Chopped Into Bearish Trading Conditions – The Market Breadth

Stock Market Commentary:

As expected, the S&P 500 took the spotlight in the latest week of trading. Earlier I noted that the index was a breakdown away from bearish trading conditions. The S&P 500 obliged and dropped under its 50-day moving average (DMA) (the red line below). However, the bearish call is challenging because sellers made marginal additional progress. The price action chopped its way into and through bearish trading conditions. As a result, I am still looking for convincing follow-through to serve as a solid confirmation. In the meantime, the market is absorbing a fresh barrage of inflation news from hopeful aspirations of a peak in the U.S. inflation rate, to the Bank of Canada boldly declaring a full onslaught against inflationary pressures, to a European Central Bank trapped by nearby war into tentatively addressing inflationary pressures.

The Stock Market Indices

The S&P 500 (SPY) started the week with a gap down and 1.6% loss that confirmed a 200DMA breakdown (the blue line below). Sellers followed up with a 0.3% loss that confirmed the 50DMA breakdown. The next day, inspired by hopes for a peak in the inflation rate (and presumably a hawkish Fed declaring premature victory), buyers rushed back into the S&P 500. The index planted itself above the 50DMA for one more day. Sellers ended the week with a full reversal of the hope trade and a 1-month closing low. The S&P 500 effectively reaffirmed bearish trading conditions.

The NASDAQ (COMPQX) started the week with a a gap down and a 2.2% loss which confirmed the previous week’s 50DMA breakdown. The tech-laden index chopped away from there. It still closed the week at a 1-month low. The NASDAQ put its March low into play.

The iShares Russell 2000 ETF (IWM) managed to outperform with a 0.6% gain. However, overhead resistance at its 50DMA served as solid resistance to the push higher. The ETF of small cap stocks is once again trying to stabilize after dropping into bearish trading conditions last week.

Stock Market Volatility

The volatility index (VIX) actually faded off its high of the week. Accordingly, the VIX is not confirmed for bearish trading conditions even with Friday’s 4.1% gain. Still, the VIX is no longer pivoting around the 20 level and looks ready to maintain more elevated levels.

The Short-Term Trading Call With Chopped Trading Action

• AT50 (MMFI) = 43.9% of stocks are trading above their respective 50-day moving averages
• AT200 (MMTH) = 36.0% of stocks are trading above their respective 200-day moving averages
• Short-term Trading Call: cautiously bearish

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, managed to close flat for the week as trading action chopped around. As a result, my favorite technical indicator did not confirm the bearish implications of the breakdown in the S&P 500. Still, I stuck to my plan to flip bearish with the index’s (confirmed) breakdown. I caveated the bearish call as cautiously bearish to allow for the potential of a fresh relief rally that reverses the S&P 500’s 50DMA breakdown. My cautiously bearish short-term trading call remains unless the S&P 500 closes above its 200DMA. Otherwise, I am looking for the next trip down to oversold trading conditions (AT50 below 20%).

The bulk of my last tranche of bullish bets expired with a whimper. With my bearish flip, I abstained from adding a fresh tranche of index calls. Instead, I focused on building up bearish positions: a SPY Apr 29 ‘$435/ Apr 22 $430 calendar put spread, a QQQ Apr 29 $340/$330 put spread, and ARKF May $24/$20 put spreads (I took profits on one set of ARKF puts that faced expiration). One bullish move I could not resist was a fresh SPDR S&P Metals and Mining ETF (XME) position with a calendar call spread. XME hit new all-time highs.

Twitter Chopped

Elon Musk is running a clown show with the stream of news about buying a huge chunk of Twitter (TWTR) shares, getting on the board, declining a board position, making a $54.20 bid to buy out the company, and now suggesting he actually cannot buy Twitter. The upshot of this lyrical madness is that my TWTR position came to life. I almost took profits but instead decided to sell a May $60 call option against the position. I am back to being a stubborn TWTR bull, and I want to keep the shares to see what happens over a longer time period. Even as TWTR rushed toward 200DMA resistance, I could not imagine a 200DMA breakout much less enough momentum to reverse losses from the October post-earnings breakdown. Musk’s offer more or less caps TWTR for the time-being even with rumors about a private equity firm preparing a bid.

Let’s see whether the Musk warchest chopped its way to the sea bottom on this adventure.

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 #503 over 20%, Day #28 over 30%, Day #26 over 40% (overperiod), Day #7 under 50% (underperiod), Day #12 under 60%, Day #283 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long QQQ put spread, long SPY call spread and put spread, long IWM call spread, long XME calendar call spread, long ARKF put spread, long TWTR shares and short a call option

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.