Almost Like Nothing Happened – The Market Breadth

Stock Market Commentary

Last week opened with a gap down amid hand-wringing about the potential for contagion from debt problems in China’s property market. However, the week ended like nothing happened. The major indices even managed marginal gains after the dust settled. As is so often the case, the Federal Reserve, under the comforting words of Jerome “J-Pow” Powell, paved the road for the buyers with reassuring resurfacing of the roads. From J-Pow in response to a question about China’s property giant Evergrande (emphasis mine):

“…the Evergrande situation seems very particular to China, which has, has very high debt for an emerging market economy, really the highest that any emerging market economy has had. And the government has been working to get that under control. This is part of that effort. The government put new strictures in place for highly leveraged companies. And Evergrande is dealing with those strictures, and it’s something [they’re] managing. In terms of the implications for us, there isn’t, there’s not a direct United States exposure. The big Chinese banks are not tremendously exposed. But, you know, you would worry that it would affect global financial conditions through confidence channels and that kind of thing. But I wouldn’t draw a parallel to the United States corporate sector.

The day’s gap up held and buyers never looked back.

The Stock Market Indices

The S&P 500 (SPY) came out the gates weak and wobbly. The index logged a 1.7% loss followed by a fractional loss. At that point, the S&P 500 was well beyond its average and median drawdown for the month of September. That extension combined with the “close enough” oversold conditions motivated me to focus on buying opportunities.

The S&P 500 spent just three days closed below its 50-day moving average (DMA) (the red line below). Since the April, 2020 breakout, the top 2 streaks are 9 and 6 days from a year ago. The index has suffered just 3 other closes below its 50DMA. The S&P 500 rebound from a shallow pullback remains the market’s most predictable pattern. BUT, and this exception is something to watch closely, the S&P 500 printed its FIRST lower low since the April, 2020 breakout. I took profits on my SPY call spread as the index hit its 50DMA.

The S&P 500 (SPY) gained 0.9% and stretched for an all-time high.
The S&P 500 (SPY) ended the week up 0.2% from the previous week. A confirmed 50DMA breakout closed the gap and produced the impression that nothing happened during the week.

The NASDAQ (COMPQX) closed its gap down just as the S&P 500 did so. The tech-laden index had a flat close to end the week – just like nothing happened.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) closed the week with a perfect gap fill that makes the index look like nothing happened to start the week. Buyers left behind a bottoming hammer.


The iShares Trust Russell 2000 Index ETF (IWM) lagged with a 0.8% loss. So despite closing its gap down with 50 and 200DMA breakouts, the index of small caps looks too weak to make a convincing near-term challenge at the top of the trading range.

The iShares Trust Russell 2000 Index ETF (IWM) managed a 0.3% gain for the week and another confirmed 200DMA breakout.

Stock Market Volatility

The volatility index (VIX) definitely exited the week looking like nothing happened to worry anyone. The VIX started the week with a convincing surge and ended the week with an equally convincing 3-day plunge. The next question is whether the 15-16 range or so holds as support for a new launching pad into the last of the stock market’s most dangerous months. For good measure, I used the cheaper prices to add a call option on the ProShares Ultra VIX Short-Term Futures ETF (UVXY). I want to keep the backside partially protected…just in case “something” really does happen. (Note I took profits on my ProShares Short VIX Short-Term Futures ETF (SVXY) call option on its first bounce; those profits partially paid for the new UVXY call option).

The volatility index (VIX) continues to cling to the 20 threshold.
The volatility index (VIX) lost 14.7% for the week as if something GOOD happened. Another short-lived surge is in the books.

The Short-Term Trading Call After Nothing Happened

  • AT50 (MMFI) = 47.8% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) 50.7% 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, put on an impressive show. My favorite technical indicator surged from the “close to” oversold conditions on Monday to three straight gains. Wednesday and Thursday were particularly strong. However, the overall trend still points downward on AT50, so I continue to stay on guard for an eventual drop into true oversold conditions. I took profits on most of my bullish short-term trades for the week, and I will now watch closely how the market trades around the 50DMAs for the S&P 500 and the NASDAQ. The S&P 500 technically confirmed its 50DMA breakout with a marginally higher close, but I am not quite convinced. I want to see a close above the 20DMA (the dotted line in the earlier chart).

The percentage of stocks trading above their respective 50DMAs (AT50) soared for three days to place a definitive bottom for this latest cycle of extremes.

AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, definitely hit the pause button on its downtrend. The surge subsequent to the 52-week low was quite impressive. However, the downtrend is far from over. The chart below should give every technical observer cause to pause.

The percentage of stocks trading above their respective 200DMAs (AT200) came to life after hitting a 52-week low.

Stock Chart Video Review

Stock Chart Reviews – Below the 50DMA

Apple Inc (AAPL)

Support held for Apple (AAPL) thanks to the general rebound in the stock market. However, momentum came to a screeching halt on Friday. As a result, I think AAPL remains at risk for a run for 200DMA support in coming weeks. A confirmed 50DMA breakout would invalidate that bearish anticipation.

Apple (AAPL) bounced away from a test of a key 2021 support level.

Facebook (FB)

A simple quote from a business update caused a lot of angst for Facebook on Wednesday: “Our estimate is that in aggregate we are underreporting iOS web conversions by approximately 15%; however there is a broad range for individual advertisers.” Sellers dropped FB well below its lower Bollinger Band (BB) for a 4.0% loss. Despite cracking important support, the short-term extreme move put me on alert for a fresh buying opportunity, especially given I thought the news catalyst was a minor speedbump for Facebook. Sure enough, selling stopped on a dime after Wednesday. I bought a weekly 355/362.50 call option spread after FB cracked above the old support line. I did not wait for confirmation given such a move might push FB all the way to 50DMA resistance. Accordingly, the short side of the call spread is set right at the 50DMA.

Facebook (FB) jumped 2.0% in an attempt to recover from a bearish breakdown below important support.

Peloton Interactive, Inc. (PTON)

I earlier noted I was looking out for a test of September lows for Peloton Interactive, Inc. (PTON). PTON sliced right through that point and set up a freshly bearish breakdown. I waited on making a move given I was more focused on the market’s bullish opportunities. In the coming week, I will either chase the stock lower or look to fade a relief bounce. An eventual test of the May lows seems to be in the cards. PTON has a long way to go to the upside to invalidate the bearish signals.

Peloton Interactive, Inc. (PTON) closed at a 4-month low as sellers remain relentless.

Best Buy (BBY)

The post-earnings glow ended quickly for Best Buy (BBY). Sellers have dominated the trading action since BBY popped for an 8.2% late August surge. BBY’s weakness even continued through the stock market’s rebound last week. The stock cracked presumed support around $107.50 and never recovered. Accordingly, BBY firmly sits in bearish territory. I will be looking for a put options play on an eventual test of the March lows.

Best Buy (BBY) looks ready to challenge its March lows.

First Solar (FSLR)

When call buyers descended upon First Solar (FSLR) the previous week, I bought shares and sold that call (Sep $105). I did not buy the calls outright because I wanted to hold shares in case the surge in activity turned into a false signal. I took profits on having the position called away from me. FSLR proceeded to plunge 8.0% to start the week. I bought back into shares the next day as FSLR tested 50DMA support and also sold a weekly $96 call for good measure. I rolled into a fresh short weekly $96 call on Friday’s 50DMA breakdown. Weakness in FSLR are still buying opportunities for me.

First Solar (FSLR) followed a reversal of its last breakout with a 50DMA breakdown.

Caterpillar, Inc (CAT)

Caterpillar, Inc (CAT) created the perfect setup for playing a bounce toward “nothing happened.” For two days straight, buyers lifted CAT well off its intraday lows before the subsequent 3-day rally. CAT has yet to fill its gap down, so I think the stock still represents a buying opportunity if the S&P 500 remains above its 50DMA.

Caterpillar, Inc (CAT) almost challenged its February lows before rebounding.

Freeport-McMoRan (FCX)

The technical setup looks bearish on copper miner Freeport-McMoRan (FCX). FCX confirmed 50 and 200DMA breakdowns the previous week. Monday’s gap down and 5.7% loss plunged FCX firmly into bearish territory. With the Federal Reserve committing itself to an imminent tapering program, I no longer give commodities the benefit of the doubt. I am looking to fade FCX somewhere below the converged resistance around the 20, 50, AND 200DMAs.

Freeport-McMoRan (FCX) confirmed 50 and 200DMA breakdowns on the way to challenging its March low.

FedEx Corporation (FDX)

The bearish setup in FedEx Corporation (FDX) put me on alert to fade a relief rally in the stock. That bounce never happened. Instead, earnings last week put an exclamation point on the downward momentum in FDX. A 9.1% post-earnings loss took FDX to a 52-week low and sellers are not yet satisfied. FDX looks over-extended for shorting, but I am not interested at all in buying it here. FDX has a lot of damage to repair. A close above the post-earnings intraday high would be a start.

FedEx Corporation (FDX) plunged past a 52-week low after a poorly received earnings report.

FedEx bulls are not giving up; the stock remains too cheap to resist for value seekers….

MicroStrategy (MSTR)

For a moment in August, MicroStrategy (MSTR) looked ready to resume its eye-popping momentum. That post-earnings run ended on August 9th. MSTR has drifted downward ever since. MSTR rode the stock market rebound into 200DMA resistance. Fresh fears from China took MSTR down 2.8% and confirmed resistance. China rolled out the next phase in its attack against cryptocurrencies by proclaiming that all cryptocurrency activities are illegal. MSTR is chock full of Bitcoin and sold off with the latest crypto panic. I am surprised the dip was not deeper. I am a buyer on a close above 200DMA resistance.

MicroStrategy Incorporated (MSTR) confirmed resistance at its 200DMA.

Stock Chart Reviews – Above the 50DMA

NVIDIA Corporation (NVDA)

My quick trade in NVIDIA Corporation (NVIDIA) worked out just as I hoped. NVDA bounded right back and even filled its gap down in two days. NVDA is back in limbo mode now.

NVIDIA Corporation (NVDA) confirmed a picture-perfect test of 50DMA support and quickly filled its prior gap down.

SoFi Technologies, Inc. (SOFI)

It looks like SoFi Technologies, Inc (SOFI) will not reach a full reversal of its January surge. I was looking for such a milestone to initiate an entry into the fintech company. SOFI had a strong week including an 11.0% gain and 50DMA breakout in the wake of an analyst upgrade. Since the move cleared the September highs, I bought a first tranche of shares. I think of this position as a long-term one.

SoFi Technologies, Inc. (SOFI) confirmed a 50DMA breakout and closed its post-earnings gap down from August.

Expedia Group, Inc (EXPE)

My big miss of the week was Expedia Group, Inc (EXPE). Even with the close above the upper Bollinger Band (BB), EXPE create a classically bullish setup with a 50DMA breakout followed by a 200DMA breakout. Both moves brought an end to the downtrend in place since the March high. EXPE also had a powerful news-related catalyst: news hit that the U.S. will soon accept vaccinated international travelers. Accordingly, the balance of power in travel-related stocks tilted firmly in favor of the buyers. The rest of the parabolic move speaks for itself.

Expedia Group, Inc (EXPE) confirmed 50 and 200DMA breakouts on a near parabolic move for the week.

U.S. Global Jets (JETS)

Of course U.S. Global Jets (JETS) benefited from the news on international travel. JETS broke out above a 2-month consolidation period that puts it in position to slice through 200DMA resistance. I am a buyer at a cheaper price on a pullback, or I am a chaser on a confirmed 200DMA breakout. I am hoping to buy cheaper.

U.S. Global Jets ETF (JETS) confirmed a 50DMA breakout on its way to a challenge of 200DMA resistance.

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 #366 over 21%, Day #8 over 31%, Day #2 over 41% (overperiod), Day #18 under 51%, Day #72 under 62%, Day #136 under 72%

Source for charts unless otherwise noted: TradingView.com

Grammar checked by Grammar Coach from Thesaurus.com

Full disclosure: long UVXY call and call spread, long FB call options, long FSLR shares and short call, long SOFI

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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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