Cool Follow-Through for the Bear Market Relief – The Market Breadth

Stock Market Commentary

The stock market saw a cool and strong follow-through day, reinforcing the potential for a sustainable low (NOT a bottom). Based on changes in market breadth, I discussed the potential for a sustainable low in “FINALLY, Some Convincing Bear Market Relief – The Market Breadth“. A flip in the short-term trends for the major indices from negative to neutral or positive further supported the notion of a sustainable low.

The Stock Market Indices

The S&P 500 (SPY) is advancing toward resistance at its 200-day moving average (DMA) (the blue line). This level looms larger than usual given the upcoming decision on monetary policy from the Federal Reserve. The Fed may trigger a deciding factor on the direction of a 200DMA pivot.

The NASDAQ (COMPQ) struggled despite the market’s strength, gaining only 0.3% as big-cap tech stocks wavered and weakened.

• Nvidia (NVDA): Dropped 1.8%, leading me to buy a put option at its 20-day moving average as a hedge against my QQQ position.
• Meta (META): Flat on the day despite prior momentum. I bought some shares.
• Microsoft (MSFT): Failed to hold gains, fading near its 22-day moving average.
• Amazon (AMZN): Lost 1%, continuing its struggle at the 200-day moving average, where it has faced resistance.
• Tesla (TSLA): Dropped 4.8%, reversing its recent attempt to break resistance. The stock now appears poised for a retest of its 2023 breakout point.

The iShares Russell 2000 ETF (IWM) gained 1.3%. The ETF of small caps looks like it will avoid a test of its official bear market line. Now IWM looks like it is stretching for a test of downtrending 20DMA (the dotted line) resistance. As part of my trading strategy, I bought call options on IWM on Friday and successfully flipped them today. This flip reflects my bear market caution – profits should not be held longer than necessary. While IWM has underperformed, I remain a long-term shareholder, trading around the core position with options.

The Short-Term Trading Call With Cool Follow-Through

• AT50 (MMFI) = 30.5% of stocks are trading above their respective 50-day moving averages
• AT200 (MMTH) = 40.1% of stocks are trading above their respective 200-day moving averages
• Short-term Trading Call: cautiously bullish

AT50 (MMFI), which tracks the percentage of stocks above their 50DMAs, rose by 3.5 percentage points, climbing back above the 30% threshold. While this is a positive sign for market stabilization, it does not eliminate the possibility of quick reversals in this bear market. AT200 (MMTH), which measures stocks above their 200DMA, also gained nearly 3 percentage points. This market breadth indicator of long-term health reversed all of last week’s loss and thus reinforced the cool follow-through.

The VIX fell 6%, continuing its sharp decline. It is nearing the 20-level, the threshold for elevated market volatility. I was finally able to take profits on VXX put options (my last tranche).

The Equities: In Cool Follow-Through

The Goldman Sachs Group (GS) was my favorite chart of the day. The investment bank’s stock confirmed a 200DMA breakout with a second higher close. GS also has a long runway ahead of testing downtrending 20DMA resistance. I am using swingtradebot to identify additional strong 200DMA breakouts.

Be careful out there!

Footnotes

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“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 #314 over 20%, Day #1 over 30% (overperiod ending 5 days under 30%), Day #11 under 40%, Day #23 under 50%, Day #50 under 60%, Day #151 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long SPY shares, long QQQ call, long NVDA put, long AMZN, long TSLA put spread, long META shares, long IWM

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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.

* Blog notes: this blog was written based on the heavily edited transcript of the following video that includes a live review of the stock charts featured in this post. I used ChatGPT to process the transcript.