Stock Market Commentary:
The stock market finally dropped into deep oversold territory. Yet, on this third day of now extended oversold trading conditions, the S&P 500 (SPY) remains 98 points away from joining the NASDAQ and IWM in hitting a bear market (a 20% loss from its all-time high). The stock market is well on its way to a 6th straight week of losses and the wheels are shredding off the applecart.
High inflation prevents the Fed from issuing its typical menu of reassurances, thus leaving market participants with few points of hope. Even Cathie Wood’s rolling 5-year time horizon of bullishness must be ringing hollower than ever. CNBC’s Fast Money caught the mood with the all caps byline for its podcast today.
The Stock Market Indices
As expected, traders faded S&P 500 (SPY) rallies back to the resistance line from the May, 2021 closing low. Buyers tested resistance twice before exhaustion set in. The resulting vacuum opened the opportunity for sellers to push the S&P 500 to a fresh 14-month low. The index is now just 98 points away from hitting the bear market level. The required 2.5% loss would be all in a day’s work for 2022 trading! Given the likelihood that algorithms and trading bots are closely watching that threshold, I am on alert for using the bear market flag as an oversold buying signal.
The NASDAQ (COMPQX) could not even pull off a feeble attempt to test overhead resistance from its September, 2020 high. Sellers continued to press an aggressive case against tech stocks. Today’s 3.2% loss pushed the NASDAQ to fresh 18-month lows. The gains from 2021 have completely faded in the rear view mirror.
The iShares Russell 2000 ETF (IWM) continued to point sharply downward. Today’s 2.5% loss took the index of small caps to a near complete reversal of its November, 2020 breakout.
Stock Market Volatility
The volatility index (VIX) continues to churn as if it is content to watch prices fall down all around. Despite the strong selling into the close of trading, the VIX LOST 1.3% on the day. Whenever the VIX wakes up for a fresh surge, I will count down to a buyable moment for this oversold period.
The Short-Term Trading Call With 98 Points to Go
- AT50 (MMFI) = 12.1% of stocks are trading above their respective 50-day moving averages (Day #3 oversold)
- AT200 (MMTH) = 20.4% 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, closed at 12.1%. This third day of oversold conditions places the stock market deep into oversold territory. This extended visit to oversold territory is exactly the kind of trading I imagined in writing “How Much Longer Can the Market Avoid An Extended Oversold Period?” The last plunge deep into oversold territory occurred during the pandemic-driven 2020 market crash. The current flush out of stocks certainly feels like a crash. Yet, the S&P 500 remains 98 points away from a bear market.
With AT50 at 12%, I am finally warming up to trigger the aggressive oversold AT50 trading rules. However, I will not chase the market higher from here. Instead, I am looking for the S&P 500 to approach or slice through bear market territory along with a VIX surge to provide my buy signal. In the meantime, I know we are all over it (well all but the most hardened bears). The market looks dead to us. However, patience can offer rewards. Somewhere 98 points from here or so lies a good risk/reward trading opportunity on the buy side (just remember good risk/reward is NOT equivalent to a guarantee!).
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 #3 under 20% (day #3 oversold), Day #5 under 30%, Day #14 under 40%, Day #25 under 50%, Day #30 under 60%, Day #301 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: no positions
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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.