Stock Market Commentary
In my previous post I looked ahead to the Fed meeting on Wednesday as a main wildcard facing down the stock market’s most predictable trading pattern. Instead, heavy headlines about a looming financial crisis in China ground the gears of the stock market. Sprinkle in some obligatory fear about the dire warnings regarding the U.S. federal government’s debt ceiling, and investors had every excuse to cash out. Big cap tech became a perfect source of funds: 1) plenty of untapped profits after months and months of relentless uptrends, 2) high liquidity from passive investors dutifully piling more and more money into the same stock market leaders. Big cap tech is often called defensive in a low growth environment. However, cashing them out as a source of funds is even more defensive. The resulting declines stood in stark contrast to the uptrends that preceded the heavy headlines.
The Stock Market Indices
The S&P 500 (SPY) lost as much as 2.9% before clawing its way back to a 1.7% loss. The index not only gapped down below its 50-day moving average (DMA) (the red line below), but also it traded well below its lower Bollinger Band (BB). That stretch was enough of an oversold condition to motivate me to buy an SPY call spread expiring in two Fridays. Given the S&P 500 last gapped below its 50DMA at the beginning of the pandemic-driven market collapse, I think the near irresistible rebound in the index will meet stiff overhead resistance at the 50DMA. Accordingly, I will quickly take profits on my position if the market obliges.
The NASDAQ (COMPQX) gapped down from a comfortable churn around its 20DMA (the dotted line below) to a resting spot below the 50DMA. The tech-laden index last gapped below its 50DMA in October, 2020. Like the S&P 500, the NASDAQ traded well below its lower-BB and rebounded off the over-stretched intraday low.
The iShares Trust Russell 2000 Index ETF (IWM) has closed below its 200DMA (the blue line below) just three times in the past 52 weeks. Two of those closes have come in the last month. The IWM rebounded from its over-stretched position all the way back to the lower-BB. Regardless of the churn, IWM remains well-tucked into its 2021 trading range.
Stock Market Volatility
The volatility index (VIX) surged 23.6% but faders worked the fear gauge well off its intraday high. That point happened to coincide with the highs from May. In other words, this move suspiciously looks like a short-term top for the VIX. Perhaps unsurprisingly, my ProShares Ultra VIX Short-Term Futures ETF (UVXY) Oct $25/$30 call spread did not move much as BOTH sides of the spread soared in price. Rather than sell for what I think is a low-ball price, I bought a ProShares Short VIX Short-Term Futures ETF (SVXY) call option as my play on more short-term wins for the VIX faders.
I noted in the last post: “The current surge is holding 18 as support. In other words, the VIX looks like it wants to serve as a launchpad for the stock market’s most dangerous months.” Bingo.
The Short-Term Trading Call With Apple’s big loss
- AT50 (MMFI) = 32.2% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 44.7% 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, plunged from 44.0% to 32.2%. My favorite technical indicator fell as low as 28% and hit “close enough” to oversold levels. As a result, I feel quite comfortable that I leaned into the sell-off by nibbling on some long positions. The short-term trading call stays at neutral since I expect a market rebound to fail at resistance or otherwise be short-lived until the market finally hits an oversold flush. I am practically itching for this market to achieve oversold conditions (AT50 below 21%).
AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, finally looks like it is hitting the pause button on its downtrend. AT200 dropped as low as 42.5% before closing right at a 52-week low. While I expect a rebound, I also expect the on-going downtrend to put a tight cap on the coming rebound.
Through AUD/JPY, the currency market supports the notion of a short-term bounce in financial markets. At the time of writing, the Australian dollar versus the Japanese yen is finally showing some signs of life after a mostly rough September to-date.
Stock Chart Reviews – Below the 50DMA
Apple Inc (AAPL)
I wrote up the technical case on Apple (AAPL) last week. Today, AAPL fell on the other side of the dividing line. Indeed, the rush to turn AAPL into a source of funds broke very important support levels. Trading is set up for an eventual test of 200DMA support. Such a move will require a push into true oversold conditions for the market. Time will tell if sellers need to grind Apple even lower as a source of funds.
Facebook (FB)
Facebook (FB) fell into the grinder for a source of funds. Its 50DMA breakdown set up some predictable trading around support that has been in place since last month. The chart below says it all. FB lost 2.5% after rebounding off the support line. I used the selling to take profits on my short position. I am left with hedging calls.
Peloton Interactive, Inc. (PTON)
I continue to watch the slow motion pullback in Peloton Interactive, Inc (PTON). The extreme excitement that came from Peloton announcing its entry into athletic wear has fizzled away. PTON neatly failed at 200DMA support at an intraday high and neatly failed at 50DMA support at a closing high. That pattern amazingly repeated trading ahead of August earnings. As a result, I am looking out for a test of September lows. PTON is a fresh short below those lows and a fresh buy on a bounce from those lows.
Whirlpool Corporation (WHR)
Before September, Whirlpool Corporation (WHR) last traded below its 200DMA in July, 2020. Trading last Friday confirmed a 200DMA breakdown. I think this move is bearish. As a result, WHR is a fade at a fresh test of resistance. WHR could invalidate the bearish signal with a confirmed 50DMA breakout.
Stock Chart Reviews – Above the 50DMA
NVIDIA Corporation (NVDA)
NVIDIA Corporation (NVDA) held 50DMA support even after gapping down below its lower-BB. I like buying NVDA for a nimble trade: a rebound back to the September consolidation range and a stop below the 50DMA.
Microsoft Corp. (MSFT)
The grind for source of funds in big cap tech even hit stalwart Microsoft Corp (MSFT). The close with a 1.9% loss neatly ended the shallow breakout from August. Buyers fought off a 50DMA breakdown. MSFT is a short on a fresh breach of the 50DMA.
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 #362 over 21%, Day #4 over 31% (overperiod), Day #1 under 41% (underperiod ending 4 days over 40%), Day #14 under 51%, Day #68 under 62%, Day #132 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 FB call options, long SPY call spread, long SVXY call, short AUD/JPY
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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.
Are you sure about that NVidia trade? The risk-reward looks awful.
“Sure” is a bad word in trading, especially short-term trading. I made what I think is a low risk, good opportunity trade on a weekly 212.50/220 call spread. If the market rebounds at all this week, NVDA has a good shot to close the Monday gap down. The call spread strikes are placed accordingly.
As a quick follow-up, I just closed out the NVDA trade as the stock closed the gap. The trade worked out even better than hoped as I didn’t have to sit through the likely churn surrounding today’s Fed decision.