Near Bearish Reversal Carves Quick Crest in Rally – The Market Breadth

Stock Market Commentary:

Throw out all the gradual scenarios for a potential climax. The stock market carved out a quick crest that puts the current rally at risk. Out-performance from small-cap stocks and late saves for the S&P 500 and the NASDAQ barely averted a technical setup for a bearish reversal. The stock market goes into April staring down the prospect of a top in the trading action despite on-going strength in the labor market. Incredibly, per Marketplace, “applications for unemployment benefits have dropped to near their lowest point since 1969.”

The Stock Market Indices

The S&P 500 (SPY) put on an impressive show with Tuesday’s gap higher to a 1.2% gain. That move created a bullish breakout above February’s high. The subsequent selling created a quick crest that crushed one of my scenarios for a climax unfolding back to all-time highs. Instead, the S&P 500 went into a reversal that almost tested support at the 200-day moving average (DMA) (the blue line below). Friday’s intraday rebound helped convince me to leave the “bearish reversal” tag in my pocket.

The S&P 500 (SPY) carved out a quick crest after breaking out above the twin February highs. Next, the index almost retested 200DMA support and finished exactly flat for the week.
The S&P 500 (SPY) carved out a quick crest after breaking out above the twin February highs. Next, the index almost retested 200DMA support and finished exactly flat for the week.

The NASDAQ (COMPQX) created similar excitement as the S&P 500 did. Unfortunately, just like the S&P 500, the tech-laden index carved out a quick crest. Moreover, the NASDAQ’s close encounter with a bearish reversal almost confirmed overhead resistance from the 200DMA. Ironically, Tuesday’s near miss turned into the NASDAQ’s saving grace. I used the pullback to add two more QQQ call spreads. Given the NASDAQ’s tenuous technical position, these should be my last until the NASDAQ makes its next major technical move.

The NASDAQ (COMPQX) was not up to the task of challenging its 200DMA resistance. The subsequent pullback eroded the week's gain to 0.3% gain and left behind a quick crest.
The NASDAQ (COMPQX) was not up to the task of challenging its 200DMA resistance. The subsequent pullback eroded the week’s gain to 0.3% and left behind a quick crest.

The iShares Russell 2000 ETF (IWM) out-performed with a 1.2% gain on the day to end the week. The action in small caps provided the most convincing indicator that the stock market avoided a bearish reversal. Still, buyers have a lot to prove from here given the quick crest created by the sharp 2-day pullback. I did not refresh a position in IWM. A new entry for IWM looks most interesting with a test of support at $203 and/or the 50-day moving average (the red line below).

The iShares Russell 2000 ETF (IWM) outperformed with a 1.2% gain on the day after filling in the previous gap.
The iShares Russell 2000 ETF (IWM) outperformed with a 1.2% gain on the day after filling in the previous gap.


Stock Market Volatility

The volatility index (VIX) finally stopped going down. The VIX dropped like a stone to 20, but next pivoted around this threshold for elevated volatility. The signals are simple going forward: a fresh low is freshly bullish, and a breakout above 22 puts the market on notice for more selling ahead.

The volatility index (VIX) spent most of the week pivoting around the 20 threshold for elevated volatility.
The volatility index (VIX) spent most of the week pivoting around the 20 threshold for elevated volatility.

The Short-Term Trading Call with A Potential Climax

  • AT50 (MMFI) = 58.0% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) = 39.9% 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, went from the edge of a test of the overbought threshold (70%) to a quick crest. At one point, my favorite technical indicator reversed all its gains for the week. Per my AT50 trading rules, that pullback qualified as a bearish reversal. However, I stalled simply because it is tough to switch out of a bullish mindset on a dime. Friday’s stabilization slowed my downgrade of the market to a short-term neutral.

Neutral is a fitting trading call given the indices are in limbo between a potential top and important support from moving averages. Moreover, with another earnings season around the corner, I have little interest in making bold moves in individual stocks. With lofty inflation and an aggressively minded Federal Reserve, I see plenty of risk for important earnings warnings and disappointments. An inverted yield curve adds an element of recession fear (at the time of writing, the chart below does not yet have the data points showing the inversion). The inversion in 2019 helped give me the confidence to flip bearish in early 2020 ahead of the pandemic-drive market crash.

Source: Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis, April 1, 2022.

The Australian dollar versus the Japanese yen (AUD/JPY) is back to flagging market risk attitudes. Accordingly, a blow-off top immediately proceeded the stock market’s quick crest. Obviously, I allowed my excitement over the stock market’s breakout the next day to drive expectations for a quick healing from the blow-off top.

A parabolic run is finally slowing down as the Australian dollar versus the Japanese yen (AUD/JPY) powers up for a potential climax.
A parabolic run ends with a blow-off for the Australian dollar versus the Japanese yen (AUD/JPY) just ahead of the stock market’s quick crest.
AT50 (MMFI), the percentage of stocks above their respective 50DMAs, completely reversed its major 2022 breakout with the quick crest. Friday's three point rebound averted a bearish tilt to market breadth.
AT50 (MMFI), the percentage of stocks above their respective 50DMAs, completely reversed its major 2022 breakout with the quick crest. Friday’s three point rebound averted a bearish tilt to market breadth.
AT200 (MMTH), the percentage of stocks above their respective 200DMAs, slightly rested after full reversing its previous breakout move.
AT200 (MMTH), the percentage of stocks above their respective 200DMAs, slightly rested after full reversing its previous breakout move.

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 #494 over 20%, Day #19 over 30%, Day #13 over 40%, Day #11 over 50% (overperiod), Day #3 under 60% (underperiod), Day #274 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long QQQ call spread, long SPY call spread, long AUD/JPY

FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!

*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.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.