Stock Market Commentary
The S&P 500 (SPY) bounced back from September’s woes for a 6.9% gain for the month of October. While the gain is extreme, I am even more interested in a different October extreme. Somehow, the index managed to skate through October without a notable drawdown. The maximum drawdown in October for the S&P 500 was a mere -0.2%. This “pullback” happened on the second trading day of the month. Both the historical average and median maximum drawdowns for the S&P 500 in October are worse than -2%. Indeed, since 1950, only 25% of Octobers experienced better drawdown performance. In other words, the seasonally strong period for the stock market (November through April) will launches on a very bullish note.
The Stock Market Indices
The S&P 500 (SPY) closed out October at a fresh all-time high. Since a breakout above its 50-day moving average (DMA) (the red line below) that brought the last bear cycle to an end, the index is on an impressive streak. Nine of the last eleven trading days have delivered gains. The run-up complements the October extreme of a minimal drawdown.
The NASDAQ (COMPQX) ended its bear cycle a day before the S&P 500. The push higher from there has been a little more choppy but still impressive. The tech-laden index ended October at an all-time high. I went into the weekend holding a fistful of QQQ weekly calls expiring this Friday. I will take profits ahead of expiration (absent a big Monday letdown of course).
Stock Market Volatility
Despite the bullish trading that dominated much of October, the volatility index (VIX) somehow managed to hold support at the 15 level. The VIX could easily slice through the 15 level in coming days or weeks if the seasonally strong period gets off to a solid start. Until that breakdown happens, my baseline assumption is that the VIX will trade range bound between the lows and highs since May.
The Short-Term Trading Call After An October Extreme
- AT50 (MMFI) = 53.1% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) 50.6% 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, closed lower for the week despite the S&P 500 and the NASDAQ hitting all-time highs. A mid-week plunge that corresponded with a 1.8% loss for the iShares Russell 2000 ETF (IWM) caught my attention. That drop ended the upward momentum for my favorite technical indicator right at the last peak. Needless to say, this divergence presents a nagging wildcard for the coming seasonally strong period despite its support from the October extreme. Since I defer to market breadth for my short-term trading call, I resisted the temptation to flip from neutral to cautiously bullish despite making a slew of bullish trades last week.
Stock Chart Reviews – Below the 50DMA
Robinhood Markets, Inc. (HOOD)
For all of two days shortly after the IPO, Robinhood Markets, Inc. (HOOD) looked like another stock that would punch through the stratosphere of logic. The trip back to the IPO price was a grind that surely frustrated bulls and bears alike. Earnings settled the score for the bulls by punching HOOD back to its lows. I traded HOOD Nov $43 call options going into earnings expecting one last gasp of a run ahead of the news. Strangely enough, the calls held their value and even went well into the green despite HOOD dropping about 5%. I held the calls thinking the jump in implied volatility could indicate an upside surprise ahead. No dice!
Starbucks (SBUX)
Starbucks (SBUX) caught my attention after a 6.3% post-earnings loss created a classic topping pattern. The chart below shows how SBUX sliced right through an important support level (the thick horizontal line). This breakdown decisively left several breakouts far in the rearview mirror. The line also represents the neckline of what now looks like a bearish head and shoulders pattern. The head sits right where July earnings left behind the all-time high for SBUX.
Zendesk, Inc. (ZEN)
Zendesk, Inc. (ZEN) looked like a short in August following a poor post-earnings response. I took profits quickly after a bottoming pattern appeared in early September. I dropped ZEN from the radar from there until now. ZEN perfectly failed at 200DMA resistance ahead of a 14.5% post-earnings plunge. Given the strong bounce from the intraday low, ZEN is only a short on a fade at a key resistance level. The first resistance sits at $110 at the prior 2021 low.
DoorDash, Inc. (DASH)
The $220-$230 level keeps giving local delivery company DoorDash (DASH) fits. Last week, DASH confirmed a 50DMA breakdown. Accordingly, I jumped into a Nov $190/180 put spread. The nascent 200DMA (the blue line below) is in play as the next “natural” support level.
Match Group, Inc. (MTCH)
Speaking of fits, Match Group, Inc. (MTCH) has spent much of 2021 in a wide trading range. Surprisingly, news of reduced mobile app fees in Google’s Play Store sent MTCH and other app-dependent companies soaring. A 10.3% one-day gain took MTCH to an all-time high. Sellers took over from there and sent MTCH spiraling right back to the 50DMA and then 200DMA support. I will be watching the results of earnings very closely.
Garmin Ltd (GRMN)
Navigation technology company Garmin Ltd (GRMN) came on the scene before GPS became ubiquitous in he hands of billions through smart devices. I thought the company would fade from the scene, but Garmin looks as healthy as ever…at least until last week’s post-earnings plunge. GRMN raised earnings and revenue guidance for 2021, so the conference call must have delivered some bad news. The technicals will shape my view of the stock from here. A close above the 200DMA would signal the potential for a full reversal and even a fresh test of 50DMA resistance. A lower close would be quite bearish.
Dominos Pizza Inc (DPZ)
I shorted Dominos Pizza Inc (PZZA) the day after its post-earnings loss. I stopped out after DPZ cracked 20DMA resistance. That move ended the primary downtrend in place since DPZ broke below its 50DMA in September. As a result, I am no longer interested in shorting DPZ. I might buy into shares on a (confirmed) 50DMA breakout.
Deere & Co (DE)
Three weeks ahead of earnings, Deere & Co (DE) is struggling to break through resistance at its converged 50 and 200DMAs. It is tempting to look at DE as a potential short. However, the strong rebound from October’s intraday low looks like a bottoming move, especially given DE tested a prior low from June. So, I am on breakout watch for DE. A breakout above converged resistance should be very bullish for DE.
Upwork (UPWK)
Earnings disappointed yet again for Upwork (UPWK). A 10.8% post-earnings loss left behind a triple top. I am left with no entry plan for UPWK: UPWK is neither a buy or a short here. The stock looks stuck in extended churn.
KraneShares CSI China Internet ETF (KWEB)
Chinese internet stocks enjoyed a brief revival in October. The KraneShares CSI China Internet ETF (KWEB) neatly bounced away from its lows in August. However, KWEB ran out of gas right where the last relief rally ended (around $54). I took issue with a trading call on CNBC’s Options Action that interpreted the pattern as a bottom with an imminent breakout. I think KWEB will just as likely unfold into an extended trading range. The headline risks alone from China should form a strong ceiling on prices. Indeed, another round of crackdowns could easily send KWEB plunging through the bottom of what I think is currently a trading range.
Stock Chart Reviews – Above the 50DMA
Apple Inc (AAPL)
Apple Inc (AAPL) is officially back in position for the Apple Trading Model (ATM) after a post-earnings rebound from just below its 50DMA. I missed the bottom so I settled on a $150/152.50 calendar call spread to get things (re)started.
LendingTree, Inc. (TREE)
Fintech companies providing consumer finance options have become quite the rage. LendingTree (TREE) looks like the seasoned veteran in the bunch with a launch in 1996. LendingTree was even an early advertiser on the internet. This year, TREE took a backseat to newer and sexier companies and is down a whopping 41.0% year-to-date. At last month’s lows, TREE traded at a 4 1/2 year low. A fresh 50DMA breakout holds out a freshly tantalizing prospect of a bottom. I am a buyer on a higher close with a stop below the post-earnings intraday low. TREE looks “due” for a test of downtrending 200DMA resistance.
Advanced Micro Devices Inc. (AMD)
I expected more fireworks out of the latest earnings for Advanced Micro Devices Inc. (AMD). So far, AMD is down 2.2% post-earnings. Ahead of earnings, AMD rallied just above $127 and faded. The day after earnings, AMD hit $128 before fading back toward the open. As a result, AMD looks a bit exhausted. I am neutral on AMD here and prefer to try a buy at the next natural supports from the 20DMA and/or 50DMA.
Impinj, Inc (PI)
Impinj, Inc (PI) printed an important breakout after reporting earnings last week. The stock is a buy on the dips as I do not like chasing stocks trading well beyond their Bollinger Bands (BBs). Note that PI is less than three points away from its all-time high.
Plug Power (PLUG)
I accumulated shares in Plug Power (PLUG) and took profits just below 200DMA resistance. That level corresponded with the June/July highs, so it looked risky to continue holding PLUG. The stock is right back on my radar as alternative energy is in fashion all over again. PLUG closed the week with a confirmed 200DMA breakout. As a result, the stock is in a very bullish position. I will be rolling back into a position from here given PLUG suddenly looks well-positioned to challenge its 2021 highs.
Lucid Motors (LCID)
Fashion is back in favor for Lucid Motors (LCID). LCID enjoyed the triple benefit of alternative energy interest, strong results from Tesla (TSLA) refreshing interest in electric vehicle (EV) plays, and LCID’s first vehicle deliveries. If LCID can hold current levels, it will become one of my best investments of the year. When LCID hit around $38 on Thursday, I sold a weekly $40 call. I took profits on that call on Friday and rolled right into a $45 strike call expiring this week.
Given my long-term interest in LCID, I am not selling shares into this bullish breakout. Instead, I am going for a “core position” strategy where I take as much premium as I can from call options on half of my position. If that somehow gets called away, I will maintain the other half for my longer-term investment. If LCID reverses all these recent gains, I at least secured some profits to buffer the (short-term) reversal.
Lithium America Corp (LAC)
Lithium company Lithium America Corp (LAC) has crept higher more quietly. Last week, LAC hit an all-time high as this important component of batteries attracts fresh interest. I have already been through several rounds of profits on LAC but did not participate in the rally off 50DMA support. With an all-time high in place, I consider LAC a buy on the dips from here.
Invesco Solar ETF (TAN)
The Invesco Solar ETF (TAN) enjoyed a breakout along with the renewed interest in solar plays. Like PLUG, I used the month of churn to accumulate shares. Unlike PLUG, I did not sell my TAN shares. Instead, I am eyeing an eventual test of the 2021 highs (at a minimum) where intrepid traders “sold the news” of the new U.S. administration’s commitment to alternative energy investments.
Skechers U.S.A., Inc. (SKX)
Skechers U.S.A., Inc. (SKX) started post-earnings trading with a gap higher and a 7.7% gain. SKX ended the day with a 0.6% gain. If SKX can hold support at the converged 50DMA and 200DMA, I consider it a buy. I am looking for a “calm after the storm” trade.
Spot Technology (SPOT)
Earnings ruled in favor of the bullish analyst calls on Spot Technology (SPOT). I used a brief drop back to 200DMA support to buy shares, and I flipped them on Friday. I am looking to build a longer lasting position after the dust settles a bit. SPOT’s next level of key resistance comes from the April highs.
KLA Corporation (KLAC)
Investors demonstrated some rapid change in heart on earnings for KLA Corporation (KLAC). The first reaction was a gap and crap that took KLAC from near $390 right back to $355. The very next day buyers stepped back in to send KLAC to a 4.9% gain and all-time high. KLAC is choppy but it looks bullish.
Intercontinental Exchange (ICE)
After Intercontinental Exchange (ICE) broke out above its 50DMA with a 3.8% gain in early October, a race to earnings launched in earnest. ICE delivered. The stock gained 2.2% post-earnings and closed at another all-time high. ICE is a buy on the dips. However, at THIS rate, the stock may not present the kind of lower risk entry I prefer. The recent surge in ICE coincides with the rocket fired under the shares of Bakkt Holdings (BKKT). Intercontinental Exchange remains a majority holder in BKKT.
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 #387 over 21%, Day #50 over 31%, Day #22 over 41%, Day #2 over 51% (overperiod), Day #93 under 62% (underperiod), Day #167 under 72%
Source for charts unless otherwise noted: TradingView.com
Grammar checked by Grammar Coach from Thesaurus.com
Full disclosure: long UVXY calls , long QQQ calls, long AAPL calendar call spread, long DASH put spread, long HOOD calls, long TAN
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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.