Bulls Explode Out of Oversold Trading Conditions – The Market Breadth

The bear market intrusion to the oversold period gave way to an explosion of bullish trading action this week. The maximum drawdown of October for the S&P 500 (SPY) was 4.0% well above the average for the month. This extreme move provided the perfect setup for the sharpness of the current oversold bounce. The rubber band snapped back with conviction. The S&P 500 is already up 4.9% from the October low. The index has also already reversed all of October’s losses. So as the bulls explode out of oversold conditions, the stock charts are filling with all kinds of colorful and telling narratives.

For this edition of The Market Breadth, a video show and tell is the best way to demonstrate the narrative. The video is a long one (36 minutes). Play it in the background while washing the dishes and sweeping the kitchen. I posted the transcript of the video below with clean-up help from ChatGPT (Google really needs to apply some better AI to the transcription service!). Note my short-term trading call remains bullish. The oversold period ended, surprisingly, on Tuesday, the day before the Federal Reserve announced no rate hike. That news somehow further reinforced bullish sentiments!

Transcript…

Hello everyone, welcome to the Market Breadth, and let’s just dive right into this. This has been an incredible week. I just want to go through a bunch of quick charts. This isn’t necessarily a tutorial because I want to emphasize that this week was incredibly bullish. It’s almost the mirror image of the bearishness we had in October. If you read my blog, you will have followed along this entire trail and seen how the indicators of market breadth have guided the trading this entire way.

So, let’s start here with the S&P 500. Some key things to note: this blue line is the 200-day moving average (DMA). Today, the index jumped 1.9% for a clean 200-day moving average breakout. It has now left behind this line that defined the “summer of loving stocks,” so we’re back into gains from the summer. The index is even poking above this pre-Jackson Hole high now. This is very bullish, this whole trading action this week, because you can see we’ve been up four straight days – that’s this entire week. But we’re still in this downtrend channel from the last high.

So, what’s a downtrend channel? It’s a set of lower lows and lower highs. The index is not truly bullish until it can break out above the last high. But until then, I still think there’s room to buy dips. For instance, I’m expecting this 50-day moving average support to hold.

Okay, let’s take a look at the NASDAQ (COMPQ). Similarly, the NASDAQ actually did its 200-day moving average breakout yesterday. Yesterday was Wednesday, and that was the Fed day, and that was what I treated as my confirmation that the oversold bounce was well underway. And the reason why this was doubly important – sorry, the text is a little off there – let me show you: This line was the bear market line for the NASDAQ, meaning 20% below the all-time high. And this, of course, this action here was extremely bearish. But notice, and this is why confirmations are important, while the NASDAQ did break down below the 200-day moving average, it never had another low below that. So, that breakdown was never confirmed. And what happened after that? Buyers stepped right in. In fact, even better than the S&P 500, it’s now five straight days of gains. So much so that now the NASDAQ is even above its 20-day moving average. It, too, is still struggling with lower lows and lower highs, but it looks like the candidate most likely to break out. So, keep an eye on that one.

Even as I speak, Apple (AAPL) is down, I think, two or three percent post-earnings. I wouldn’t even worry about that because Apple has also broken out above its 200-day moving average, and it can come down to the 50-day moving average and still be a part of the bullish bounce here for the oversold bounce. And you can see on TradingView, it’s showing the aftermarket action. So, we’re currently at 172, and you can see here where my cursor is that the 200-day moving average is around 171.32. So, you know, Apple could even go down to 170 and still not make me change my overall opinion.

Anyway, let’s go back now to the other major index, which is IWM, the small caps, from the Russell 2000 ETF. Sorry for the text here, getting in the way. Let’s just pop that downward so I can go to the bottom. Now, it’s easier to see. And look at that. You know, I have refused to pay any more attention to IWM because it’s just been accelerating practically downwards, even below this pre-pandemic high. That was pretty bearish to me. And now, today, all at once, a 2.7% gain, and it’s breaking out above both its pre-pandemic high and the 20-day moving average downtrend. This is very bullish for small caps. I want to see one more close above that, and then I’m all good with trading in IWM again. I do kind of regret missing this move, but I’m all good because of all the other trades I did. And again, the blog explains more. My main purpose here is just to go through some charts that are very indicative of the trading action. And I had to write down a bunch of them; usually, I just do them off the top of my head. But there are so many good messages here.

So finally, market breadth, which is what I’m all about and what guides my trading. This is the percentage of stocks above their 50-day moving average. TradingView calls it MMFI. I call it AT50 for Above The 50. Hopefully, you see this right away. This market breadth indicator just exploded higher today. I mean, just exploded. 50% on a percentage basis – I don’t pay attention to that so much, but just look at this. It closed yesterday at 24% and closed today at 36%, and that’s the highest close it’s had since, wow, look at that, since about two months ago, essentially. This is extremely bullish. Even with a pullback, those pullbacks have to be bought, again, back down to support levels. So, the oversold period is definitively over. For those of you again who follow the blog, I have to keep promoting it… I talked about how, given the bearish tones of how long this oversold period was lasting, one trading capability for coping in that bearish sentiment as this oversold period dragged on was to wait until the oversold period ended. Well, that happened on Tuesday, and I got very active Wednesday, even before and definitely after the Federal Reserve. So, this is amazing.

And let’s just take a look at the percentage of stocks above their 200-day moving average (AT200), just to see. And yep, this confirms it. It also exploded higher, and it’s actually essentially ended this downtrend defined by this line. So, you have to follow these indicators to say that sentiment this week has taken a sharp shift from bearish to bullish, with, of course, pending and outstanding confirmations to go.

Another point to mention is why the market has shifted so drastically. A number of events occurred this week. The Federal Reserve, for reasons unknown to me, was expected by others to potentially increase rates. Personally, I did not believe this would happen. Following the Federal Reserve meeting on Wednesday, my impression was that no significant new information had emerged, yet the market reacted as if it were significant news. The Fed neither raised rates nor provided concrete plans for future increases. Prior to the meeting, the Fed fund futures indicated that the market did not anticipate further rate hikes.

Luckily, I was already bullish on the market, but I was surprised that this became the headline: a major announcement indicating the Fed is likely finished with rate hikes. This confirmation undoubtedly supports prices. Perhaps even more crucial was the action in the bond market. Bond yields plummeted, and stocks typically favor lower yields. Looking at TLT, I understand that the U.S. government’s large funding round announced last Wednesday morning was well received, positively influencing interpretations of the Fed’s stance. TLT, representing long-term U.S. treasury bonds, rose nearly 2% today. Higher prices mean lower yields, which is extremely positive for the stock market. As a precaution, I purchased a January put option on TLT to hedge my position. With the earnings season in full swing, the main potential threat to this bullish sentiment is anything that causes bond yields to fall again. However, I believe bond yields have peaked for now. Should there be a pullback, I anticipate it will stabilize around this area. Nevertheless, I feel more secure with the put option in place.

Let’s now review key market indicators. As a subscriber and advocate of SwingTradeBot, I want to verify my bullish impression by examining the general market overview. As expected, short-term indicators have turned up. Mid-term indicators, previously down, now show a mix, with the NASDAQ 100 appearing flat. Long-term indicators have also turned positive, which I attribute to the impact of the 200-day moving average. Examining other indicators, we see that although new highs are not numerous, they significantly outnumber new lows. One standout metric is the bullish signals: approximately 4,400 bullish versus 1,700 bearish signals. Note that some overlap exists between these indicators. SwingTradeBot also calculates the percentage of stocks above their 50-day moving averages, showcasing a significant breakout. This suggests that we are unlikely to enter an oversold territory without another major catalyst. Both bulls and bears must respect this market breakout.

Now, I won’t delve into a tutorial on scans, but let me guide you through some quick chart analyses, as there are numerous stories unfolding here. Without a specific script, please bear with me as I cover various individual stocks and their narratives, which may vary.

Caterpillar (CAT), as followers of my blog know, serves as my hedge against bullishness. It performed exceptionally well last week, and recent earnings have validated sellers’ concerns. Caterpillar’s price dropped a substantial 6.6%. Since I was bullish by then, I refrained from placing a bearish pre-earnings bet, feeling sufficiently covered by my earlier hedge. However, I now suspect Caterpillar is gearing up to turn bullish again. Post-Fed, it saw a 2.6% increase, and today it rose by 3%. It’s likely to surpass the 200-day moving average soon. I’m closely monitoring Caterpillar as a market sentiment indicator. Should it struggle at the 200-day average and turn back, I will reintroduce a put option as a hedge against my overall bullish stance.

Moving on to Tesla (TSLA), its stock has transitioned from bearish to a state that, while not fully bullish, appears promising. In May, Tesla experienced a breakout, leading to nearly two months of gains and setting a bullish tone for the summer market. Despite a pullback post-earnings, it quickly rebounded from the breakout support level. Unfortunately, I wasn’t astute enough to capitalize on this rebound. Looking back, the choice to go all in after a 7% bounce, which solidified the support, now seems obvious. Tesla’s recent behavior suggests bearishness, appearing poised to continue its decline. However, it rebounded sharply, less due to Tesla-specific factors and more because of the overall bullish market. Currently at the 200-day moving average, Tesla’s future movement will be telling. If it closes below today’s intraday low, I’ll interpret that as bearish for the stock and possibly employ it as another hedge.

Next, let’s examine XPO Inc (XPO), a logistics stock. Its resilience amidst the market downturn from August to October, maintaining a tight range, caught my attention. Following its earnings report, XPO surged 15%, a notable move for a logistics company and another bullish confirmation for me. It appears that buyers are gradually returning to XPO. On examining its monthly performance, we see that XPO is nearing all-time highs – a bullish sign for both the economy and the overall stock market. However, I’ll refrain from declaring this as a definitive market indicator.

FedEx Corporation (FDX) offers another interesting case. Despite my extensive analysis on the stock, which I won’t reiterate here, FedEx’s behavior following a breakdown below its 200-day moving average is worth noting. I had a put spread on FedEx, which I viewed as a market bullishness hedge. I chose not to take profits on this position. In hindsight, though regrettable, the loss on this put spread was offset by gains from other bullish investments. This instance illustrates the benefit of waiting for confirmations of significant movements. FedEx never conclusively broke below its 200-day average. Conversely, it did confirm a breakout above this level. Let’s quickly switch to the 50-day moving average to assess its trajectory. Unfortunately, due to TradingView’s recent limitations on free accounts, I must toggle between different views. The 50-day moving average shows potential for FedEx to reach around 252-253. I’m curious to see if buyers remain enthusiastic at this level. If not, a short-term trade on a pullback to the 200-day average could be advantageous.

Continuing, let’s discuss home builders. My writings on Seeking Alpha delve into numerous aspects of this industry, which I won’t detail here due to time constraints. However, I plan to cover some of these topics in my upcoming market housing review. The recent drop in rates has clearly benefited the rate-sensitive homebuilding sector. The ITB ETF, largely composed of homebuilders, has seen a remarkable upsurge. Just yesterday, I managed to invest in one homebuilder as it surged by 3.5%. Today, I had to follow suit hastily, as the market continued its ascent. The 200-day moving average breakout for ITB is particularly notable, and I’m not waiting for additional confirmation to act on this. Fundamental reasons, which I’ll soon expound upon in writing, support this decision. The sector’s swift shift from a prolonged bearish phase to apparent bullishness is astounding. M/I Homes (MHO), a company I discussed positively on Seeking Alpha, is another example.

It held a 200-day moving average support and has not looked back since. That’s pretty amazing. All right, here’s another stock; let’s go to some tech stocks. Fastly (FSLY) had earnings today. This is another one where you have to note that sometimes the market acts like it really has no clue what’s going on. Back in August, Fastly surged 23% post-earnings. That looked pretty bullish. While the stock swooned a little bit afterwards, it did continue higher, but then, you know, it stopped on a dime, right with the market’s peak. I think this is the market’s peak, right at September 1st, and sellers just went to town on it. Now we have earnings again, and the stock surges. It closed at 15.6% after swooning, but I think it was up as much as 20-25%, and then sellers started descending on it. So, what gives, you know? Is this company doing well or not? Well, I didn’t look into the earnings. I’m just looking at the technicals. I went ahead and bought a few call options, speculative, expiring next Friday, just in anticipation of support holding, but this is just a presumption, given there’s general bullish sentiment in the market. I could, of course, be flat-out wrong.

Okay, AMD, oh my goodness, this one is amazing. I was worried about Advanced Micro Devices (AMD) because it did confirm a 200-day moving average breakdown, but it hasn’t looked back since. So, this was a false breakdown. How can you tell a false breakdown? You can only tell a false breakdown after the fact, and earnings just confirm that AMD is still all good. I mean, it surged almost 10%, so it’s back in bullish territory. Given that the market is bullish, I want to buy the pullbacks if the market gives any on AMD, and again, I’m only good as far as the 200-day moving average as support.

Okay, the next one on my list is Logitech (LOGI). I think this says it all. Earnings are up 13%, and buyers have generally just been trickling in step by step by step. I am long on Logitech, but I’m also a long-suffering holder of Logitech. And why do I say long-suffering? Because this all looks good for this year, but if I go back a little bit further, like monthly – oh, too far – let’s just do weekly, you can see that Logitech has had a really rough time since 2021. I think I bought somewhere in here, thinking that this support would hold. So, I’m crossing my fingers that the current momentum continues, and I can get back to even. Fortunately, I did buy more somewhere down here. I can’t quite remember, so I boosted my lowered cost basis to make this an even better trade.

So, I showed you AMD. I should have moved to Nvidia (NVDA) right after that. This is classic, folks. You know, there are a lot of people making a big deal out of this head-and-shoulders pattern. I even wrote about it, but I also wrote – and, you know, my trading friend, Trader Mike, the owner and creator of Swing Trade Bot, reminded me that it’s hard to find a head-and-shoulders bearish top that actually works out. I literally think that there must be trading bots out there that are counter head-and-shoulders trading because invariably either the neckline of the head-and-shoulders will hold as support, and then you never get the confirmation of a top, or a breakdown happens, and it tricks a bunch of bears, and then the thing flips right around. Well, that’s what’s happened with Nvidia. So, here’s the left shoulder, the head, the right shoulder. Here’s the neck; below the neck is bearish. You can see the first bounce here. Sellers took it right to the edge, and then buyers came right in. Then the sellers punched it down below the neckline, but then buyers pushed it right back. There, you can see how important this neckline has been to these trading bots that seem to be counter head-and-shoulders. And now it’s off to the races. Needless to say, I bought call options on Nvidia yesterday, I think it was either right before or right after the Fed, and then I sold it here at the 20-day moving average resistance. But because of this, I know these look like tiny moves, but for the call options, these are huge moves, so I was really happy that I caught that one.

Alright, let’s keep it moving. Bad news for this HR software company, Paycom Software (PAYC). It had, of course, a big rebound today because it’s following all the short covering and change in sentiment, but for earnings – oh my gosh – you know, it plunged 38%. That’s a significant change in the business. Whenever I see something like that, I like to go back far enough to get some perspective, and, sure enough, I mean, this takes the stock past the low of the pandemic, which to me is surprising because I doubt – so, if this thing is following the economy, then this looks way overdone. But if there’s something very company-specific that’s flawed, then okay, fine. But you can see, because of the bullish sentiment, buyers looked at this and took this as a sign to buy Paycom at least back up to its pandemic low. So, let’s see what happens. I think, if you go back to the daily, you can see that if you’re a quick trader, you want to buy this one at least up to the lower Bollinger Band (BB). Again, the lower Bollinger Bands define the two-sigma price volatility around the 20-day moving average, and this is just so overdone; it’s bound to rubber-band back up. But once it gets back to the more normal range of volatility, you have to be very careful from that point on because the people who got trapped by this big plunge will now start to think, “Oh my gosh, let me just take – now that my losses are reduced, let me just get out of here now.” So, there’s going to be a lot of that kind of battling. I’ve got this one on my list because, as you know, extreme moves to the upside or to the downside attract me. That’s just part of the market breadth calling.

Alright, so next on my list, oh yes, I’ve got penance to pay for Wingstop (WING). Again, I wrote about this one on my blog. I ignored this analyst upgrade to 200, and I insisted that all this churning here would exhaust the buyers and that Wingstop would follow consumer discretionary back down to this level. I couldn’t comprehend why it sold off and then abruptly reversed. Clearly, someone was privy to some information. The earnings were astounding, with a 7.5% surge. Despite being significantly above the upper Bollinger Band, which indicates it is highly overextended, buyers continued to drive it up. Wing Stop, known for having a substantial short interest, might be influencing this, but still, I was completely incorrect in my assessment. The lesson for me here is that, while having narratives is beneficial, paying closer attention and giving more respect to the price action and technical aspects is even more advantageous. What I failed to acknowledge was that this fluctuation wasn’t exhausting the buyers. Instead, it demonstrated the stock’s resilience as it fluctuated around the 200-day and 20-day moving averages. At the very least, I would not have been trapped in a put spread before the earnings announcement. However, I was firmly convinced of the exact opposite outcome, so this was a significant mistake on my part. Now that I have recorded this, I don’t need to write about it.

Garmin (GRMN) was fascinating. Garmin continually astonishes me with its ability to still sell its navigation products, a topic I need to explore further. Despite this, Garmin keeps progressing. Yesterday, there was a significant 10% increase post-earnings. It has now broken out, indicating bullishness. Of course, we should gain some perspective. Garmin has struggled since 2021, but it is gradually advancing. I find this stock appealing; it’s on my list for purchasing during dips. To be extremely cautious, I would set my stop level just below its last high. Such stop levels are prudent because what if the fundamentals that previously caused a decline suddenly reemerge?

Let’s proceed to DoorDash (DASH). I authored a bearish article on Seeking Alpha about DoorDash and maintain my bearish stance. The irony of not adhering to a trading thesis is evident here. Despite this, the company’s most recent earnings results, while fundamentally bullish, haven’t altered my view on the longer-term prospects of the company. I do not see the justification for paying a premium for this type of company. Once DoorDash failed to break below the 200-day moving average, I had to acknowledge the price. Hence, I executed a well-balanced strategy. I bought a put spread and a call option, positioning the short side of the call to expire last Friday, with the long side remaining.

Subsequently, on Monday, DoorDash rose, offering a small profit on my call option. I decided to secure the profit immediately, retaining the put option as a hedge against my other position. However, this rapid shift from a balanced to a bearish stance on DoorDash was technically driven. I regret this approach now: I had a $75 call option set to expire the next day, and with DoorDash closing today at around $88, you can deduce the financial impact. I lost substantial potential profit by prematurely abandoning a correct trading thesis but poorly executing it.

Now, Informatica (INFA), an old-school data analytics company, caught my attention. I’m experienced in this field, so I appreciate its potential. Informatica appeared in my earlier bullish scans when the market mood was positive. I didn’t exit this position, even as it declined, because I was intrigued by its narrative and what I was observing. I took a risk, holding through earnings, and was rewarded with an 18% surge. However, I can’t claim this was solely skill; there was an element of luck. I’m relieved I maintained the position and took profits afterwards. Informatica remains on my radar, and I’m eager to delve into its earnings, potentially even writing about it on Seeking Alpha.

Another company to discuss is Cognizant Technology (CTSH). I was surprised to see its performance post-earnings. Despite an initial downturn, it’s now struggling against resistance at the 200-day and rapidly descending 20-day moving averages. Monitoring IT companies like Cognizant is crucial due to their broader industry implications.

Next, CDW Corporation (CDW) presents a paradoxical case. When it issued an earnings warning, resulting in a 133% decline, certain bears, including one in particular, saw this as a sign of weakness in enterprise spending. This perspective made sense initially. However, the market subsequently disregarded these implications, even after the company reported earnings and the stock dipped momentarily. Buyers quickly dominated. If one respected the price action and technicals, as a bear, concerns would arise as the stock consistently ascended. Exiting the bearish position became imperative once the stock confirmed a breakout above the 200-day moving average, particularly after it surged post-earnings in August. The stock’s recent behavior is intriguing; after initially validating bearish sentiments, buyers propelled it over the 200-day moving average. Bearish investors should have exited around this point, sparing themselves considerable distress. Following the market trend, the stock recently increased by another 3.8%. Like Cognizant, I intend to monitor CDW closely, as its trading activities are unusual for a stalwart IT firm, hinting at underlying dynamics worth exploring.

Let’s cover a few more topics. Despite previously announcing that I was concluding, additional points warrant discussion. The market is replete with narratives, and I’m merely scratching the surface.

Texas Instruments (TXN) appeared distinctly bearish. It even declined after its earnings announcement. However, now, riding the coattails of overall market sentiment, it has closed its gap. This development leads me to reassess Texas Instruments as, at the very least, no longer bearish, and potentially bullish. Nonetheless, it must still overcome a significant downtrend. I would not consider purchasing it until it surpasses the 20-day moving average and confirms this breakout. If it does, there could be considerable resistance around the 200-day moving average. Despite being a conventional tech company, Texas Instruments deserves attention due to its potentially significant trading activities.

Finally, let’s discuss Microsoft (MSFT). This stock offers several important lessons, particularly for large-cap companies. Following its earnings announcement, the stock rose by 3.1%, only for sellers to subsequently drive it down, negating the post-earnings gains. Typically, this would indicate a disregard for the initial positive response to earnings. However, the sellers were the ones misled. Microsoft maintained support at the 20-day moving average, with buyers continually elevating it. Now, the post-earnings optimism is resurging, rendering Microsoft a viable buy on dips. However, I would advise against purchasing it currently because it is significantly overextended above the upper Bollinger Band. While the stock might continue to ascend, I find the risk-reward setup unattractive for such moves.

I hope this discussion has been insightful. Sometimes, the sheer number of market narratives makes writing impractical, making video an effective medium.

Thank you to those who have remained engaged throughout this presentation. Your perseverance in analyzing these charts is appreciated. I will see you next time.

Be careful out there!

Full disclosure: long QQQ calendar call spreads, long AAPL put spread, long DASH put spread, long WING put spread, long LOGI, long TLT put spread, long ITB