New Stock Rotations Pressured Market Breadth – The Market Breadth

Stock Market Commentary

August was a breeze, and the stock market strolled in September. A few pebbles rolled into the path this week. The indices delivered divergent behavior which brings up familiar themes of rotation. Most notably, the rotations pressured market breadth as small caps in particular displayed fresh signs of weakness.

The Stock Market Indices

The S&P 500 (SPY) opened the week with a 0.3% loss. The index closed almost flat today after a close encounter with uptrending support at the 20-day moving average (DMA) (the dotted line below). You guessed it: the sellers may have already run out of steam. I can barely call the resulting moves a “pullback.”

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) bounced in picture-perfect style away from its uptrending 20DMA support.

The NASDAQ (COMPQX) held its ground at the start of the week in a divergence from the S&P 500. The tech-laden index even notched a marginal all-time high. Today’s 0.6% pullback leaves the NASDAQ hanging out in limbo.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) fell 0.6% away from its all-time high.


The iShares Trust Russell 2000 Index ETF (IWM) reminded traders and investors that its trading range remains alive and well. A third straight day of selling took the divergent index of small caps straight into converging support at its 20DMA and 50DMA (the red line below). Needless to say, I am relieved I refused to let IWM fool me yet again with a briefly lived 50DMA breakout.

The iShares Trust Russell 2000 Index ETF (IWM) lost 1.1% but still bounced away from converged support at its converged 20DMA and 50DMA.

Stock Market Volatility

The volatility index (VIX) ran out of steam as faders started their work before the VIX could reach the 20 level. This picture looks like more churn for the VIX along with support that continues to firm around 15-16.

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) faded from a gap to close at a 1.0% loss.

The Short-Term Trading Call With Pressured Market Breadth

  • AT50 (MMFI) = 47.6% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) = 53.4% 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, suffered its third losing day in a row. My favorite technical indicator swiftly pulled back from near 60% to under 50%. This sharp reversal that pressured market breadth belies the relatively benign and calm trading in the S&P 500 and even the NASDAQ. The move also holds a new downtrend intact. Note well that the next lower low takes MMFI to oversold levels below 21%.

The percentage of stocks trading above their respective 50DMAs (AT50) pulled back sharply from the 60% level.
The percentage of stocks trading above their respective 200DMAs (AT200) remains locked in a steep downtrend.

Stock Chart Reviews – Below the 50DMA

Coupa Software Incorporated (COUP)

As 200DMA resistance watches bemused from above, Coupa Software Incorporated (COUP) follows a roller coaster trending downward. Investors clearly do not know what to make of the company or the ups and downs about its earnings reports. COUP ran nearly straight up into earnings only to come out the other side with a 4.2% post-earnings loss. If the current pattern holds, COUP is on its way to a new low of the year from here. However, a 200DMA breakout should be extremely bullish for the stock.

Coupa Software Incorporated (COUP) lost 4.2% post-earnings as overhead resistance from the 200DMA holds comfortably.

Texas Pacific Land Corporation (TPL)

Texas Pacific Land Corporation (TPL) popped onto my radar from a price alert. Per Yahoo Finance, TPL “engages in the land and resource management, and water services and operations businesses.” The company is also an oil and gas infrastructure company. The stock topped out in the spring and has slowly leaked since. The steady downtrend makes the 200DMA breakdown bearish even though it was also a dividend payday. A lower close confirms a bearish setup.

Texas Pacific Land Corporation (TPL) sliced through 200DMA support on its ex-dividend day.

Five Below, Inc. (FIVE)

I mentioned the setup for Five Below, Inc. (FIVE) in my last Market Breadth post. FIVE proceeded to jump 3.0% with a big fake-out move. The selling that resumed confirmed a 200DMA breakdown and a bottoming hammer pattern. Thus, the setup quickly changes for FIVE. The stock is a buy on a fresh 200DMA breakout. The stock is firmly bearish if the bottoming hammer gives way to a lower close.

Five Below, Inc. (FIVE) confirmed a 200DMA breakdown with a bottoming hammer pattern.

PulteGroup, Inc. (PHM)

My last Housing Market Review focused on the dynamics of a “comfortable calm” settling over the housing market. I followed up describing the relatively bullish earnings report from Tri Pointe Homes, Inc. (TPI). PulteGroup, Inc. (PHM) interrupted the calm for the stocks of home builders with an earnings report that disappointed investors. Presumably, talk about a stubbornly gummed up supply chain scared investors to the sidelines. PHM gapped below its 200DMA with a 6.1% loss and a 6-month low. While I never short home builders, PHM looks like a setup for a short with a stop above the 200DMA.

PulteGroup, Inc (PHM) lost 6.1% and suffered a 200DMA breakdown

Stock Chart Reviews – Above the 50DMA

Apple Inc (AAPL)

Apple (AAPL) went parabolic to start the week and completely reversed its gains the very next day. I made a late Apple Trading Model move into call options as a play on a rebound. Buyers got started with a bounce off the bottom of Tuesday’s gap up. Time is ticking to Friday.

Apple Inc (AAPL) held onto all-time highs as post-earnings momentum continues.

Amazon.com, Inc. (AMZN)

I watched Amazon.com (AMZN) bounce sharply out of its 200DMA breakdown. Next, AMZN challenged its 50DMA resistance. I pounced on the 50DMA breakout with a weekly 3660/3670 calendar call spread. This trade assumes AMZN will continue the current momentum right past the post-earnings gap down.

Amazon.com, Inc (AMZN) confirmed a fresh 50DMA breakout and is pushing into its post-earnings gap down.

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 #354 over 21%, Day #37 over 31%, Day #12 over 41%, Day #1 under 51% (underperiod ending 8 days over 51%), Day #60 under 62% (underperiod), Day #124 under 72%

Source for charts unless otherwise noted: TradingView.com

Grammar checked by Grammar Coach from Thesaurus.com

Full disclosure: long UVXY call spread, long AMZN calendar call spread, long AAPL 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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