Stock Market Commentary
After the Grinch roasted Santa on an oversold fire, I expected a bounce with lots of churn into the holiday season. The bounce arrived right on schedule, but buyers had no patience for churn. The stock market look inspired by Santa’s revenge as a sharp oversold rally launched a broad swath of stocks higher. The move was the perfect Christmas gift that brought the cheer of important breakouts for the S&P 500 and the NASDAQ. Plunging volatility suggests that the stock market will be ready for more cheer to end the year.
The Stock Market Indices
The S&P 500 (SPY) gained 2.3% for the week after opening the week with a bottoming hammer, a 50DMA breakdown, and oversold conditions. The index immediately confirmed the hammer with a 1.8% gain and a fresh breakout above its 50-day moving average (DMA) (the red line below). Despite manic trading since early November, the S&P 500 looks setup once more for its next sustained rally. The index ended the week with a 0.6% gain and an all-time high.
The NASDAQ (COMPQX) swept the Grinch right out the chimney as Santa’s revenge pushed the tech-laden index over the hump of 50DMA resistance. The oversold bounce delivered a 4.5% gain off the lows. A close over the 15,800 level will put the NASDAQ in play for a run to an all-time high.
Santa’s revenge wiped the iShares Russell 2000 ETF (IWM) from “breakdown watch.” IWM gained 4.7% off the oversold lows. However, the index of small cap stocks is far from clear. IWM closed the week below 50 and 200DMA resistance and closed the week right in the middle of its 2021 trading range.
Stock Market Volatility
Coming into the week, I thought the volatility index (VIX) was building a firm foundation. At a minimum, I saw the conditions for maintaining manic market behavior. Instead, a fade that started at Monday’s intraday high grew into constant downward pressure. The VIX ended the week at a one month low and suddenly looks positioned to make a fresh run at recent lows. This prospect supports a bullish bias on the stock market going into the end of the year.
The Short-Term Trading Call With A Sharp Oversold Rally
- AT50 (MMFI) = 37.4% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) 42.9% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, closed at 37.4%. The surge from the inrtaday low of 18.5 on Monday to Thursday’s close at 37.4% represents a broad-based and sharp oversold rally. Any stock that did not benefit from this bounce is truly suspect. Even AT200 benefited from the sharp oversold rally by jumping from 32.7% to 42.9%. All the stock market needs is a higher high from the S&P 500 to confirm a new bullish phase is underway.
This turn of events likely surprised anyone stuck on the myriad of negative headlines of this month. Yet, extremes in market behavior are difficult to maintain no matter the news. This lesson forms the fundamental case for my AT50 trading rules on market breadth. In this case, all the motivated sellers finally exhausted themselves at the point of oversold conditions. The next phase of trading is mainly about follow-through and further confirmations of the new bullish momentum.
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 #426 over 20%, Day #2 over 30% (overperiod), Day #20 under 40%, Day #24 under 50%, Day #26 under 60%, Day #206 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: no positions
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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.