounded off its lower Bollinger Band (BB) in picture-perfect form.

The NASDAQ (COMPQX) has not been as friendly to pattern trading as the S&P 500. Still, last week, the tech-laden index demonstrated that the bulls remain in charge. Buyers immediately jumped on Thursday’s breach of 50DMA support and have not yet stopped scooping up the “bargains.” The NASDAQ gained 1.2% on Friday.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) recovered from an ever so brief 50DMA breakdown.

Even the lagging iShares Trust Russell 2000 Index ETF (IWM) maintains its own setup for pattern trading. For almost the entire year, IWM has bounced in a well-defined trading range. So, even with IWM printing a bearish breach of 200DMA support on Thursday, I pounced on a weekly IWM calendar call spread. Despite IWM last closing below its 200DMA 11 months ago, I bet on the pattern of IWM rebounding from the bottom of its trading range. IWM delivered on Friday with a 1.7% rebound. That move quickly took the position to my initial profit target. Further buying confirms the 200DMA breakout and rebound.

The iShares Trust Russell 2000 Index ETF (IWM) rebounded 1.7% from a 1-day 200DMA breakdown.

Stock Market Volatility

I report on the “volatility faders” all the time. These traders have had a field day given the default position of complacency in the major indices of the stock market. The volatility faders went right back to work last week. The volatility index (VIX) managed gains the first 4 days of the week. However, on the 4th day, the faders signaled the beginning of the end. The VIX stopped just short of the intraday high of its last surge in July. Faders next pushed the VIX almost to a flat close. They sealed the deal with Friday’s 14.4% reversal.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) managed a 2-day surge before faders predictably smashed it back down. The VIX lost 14.4% to end the week.

The Short-Term Trading Call with Pattern Trading

  • AT50 (MMFI) = 35.9% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) = 52.8% of stocks are trading above their respective 200-day moving averages
  • Short-term Trading Call: neutral

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, rebounded to 35.9%, but my favorite technical indicator closed down for the week. While Thursday’s drop below 30% was certainly “close enough” to oversold for this bull market, I remain unenthused. The decline in longer-term market breadth presented by AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, combined with the recent breakdown and plunge in AUD/JPY, cooled my heels. I think it will take a real breakdown and sell-off in the S&P 500 to create the next attractive buying opportunity in the stock market. Until then, I see very tight constraints on the bullish pattern trading offered by uptrends and trading ranges.

The percentage of stocks trading above their respective 50DMAs (AT50) jumped 5 points and avoided testing the July lows for now.
The percentage of stocks trading above their respective 200DMAs (AT200) jumped 2 points off a 10-month low.

Stock Chart Video Reviews

Stock Chart Reviews – Below the 50DMA

Caterpillar, Inc (CAT)

Caterpillar, Inc (CAT) raised the alarm level a notch by suffering a 200DMA breakdown last week. However, the bottoming pattern from July’s hammer candle continues to hold as a low. A break below that candle could confirm a new bearish spin on CAT and the stock market in general.

Caterpillar, Inc. (CAT) breached 200DMA support again and is one confirmation away from flipping into bearish territory. (AMZN)

Pattern trading for (AMZN) means a persistent trading range that started 13 months ago. Last month’s breakout proved fleeting as earnings took AMZN right back into the trading range. I managed to pull off a successful post-earnings trade on AMZN, but that win now looks very lucky with the context of a steady sell-off since then. I will be ready to try again if AMZN tests the 3000 level close to the bottom of the trading range. (AMZN) is stuck in an August downtrend that includes a confirmed 200DMA breakdown. Still, the 13-month trading range remains well intact.

Red Robin Gourmet (RRGB)

The pattern trading for Red Robin Gourmet (RRGB) has been a steady downtrend since the March highs. Like so many reopening trades, the market sniffed out a cooling in prospects months ago. RRGB plunged 16.4% post-earnings and wiped out the rest of its gains for 2021. Of course, since I am a Red Robin Gourmet fan I keep looking for an excuse to buy. The updated hurdle for RRGB is a close above the post-earnings intraday high.

Red Robin Gourmet (RRGB) complete a round-trip for 2021 by plunging 16.4% post-earnings.

Peloton Interactive (PTON)

On a rare day of notable selling, I expressed my befuddlement at a 3.0% pop in Peloton Interactive (PTON). Sure enough, PTON fell back 2.3% the next day and closed the week at a 2-month low. While May’s post-earnings and post-recall rebound was impressive, I think the market continues to sniff out increasing tailwinds for PTON. The stock peaked right at the beginning of the year. The June/July breakout failed to hold and now looks like a failed test of the April peak. Unless masses more people somehow decide it is better to exercise indoors than outdoors (or at a gym), I think PTON will soon enough retest its 2021 lows. A 153 forward P/E and 10 price/sales is simply too rich a price to pay for a company whose biggest tailwinds came from a pandemic that is closer to the end than the beginning.

Peloton Interactive (PTON) quickly reversed a 1-day 3.0% pop and finished the week at a 2-month low.

General Motors (GM)

The pattern trading in General Motors (GM) kept the stock pivoting around its 50DMA. The surprise 8.9% post-earnings plunge was the first warning of a change in behavior. Last week’s 200DMA breakdown confirmed the change. GM closed the week at a 7-month low. News of a massive $1B Chevy Bolt recall threatens to drive GM into a complete reversal of its 2021 gains before the selling ends.

General Motors Company (GM) confirmed a 200DMA breakdown and kept selling to a 7-month low.

Valero Energy Corporation (VLO)

The February breakout in Valero Energy Corporation (VLO) lasted only a month. From there, VLO churned its way to a full reversal. VLO closed last week at a fresh 6-month low. With the stock looking like it confirmed a double-top between March and June, I no longer monitor VLO closely for a fresh buying opportunity. Indeed, the 200DMA breakdown is a bearish look for VLO.

Valero Energy Corporation (VLO) closed the week at a 6-month low and remains stuck in a bearish position.

Stock Chart Reviews – Above the 50DMA

Coinbase Global (COIN)

Coinbase Global (COIN) is only 4 months old as a publicly traded company. As a result, the pattern trading in the stock has a thin history. Still, the $250 reference price for the direct listing provided a reference point for a top in the stock until the small run-up into earnings. Last week, COIN managed a picture-perfect bounce off 50DMA support. I am a buyer here on the confirmed test of 50DMA support with a stop below the 50DMA.

Coinbase Global, Inc. (COIN) followed through on a successful test of 50DMA support with a 3.7% gain.

Facebook (FB)

The 50DMA provides a guide to pattern trading in Facebook (FB). Last week was a classic example. FB gapped right down to 50DMA support and buyers stepped in from there. FB notched a 1.2% gain on Friday. I tried a different kind of options trade on FB here. I bought a weekly calendar call spread with a $355/$357.50 strike to play a pin at $355. Instead, FB moved to $359 to close the week. I let the short side get assigned. The new position has little additional downside but a lot of potential upside if selling in the stock market resumes next week and finally goes after the few stocks driving the major indices higher.

Facebook (FB) followed through on a test of 50DMA support with a 1.2% gain.

Be careful out there!


“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 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 #341 over 21%, Day #24 over 31% (overperiod), Day #4 under 41% (underperiod), Day #35 under 51%, Day #47 under 62%, Day #111 under 72%

Source for charts unless otherwise noted:

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Full disclosure: long UVXY call spread, short FB shares and long FB call, long GM

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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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