A Stock Market In Survival Mode – The Market Breadth

Stock Market Commentary

I flipped bearish on the stock market over a week ago because of a significant breakdown in the S&P 500 (SPY). Moreover, the breakdown occurred alongside vulnerable breadth indices and a bottoming volatility index (VIX). As a result, when the index closed lower than the previous week’s low, I braced for follow-through. Instead, last week, buyers took the stock market into survival mode. The S&P 500 closed with gains three straight days before resistance took over again. This week opened with a fade into the close that confirmed that the stock market is still a fade on rallies.

The Stock Market Indices

The S&P 500 (SPY) faded from overhead resistance at its 50-day moving average (DMA) (the red line below). Two days of selling, albeit mild, confirmed the resistance. Sellers finished closing last week’s small gap up and put a test of last week’s low into play. I expect the index’s survival mode to get more intense on a defense of the month’s lows.

The S&P 500 (SPY) is sliding down its first true downtrend since March, 2020
The S&P 500 (SPY) met picture-perfect resistance at its 50DMA and also failed to shake the 20DMA downtrend.

The NASDAQ (COMPQX) failed even more clearly at downtrending 20DMA resistance (the dotted line below). Like the S&P 500, the tech-laden index closed its gap up from last week. The NASDAQ’s survival mode is playing out much closer to 200DMA support.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) lost 0.5% as the 20DMA downtrend held firm against the relief rally.


The iShares Trust Russell 2000 Index ETF (IWM) remains the surprise representative of relative stability. IWM looks magnetically attracted to the convergence of its three major moving averages right in the middle of the 2021 trading range. I see nothing but churn and no immediate trading opportunities here. Survival mode for IWM is a tight hug on the major moving averages.

The iShares Trust Russell 2000 Index ETF (IWM) now has a pivoting pattern around its 200DMA. The convergence of all three major trend lines create a tight squeeze on the extended trading range.

Stock Market Volatility

The volatility index (VIX) is doing its own pivot around the 20 level. Today’s selling was enough to push the VIX from last week’s low right to 20, the threshold of “elevated” volatility. Survival mode for the VIX is the series of higher lows since mid-August while being unable to hold a surge for more than 2 days at a time. Of course the VIX’s survival mode works directly counter to the survival mode for the major indices. Something has to give…

A rounded bottom for the volatility index (VIX) could be setting up a major surge in the coming weeks.
The volatility index (VIX) drove down to its uptrend line from the August low. Perhaps the VIX has one last surge to go this month.

The Short-Term Trading Call In A Survival Model

  • AT50 (MMFI) = 45.1% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) 48.2% of stocks are trading above their respective 200-day moving averages
  • Short-term Trading Call: cautiously bearish

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, is developing a pattern of churn between 40% and 50%. My bearish bias focuses on the downtrend in effect since overbought conditions in February. So while a visit to oversold territory may be slipping off the table for now, I still expect an imminent test of recent lows for AT50. I described this kind of bullish bearishness in the October jitters I observed in Jim Cramer’s recent back and forth commentary on the stock market’s precarious position.

In the meantime, the stock market’s survival mode is in full view with the churn in AT50. AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, continues to hold forth the flag for bearishness. This longer-term indicator of market breadth remains stuck in a steep downtrend with little rest for a fight in a survival mode.

AT50 (MMFI) closed the week at 46.1% and is starting to drag out a trading range defined by recent highs and lows.
AT200 (MMTH) looked ready to make new lows for a relief rebound took it just above the downtrend line.

Stock Chart Reviews – Below the 50DMA

Advanced Micro Devices (AMD)

My bearish eyes are currently trained to see fades from 50DMA resistance as opportunity for shorting (or buying put options). In the case of Advanced Micro Devices (AMD) I cannot easily transition my mind from bullishness to bearishness. The shorting opportunity off the 50DMA fade looks too shallow given the risk of a quick 50DMA breakout. Accordingly, I prefer a breakdown below recent support around $100 as a truly bearish signal. Such a move would put the July post-earnings breakout at risk of a full reversal.

Advanced Micro Devices (AMD) failed at 50DMA resistance with a 1.3% loss and confirmed resistance with a 0.4% loss.

Facebook (FB)

Facebook (FB) is facing withering fire. No matter what the company says, awareness of the business model of social media addiction will remain intense. Accordingly, skepticism will also remain high. Anything Facebook does to protect its users can be seen as an attempt to keep up with the likes to TikTok in the arms race of social media habits. On the other hand, that same addiction in turn creates the buffer Facebook enjoys as one of the planet’s best advertising platforms. Investors remain laser focused on the revenues and profits.

FB lost 1.4% on the day. I am positioned for a test of 200DMA support before the end of the week.

Facebook (FB) gave up support at the July lows and is now struggling to stay away from a challenge of 200DMA support.

Tractor Supply Company (TSCO)

Like many other stocks, Tractor Support Company (TSCO) has a pattern this year of breaking 50DMA support only to rebound in due time. So I have to look for what could be different this time. TSCO only lost 0.6% but confirmed the latest 50DMA breakdown. A lower close would introduce some different behavior and trigger a short trade for me. As with any such trade, a fresh 50DMA breakout invalidates the bearish call.

Tractor Supply Company (TSCO) is struggling to hold on to 50DMA support. The lower close put 200DMA support into play.

Moderna (MRNA)

In a previous Market Breadth post, I discussed at length the implications of Merck’s COVID-19 treatment. Moderna (MRNA) represents the negative side of the good news. With somewhat reduced prospects of COVID-19 vaccine and boosters shot in the future, investors quickly dumped MRNA overboard. However, I suspect MRNA’s opportunity is only capped by the population of unvaccinated and those otherwise on the fence who will prefer to take drugs in the aftermath of an infection rather than try to prevent the infection in the first place. For those who follow traditional preventive practices for health care, vaccines should remain a priority standard of care.

In the meantime, the technicals on MRNA are bearish. The stock looks poised to test 200DMA support. I do not want to short this stock, but I will consider buying it after a rebound off the 200DMA.

Moderna, Inc (MRNA) created a major topping pattern as Merck’s COVID-19 treatment laid waste to investor hopes for endless vaccine and booster shots.

Stitch Fix, Inc. (SFIX)

The selling pressure continues on Stitch Fix, Inc (SFIX). SFIX is a great example of how technicals can work well once sentiment turns bearish: a fade from a clear technical level like 50DMA resistance transforms into an on-going rejection of the stock. SFIX lost another 4.6% and closed near a 52-week low.

Stitch Fix, Inc (SFIX) finished reversing a 15.6% post-earnings gap up from September. A 6.6% loss to end last week set up SFIX for the new 52-week low.

The Boston Beer Company, Inc. (SAM)

Ever since The Boston Beer Company, Inc. (SAM) collapsed from its July earnings debacle, I have looked for a buying opportunity. Last week, SAM finally sprung to life on two days of heavy buying volume. While the bounce came off an obvious round number ($500 in this case), the surge still impressed me enough. I bought a few shares today with a stop loss under $500. Hopefully, SAM can heal itself over time to eventually challenge 200DMA resistance or even fill the July gap down. I am not interested in fading SAM from 50DMA resistance because the stock is already so beat up with a 59% decline from the all-time high set just 6 months ago.

The Boston Beer Company, Inc. (SAM) finally showed some life with a two day surge of buying off a 17-month low.

NVIDIA Corporation (NVDA)

NVIDIA Corporation (NVDA) remains a high flyer despite failing at overhead resistance at converged 20 and 50DMAs. Accordingly this bearish setup has a shallow volume of bearish opportunity until the stock makes a lower low.

NVIDIA Corporation (NVDA) showed the slightest confirmation of a new bearish tint to sentiment by confirming resistance at its 50DMA.

Nike, Inc. (NKE)

Classically bullish opportunities can appear in the midst of a bearish period (sometimes in the form of dead cat bounces or relief rallies). A confirmation of 200DMA support drew me into weekly call options on Nike, Inc. (NKE). However, a bearish period makes me quick to take profits on such such trades. With downtrending 20DMA resistance looming overhead, I took profits. Perhaps appropriately, NKE’s relief rally stopped cold at 20DMA resistance. NKE lost 1.4% today.

Nike,Inc. (NKE) confirmed 200DMA support and enjoyed a rally all the way to the 20DMA downtrend.

Splunk, Inc (SPLK)

Splunk, Inc. (SPLK) is moving in a contrary way, so I currently treat it differently from this bearish period. Particularly, when sentiment turns bullish again, I strongly suspect SPLK will enjoy a sharp and speedy rally out of its current survival mode. I want to be in position whenever that happens.

SPLK marginally confirmed 50DMA support at the end of last week. I promptly jumped into a calendar call spread soon after SPLK retested 50DMA support. The stock should churn a bit so I pinned both sides of the weekly call at a $155 strike. I created a short-term position because I am not yet ready to commit to a more significant (bullish) position.

Splunk Inc (SPLK) managed to confirm both 50 and 200DMA breakouts. SPLK suddenly looks poised to challenge its post-earnings highs.

Carmax (KMX)

Still in between 50 and 200DMA limbo (a kind of survival mode), Carmax (KMX) confirmed 50DMA resistance. I continue to wait for a breakout or a breakdown.

Carmax (KMX) survived a test of 200DMA support but failed to break through 50DMA resistance.

iShares MSC Japan Index Fund (EWJ)

Last December, the iShares MSC Japan Index Fund (EWJ) broke an all-time high that held in place since the year 2000. The gas ran out two months later as EWJ resigned itself to a descending trading range. EWJ suddenly broke out again last month, but promises of capital gains taxes in Japan sent the ETF spiraling back to a complete reversal. Despite the 200DMA breakdown, I bought a little EWJ because of the bullish implications of the last breakout. Moreover, the current churn looks like an encouraging attempt to hold the bottom of the trading range as support.

iShares MSC Japan Index Fund (EWJ) enjoyed a brief breakout in September before a fresh 200DMA breakdown this month completed a full reversal.

Stock Chart Reviews – Above the 50DMA

ChemoCentryx, Inc. (CCXI)

ChemoCentryx (CCXI) will go down as my biggest miss of the year. Earlier this month, I said about CCXI: “the chart below clearly shows a pattern of accumulation at these ‘de-risked’ prices…I am keeping CCXI on the shopping list for whenever and however October’s seasonal dangers resolve themselves.” In other words, I saw in CCXI a fantastic discount, but I was unwilling to take the risk in this bearish environment. That wariness cost me an overnight double.

Last Friday, CCXI soared 96.0% on news that “the U.S. Food and Drug Administration (FDA) has approved TAVNEOS (avacopan), an orally administered selective complement 5a receptor inhibitor, as an adjunctive treatment of adult patients with severe active anti-neutrophil cytoplasmic autoantibody-associated vasculitis (also known as ANCA-associated vasculitis or ANCA vasculitis), specifically granulomatosis with polyangiitis (GPA) and microscopic polyangiitis (MPA) (the two main forms of ANCA vasculitis), in combination with standard therapy.” Admittedly, I could not even begin to explain all this language (the condition can be fatal if left untreated), but the chart was all I needed in this case. “Someone” had sufficient knowledge and/or confidence to move in anticipation of CCXI’s good news.

At least I am not one of the many analysts forced to upgrade CCXI after the stock already reversed most of the May loss that forced them to downgrade CCXI at the lows. For example, JP Morgan downgraded CCXI from neutral to underweight on May 7th and upgraded back to neutral on October 11th. Piper Sandler downgraded CCXI from overweight to neutral on May 8th and upgraded back to overweight on October 8th.

ChemoCentryx, Inc. (CCXI) quickly transitioned from halting progress to a near complete recovery of its May meltdown. CCXI ended the week with a 96.0% 1-day gain!

Spotify Technology (SPOT)

The slow healing process from damaging analyst calls continues for Spotify Technology (SPOT). The major share buyback program keeps me interested in finding a new entry point, and I saw one in last week’s small 50DMA breakout. I bought an October 22 $137.50/$150 call spread timed to follow what I think could be the worst of whatever selling October will offer up for the general stock market.

Spotify Technology (SPOT) is clinging to a fresh 50DMA breakout.

Electronic Arts Inc. (EA)

Today Electronic Arts (EA) experienced a lot of options action. Briefing.com pointed out a large jump in relative volume for the weekly $138 puts. I almost bit. However, I also noticed heavy call buying. In this case it takes sophisticated insider knowledge or advanced data to sort out what this mix of trades really says about stock sentiment. As a result, I sat on my hands.

Last week, I bought a call near the end of EA’s 7.0% down day. The sudden selling looked just as mysterious as the prior sudden run-up. I immediately took profits the next day after EA delivered a press release that seemed to provide a modicum of reassurance to the anxiety-filled trading: “Electronic Arts Announces Record-breaking FIFA 22 Launch and Provides Comments on the Future of Football.”

Electronic Arts Inc. (EA) sharply reversed a steep rally only to rebound right back. All the volatility has done nothing for the overall trading range except make it more chaotic.

Freeport-McMoran, Inc (FCX)

Late last month I insisted that it was time to fade commodities. The strong U.S. dollar eliminated my bullish deference to commodity-related plays. I successfully flipped put options at the start of the month – I took profits as FCX rebounded sharply from intraday lows. I was poised to try another fade after FCX rallied into 50DMA resistance. However today FCX kept on moving and gapped over 200DMA resistance. While the fade from intraday highs looks a little bearish, I am content to wait for FCX to close below its 50DMA again before buying put options again.

Freeport-McMoran, Inc (FCX) rebounded sharply enough to pull off a fresh 50DMA breakout. However a fade took FCX back to 200DMA support at the close.

Schlumberger (SLB)

Today I took profits on my Schlumberger (SLB) position. SLB is lagging behind the run-up in oil prices, so I figure once oil cools off stocks like SLB could sell off sharply. I prefer to get out of the way well ahead of such a move. Note how well SLB fought off 200DMA breakdowns from August to September before confirming a breakout above the converged 50 and 200DMAs. SLB appears to enjoy a lot of support for now.

Schlumberger (SLB) gained 2.5% to close at a 3-month 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 #372 over 21%, Day #35 over 31%, Day #7 over 41% (overperiod), Day #24 under 51% (underperiod), Day #78 under 62%, Day #142 under 72% (restated)

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 SPY puts, long EWJ, long SAM, long SPOT call spread, long FB puts

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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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