An S&P 500 Breakdown Away from Bearish Trading Conditions – The Market Breadth

Stock Market Commentary:

The S&P 500 takes the spotlight going into trading this week. The index is a breakdown away from officially ushering in a return to bearish trading conditions. Trading last week completed the stock market’s return to the reality of macro conditions. Fed-speak dominated the air as sellers followed through on topping out the stock market the previous week. The Fed’s disinterest in the travails of the stock market is increasingly evident. Jim Bianco even suggested that the more the stock market rallies contrary to Fed tightening, the more aggressive the Fed can and will get. For now, the S&P 500 is the last holdout for the buyers and the bulls.

The Stock Market Indices

The S&P 500 (SPY) is a breakdown away from bearish trading conditions. The index valiantly defended support at its 200-day moving average (DMA) (the blue line below) for the last three days. An uptrending 20DMA (the dotted line below) lent a hand to the case for support. This convergence is encouraging. However, a breakdown below such solid support would deliver a similarly solid bearish warning. A breakdown below the uptrending 50DMA (the red line below) would confirm the bearish warning. Given the rapid run-up from the March lows, the S&P 500 has no “natural” level of support below its 50DMA until those March lows.

The S&P 500 (SPY) battled three straight days to hold 50DMA support converged with 20DMA support.
The S&P 500 (SPY) battled three straight days to hold 200DMA support converged with 20DMA support.

The NASDAQ (COMPQX) did not bother putting up a fight at its uptrending 20 or 50DMAs. That lack of fight surprised me. A presumption of support helped fuel my last round of speculation in XLC and QQQ call options. The tech-laden index’s breakout above its March highs also came to an end. The NASDAQ’s 50DMA breakdown put its March lows in play. Because the NASDAQ is in this precarious position, the stock market is an S&P 500 breakdown away from descending into overall bearish trading conditions.

The NASDAQ (COMPQX) lost 1.3% and broke down below its 50DMA.
The NASDAQ (COMPQX) lost 1.3% and broke down below its 50DMA.

The iShares Russell 2000 ETF (IWM) crept closer to revisiting its March lows. IWM was the first of the three indices to fall down with a 50DMA breakdown. Still, I am surprised the index of small caps dropped into this precarious position before testing overhead 200DMA resistance. Along with the NASDAQ’s fall, IWM’s confirmed 50DMA breakdown sets up the stock market for being a breakdown away from bearish trading conditions.

The iShares Russell 2000 ETF (IWM) declined 4 days in a row and confirmed its 50DMA breakdown.
The iShares Russell 2000 ETF (IWM) declined 4 days in a row and confirmed its 50DMA breakdown.


Stock Market Volatility

The volatility index (VIX) looks like it is itching to surge again. While the stock market is an S&P 500 breakdown away from bearish trading conditions, faders were able to take the VIX well off its highs for the week. As a result, the 20-level continues to act like a magnet for the VIX. A close above the intraday high for the week would provide a fresh signal of bearish conditions.

The volatility index (VIX) churned mightily during the week but ended just above the 20 threshold.
The volatility index (VIX) churned mightily during the week but ended just above the 20 threshold.

The Short-Term Trading Call A Breakdown Away from Bearishness

  • AT50 (MMFI) = 44.1% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) = 34.6% 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, managed to hold a sliver of its gains from last month’s big breakout. However, the achievement looks ever more tenuous given the signals of bearish trading conditions from the indices. An S&P 500 breakdown should pressure AT50 into testing the lows of March. The onset of the April earnings season is the biggest wildcard besides the Russian invasion of Ukraine.

My last tranche of bullish bets are all at risk. The lingering question is whether the onset of bearish trading conditions will be aggressive enough to light up my small collection of remaining put options. If bearish conditions unfold, I will aggressively add to existing bearish bets against ARKF, ARKK, and IGV. In other words, I will return to the kinds of trades that dominated my thinking starting in January. I captured some of this thinking in chronicling the long journey downward for the ARK series in “Cathie Wood: A Doozy of A Correction.”

AT50 (MMFI), the percentage of stocks above their respective 50DMAs, finished reversing its breakout with a 3+ week low.
AT50 (MMFI), the percentage of stocks above their respective 50DMAs, finished reversing its breakout with a 3+ week low.
AT200 (MMTH), the percentage of stocks above their respective 200DMAs, is trying to stabilize after reversing its recent breakout.
AT200 (MMTH), the percentage of stocks above their respective 200DMAs, is trying to stabilize after reversing its recent breakout.

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 #499 over 20%, Day #24 over 30%, Day #18 over 40% (overperiod), Day #3 under 50% (underperiod), Day #8 under 60%, Day #279 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long QQQ call and call spreads, long SPY call spreads, long IWM call spread, long ARKK put and put spread, long IGV calendar put spread, long ARKF puts

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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.

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