Stock Market Commentary:
The stock market finished the week with confirmations of the bullish signals that were hard to believe. Accordingly, the follow-through buying served to uphold bullish belief despite the negative headwinds that scream with bearish overtones. Looking back, the current V-move upward looks swift. However, letting bullishness ride through this swing has taken a lot of patience. The accumulated headwinds of war, inflation, sinking consumer confidence, soaring mortgage rates, and an ever more aggressive Federal Reserve beckon the rational side of my trading brain to question what my eyes see plainly. The stock market has bullish technicals again and the price action to match. These are the ingredients that uphold bullish belief – at least until sellers prove a different case.
The Stock Market Indices
The S&P 500 (SPY) led the way to uphold bullish belief. After a 1-day stall at its 200-day moving average (DMA) (the blue line below), the S&P 500 proceeded to break out. A 1.2% pullback below the 200DMA turned into a stepping stone for confirmation of the 200DMA breakout. The S&P 500 ended the week at a 6-week high. The index now faces a challenge of the twin highs from February. A breakout above those highs could suck in remaining skeptics.
The NASDAQ (COMPQX) still has a ways to go to challenge its 200DMA. Still, the tech-laden index managed to uphold bullish belief with a marginal confirmation of its 50DMA (the red line below) breakout. The NASDAQ will have to fight through its February highs on the way to testing 200DMA resistance. In the meantime, a 2.0% gain for the week made the case for the buying support needed to launch into its biggest test of the young year.
The iShares Russell 2000 ETF (IWM) returned to playing the laggard. The ETF of small cap stocks remains in bullish territory above its 50DMA, but it churned all week. IWM earned a 0.6% loss for its efforts. I am starting to wonder whether IWM has started down the path of a new extended trading range. I will likely take profits on my April call spread in the coming week.
Stock Market Volatility
Faders continue to pressure the volatility index (VIX) toward a rendezvous with the important 20 level. The VIX has no more uptrend to support the notion that a fresh surge is around the corner. Last month, the VIX stopped at 20 on a dime. Accordingly, I will be watching the next test very closely. I will interpret another rebound from 20 as a fresh headwind and warning.
The Short-Term Trading Call to Uphold Bullish Belief
- AT50 (MMFI) = 56.0% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 39.8% 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, only gained two percentage points for the week. Thus, my favorite technical indicator only marginally served to uphold bullish belief. Still, a gain is a gain when it comes to AT50. I continue to await a visit to the overbought threshold at 70%. All else remaining the same, that event would push me off my cautiously bullish perch. Per the AT50 trading rules, a reversal from or breakdown below the overbought threshold is a (short-term) bearish event. A fresh 50DMA breakdown for the S&P 500 without a test of the overbought threshold would flip me to neutral.
The NASDAQ represents a large wildcard. At the current pacing, the NASDAQ could test 200DMA resistance just as AT50 is hitting overbought conditions. I will happily upgrade to bullish if the NASDAQ confirms a 50DMA breakout with the market in overbought territory. However, the NASDAQ’s failure to breakout will not be an automatic bearish event. The S&P 500 is my standard bearer.
As always, I am taking this one step at a time and avoiding overthinking too far into the future.
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 #489 over 20%, Day #14 over 30%, Day #8 over 40%, Day #6 over 50% (overperiod), Day #89 under 60% (underperiod), Day #269 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long SPY call spread, net long QQQ call spreads, long IWM call spread
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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.