Stock Market Commentary:
The stock market held up surprisingly well last week given the intensifying Russian assault on Ukraine and the accelerating economic sanctions pressing upon Russia. Yet, similar to my concerns for the suffering Ukrainian people, I have increasing doubts that this market “stasis” can last much longer. Specifically, the downtrending 20-day moving averages (DMAs) of the S&P 500 and the NASDAQ tightened resistance looming over the trading action. The 20DMAs stopped mid-week rallies cold. Accordingly, the overhead downtrend looks more prominent. While the churn zones remain intact, I am shifting my attention to the behavior of the market breadth indicators. AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, even more clearly defines the tightened resistance looming over the stock market…and the opportunity at the oversold lows.
The Stock Market Indices
The S&P 500 (SPY) looked ready to print a gain for the week. Unfortunately, after peeking its head over its 20DMA (the dotted line below), the S&P 500 turned around for a 0.5% loss on Thursday. Friday’s follow-through selling closed out the index with a 1.2% loss for the week. Buyers surprisingly lifted the S&P 500 off its intraday low. Yet time is officially ticking away on my long S&P 500 call position expiring this Friday (the short call spread position at higher strikes expires the following week).
The NASDAQ (COMPQX) fared worse than the S&P 500. The tightened resistance from the 20DMA repelled the tech-laden index to a 1.6% loss on Thursday. The follow-through 1.7% loss on Friday created the NASDAQ’s second lowest close of the year. Accordingly, the NASDAQ is in play for a retest of those lows from the last oversold episode. This risk makes me over-exposed in QQQ call options despite taking profits on one position at 20DMA resistance.
The trading pattern for the iShares Russell 2000 ETF (IWM) differs from the other two major indices. First of all, the 50DMA (the red line below) is providing the tightened resistance. IWM’s attempted rally fell short of testing overhead resistance. Second, the 20DMA for IWM is actually starting to turn upward while IWM pivots around it. Seeing this glimmer of hope, I actually opened a fresh IWM call spread on Friday expiring way out in April with $202/$207 strikes. I picked $207 as the short side given it sits at 50DMA resistance. I took profits on my former position earlier in the week.
Stock Market Volatility
The volatility index (VIX) has yet to cool down. The faders have essentially lost control (or interest) since the VIX last bottomed on February 9th. More than any other signal, the VIX makes me brace for an increasing risk of a revisit to oversold trading conditions. The VIX typically tops out with a surge, and a final surge from current levels could easily surpass the highs set in January. When combined with oversold trading conditions, such a VIX surge would flag the next major buying opportunity in the stock market.
The Short-Term Trading Call With Tightened Resistance
- AT50 (MMFI) = 34.5% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 33.7% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: cautiously bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, tested the lows of the week on Friday but managed to rebound. At its highs for the week, AT50 fell short of the tightened resistance coming from the overhead downtrend. On the positive side, AT50 remains well above its lows. As a result, a trading range has emerged that provides clear trading guidance. I downgraded my trading call to cautiously bullish to reflect my near-term expectations for more oversold trading periods that will offer better price points. This downgrade also reflects my increased interest in opening hedging positions at or near the top of AT50’s current range. Accordingly, I have a fresh position in ARKF put options (I already flipped an ARKK calendar put spread as, once again, I under-estimated the downside drag for this ETF stuffed with collapsing growth stocks).
The next time the stock market stops cold at the top of AT50’s current range, I will further downgrade to neutral.
The on-going risks in the market from geo-political issues should sober even the most hardy traders. World War Three is essentially underway with economic sanctions from the West seeking to strangle Russia while Russia scrambles to figure out how to retaliate. The scale of the sanctions are unprecedented so we are only just beginning to feel and understand the fallout. For those traders who have no plan for market volatility, the best course of action is to step away and wait for that time in the distant future when the S&P 500 makes a bullish breakout above its 50DMA. Longer-term investors should expect better entry points ahead; there should be no rush to pile into anything at this juncture.
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 #474 over 20%, Day #6 over 30% (overperiod), Day #11 under 40% (underperiod), Day #41 under 50%, Day #74 under 60%, Day #254 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long QQQ call spreads, long IWM call spread, long SPY call spread and short SPY call spread, long SPY
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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.
what are you calling the At50 s trading range? Overhead resistance at 50DMA and low < 20 absolute value? Those bounces from < 20 happened in matter of hours last time…
The “bottom” of the range is the entire oversold trading region. So starting at 20%. The last two dips into oversold territory were extremely short indeed! Something tells me it won’t be so short the next time.
The top appears to be between 40-50% for now.