Stock Market Commentary:
The stock market took one more day to get resolution on the technical signals flashing from market breadth. A drop from overbought conditions triggered a bearish market signal. Failures at important resistance from the S&P 500, the NASDAQ, and IWM each reinforced the bearish signal. However, the relatively mild trading action and the reluctant response from the volatility index suggest that the next phase of trading could look more like churn than an outright reversal.
The Stock Market Indices
The S&P 500 (SPY) only fell 0.4% but still confirmed resistance at the top of the June highs. Given the index has essentially gone nowhere for almost two weeks, trading churn above support from the May, 2021 low looks more likely than a complete breakdown in the immediate term.
The NASDAQ (COMPQ) generated a bigger disappointment than the S&P 500 yesterday. The tech-laden index made a more significant move again today. The NASDAQ fell 1.2% and definitively confirmed resistance at overhead resistance from the bear market line. Now in play is a test of converging support from the uptrending 20-day moving average (DMA) (the dotted line below) and the September, 2020 high.
The iShares Russell 2000 ETF (IWM) joined the NASDAQ by definitively confirming resistance at its bear market line. The ETF of small caps lost 1.4% but held on to a steep uptrend. Still, I took remaining profits on my IWM call spread right at the open. A test of uptrending 20DMA support is now in play following IWM’s fakeout of outperformance.
Stock Market Volatility
The volatility index (VIX) showed little concern over the bearish confirmations in the stock market. The VIX only gained 2.3% on the day. It even still looks “weighty” enough to test the 20 level.
The Short-Term Trading Call Without Resolution
- AT50 (MMFI) = 68.8% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 33.0% 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, closed yesterday in overbought territory after 356 trading days below the 70% threshold. That trip lasted just one day as AT50 closed at 68.8%. Per the AT50 trading rules, I flipped the short-term trading call to (cautiously) bearish. As noted above, the triple confirmation of important resistance for the S&P 500, the NASDAQ, and IWM meant that I did not hesitate to make the change. However, I am not all out bearish because the S&P 500 looks like it could churn for a while above support from its May, 2021 low. A breakdown below that support would push me to get more bearish and anticipate a test of 50DMA support (the red line). The potential churn could also cause AT50 to pivot in and out of overbought conditions until the next big catalyst for the market.
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 #26 over 20%, Day #20 over 30%, Day #13 over 40%, Day #13 over 50%, Day #7 over 60%, Day #1 under 70% (underperiod ending one day overbought)
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long QQQ 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.