Stock Market Commentary:
Federal Reserve Chair Jerome Powell reminded the market one more time about the Fed’s determination to fight inflation with normalized monetary policy, and the market cared for the briefest of moments. After the anti-inflation dust settled, the major indices closed trading on a strong note. For example, the extended oversold period came to an end despite retailers like Walmart (WMT) weighing on the trading action. The otherwise broadly based buying sliced the S&P 500 right through key resistance. This important breakout confirmed the end of oversold conditions and held out the tantalizing prospect of a continued rally.
The Stock Market Indices
The S&P 500 (SPY) left behind the prospect of remaining trapped in a new churn zone between the May, 2021 low as resistance and the bear market line as support. The index’s 2.0% gain created the important breakout for the day. Follow-through buying will set up the potential for a rally right through the 20-day moving average (DMA) (the dotted line below) and to the 50DMA.
Per my plan, I took profits on my SPY shares. I will now switch back to call options on a higher close.
The NASDAQ (COMPQX) came close to joining the S&P 500 with its own important breakout. The tech-laden’s index gained 2.8% and stopped trading just under the important September, 2020 high. Like the S&P 500, a confirmed breakout above this resistance would set up a run all the way to overhead 50DMA resistance.
The iShares Russell 2000 ETF (IWM) is converging on both its downtrending 20DMA and the former 2022 low. These two price levels represent stiff resistance. Accordingly, a breakout above this converged resistance would signal a new bullish phase for the bounce out of oversold conditions.
Stock Market Volatility
The volatility index (VIX) confirmed the fresh wave of bullishness with another large decline. The VIX lost 5.0% for its 6th straight down day. The topping pattern from last week is now very clear. Going forward I will treat 35-40 as the likely maximum high for the next trip through oversold trading conditions.
Note I took profits on my SVXY shares on Monday. I do not plan to buy shares again until the VIX experiences a large surge in the middle of oversold trading conditions.
The Short-Term Trading Call With A Bear Market Bounce
- AT50 (MMFI) = 25.0% of stocks are trading above their respective 50-day moving averages (ending 6 days oversold)
- AT200 (MMTH) = 26.0% 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, gained for a fourth straight day. The 25.0% close launched my favorite technical indicator out of oversold trading conditions (defined by the 20% threshold). The 6-day long oversold period qualifies as an extended stay and validated my read of the likelihood of such a period occurring in this moment. The S&P 500 gained 2.4% for this oversold period. This performance means that the aggressive strategy of buying the first oversold day worked yet again (recall that I chose to wait).
Normally, this would be a time to get more bullish. However, I remain wary because of the looming challenges of important overhead resistance for the major indices. As a result, I will continue to moderate by pursuit of buying opportunities. A confirmed 50DMA breakout for the S&P 500 would convert me to bullish.
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 #1 over 20% (overperiod ending 6 days oversold), Day #9 under 30%, Day #18 under 40%, Day #29 under 50%, Day #34 under 60%, Day #305 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.