Stock Market Commentary
The upward drift in the stock market continued another week. The latest narrative comes from the cascading impact of the infrastructure bill settled in the Senate (I feel like the U.S. has passed this bill 10 times already!). While more wrangling lies ahead in the House of Representatives, the stock market felt comfortable enough to plow into infrastructure-related plays, especially industrials and materials. Market breadth benefited from this buying the first three days of the week but languished the last two days of the week. As a result, a fresh spark for industrials accomplished little else for the stock market. The moribund and listless trading that created a wider divergence with market breadth convinced me to downgrade my short-term trading call back to neutral.
The Stock Market Indices
The S&P 500 (SPY) barely moved off the zero line each day of the week. Still, with positive moves the last 4 days, the melt-up remained well intact.
The NASDAQ (COMPQX) did not convert its listless trading into an upward drift. Still, buyers appeared interested enough to hold the 20-day moving average (DMA) (the dotted line below) as support.
The same old story holds for the iShares Trust Russell 2000 Index ETF (IWM). The 2021 trading range stretched into a 7-month run. All week, the 50DMA (the red line below) held as tight resistance. The 20DMA managed to hold as support. Last week was one of the tightest squeezes for IWM this year.
Stock Market Volatility
The volatility index (VIX) went into its own listless mode. The VIX drifted lower all week before closing near the pandemic lows set in June.
The Short-Term Trading Call With Industrials Dragging the Market Higher
- AT50 (MMFI) = 44.2% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 59.9% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: neutral
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, printed two strong days after gapping down on Monday. Losses the final two days of the week left MMFI close to net flat on the week. The pullback also left a downtrend in place defined by the 50DMA of AT50 (try saying that 10 times). This behavior is bad enough on its own. AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, makes the market breadth dynamics look even worse. AT200 ended down for the week and closed barely above the 8-month low set in July.
The underlying health of the stock market looks worse and worse with the widening divergence between the S&P 500 and market breadth. As a result, I retreated back to neutral for my short-term trading call. Sure the stock market can keep melting up from here with the casual rotations from sector to sector and back again. However, I do not want this mesmerizing dance lulling me to sleep as the stock market enters its most dangerous period of the year.
Stock Chart Video Review
Stock Chart Reviews – Below the 50DMA
Wynn Resorts, Limited (WYNN)
Ahead of earnings, Wynn Resorts, Limited (WYNN) fell to an 8-month low on heavy selling volume. Somehow earnings provided enough relief for an 8.3% rebound the next day. However, the excitement lasted barely one more day. WYNN ended the week with a 1.7% loss as the rebound ran out of steam.
Vuzix Corporation (VUZI)
Ever since a stock secondary, Vuzix Corporation (VUZI) has followed a long path downward. The inability to break 50DMA resistance in June further confirmed the selling pressure. VUZI lost another 7.2% post-earnings last week. Buyers almost reversed the entire post-earnings loss (starting from the gap down) until Friday’s 8.2% loss took the stock right back down. VUZI remains in a bearish position with a confirmed 200DMA breakdown.
Altice USA, Inc. (ATUS)
Broadband and video services company Altice USA, Inc (ATUS) fell out of a trading range in the wake of an 8.4% post-earnings plunge. Sellers have maintained the pressure ever since. A 2.0% loss on Friday took ATUS to an 8-month low and complete reversal of its November breakout and run-up. ATUS looks poised to test the price levels around November earnings. The networking and communications business is tough!
Wix.com Ltd. (WIX)
I last noted web site platform Wix.com Ltd. (WIX) at the beginning of the “growth tantrum” in March. I proposed a trade for a an eventual rebound to all-time highs with a stop below the 200DMA. WIX broke 200DMA support. Without convincing follow-through, I held on long enough for a fresh 50DMA breakout. I took minimal profits at that point, just thankful I “escaped” the 200DMA breakdown.
Fast forward to May earnings. WIX collapsed 17.3% post-earnings and another 7.4% decline broke the previous trading range. Bargain hunters took over from there. WIX dished out a fresh set of hard lessons in earnings last week. The stock plunged a fresh 17.0% and this time bargain hunters kept their distance. WIX closed the week at a 14-month low. Needless to say, the company has likely exhausted its pandemic-related tailwinds. Wix.com Ltd remains far away from profitability and still trades at 10x sales.
Fastly (FSLY)
Bargain hunters stepped into a fresh post-earnings collapse by Fastly (FSLY). On August 5th, FSLY collapsed 17.5% post-earnings and was down a lot more at the open that day. Bargain hunters lifted FSLY off a 15-month low which in turn finished a complete reversal of FSLY’s big breakout. I remain partial to finding a fresh investment opportunity in FSL. Unfortunately, the stock is clearly stuck in a bearish trend since a head and shoulders top that stretched from August, 2020 to February of this year.
Alibaba Group Holdings Ltd (BABA)
While I continue to avoid investing or buying into Chinese stocks, trading opportunities still occasionally tempt me. The sudden sell-offs and occasional dead cat bounces provide fertile ground for pairs trades. After I saw what looks like a bottoming pattern in Alibaba Group Holdings Ltd (BABA), I bought a single Aug $192.50 call option. The chart below shows BABA forming a bottoming hammer-like candle just above the even stronger bottoming candle from the abandoned baby bottom. I paired this position with an August 27 $150/$145 put spread in Baidu (BIDU). BIDU fell 4.5% on Friday after reporting earnings. Finally, for good measure, I added an August 27 $50 call option in KraneShares CSI China Internet ETF (KWEB) just in case the real action unfolds in the following week. BABA is the second largest holding in KWEB. BIDU is currently number 7.
If these trades work out, I will more formally write about pairwise trading in these names in a dedicated post.
Stock Chart Reviews – Above the 50DMA
Caterpillar, Inc (CAT)
Caterpillar, Inc (CAT) helped to lead the industrial trade last week. I kept an eye on CAT after it successfully tested 200DMA support to start the week. The continued buying the next day put me into a weekly $217.50/$215 calendar call spread. I assumed CAT would spend some time fighting with 50DMA resistance. Instead, CAT sliced right through resistance with a 3.6% jump. A last gasp run to $224 the next day took me out of the position with my initial profit target. CAT remains in a bullish position as long as it keeps support at its 50DMA.
Deere & Company (DE)
The CAT bounce off 200DMA support made me search for trades in other industrials. Deere & Company (DE) was even more clear than CAT. The stock confirmed a 50DMA breakout in late July. Like CAT, the subsequent run-up in DE exceeded my modest expectations. Like CAT, the stock market gave me a modest profit on my calendar call spread. The buying hit a wall after Wednesday as DE closed just below its all-time high. This position is limbo for new trades. DE is a better buy from here on a breakout to all-time highs.
Teucrium Corn Fund (CORN)
The wicked uptrend in corn prices ended in May. However, the subsequent triangle pattern in Teucrium Corn Fund (CORN) looks like the formation of a new bullish trade. The $19 level has held as consistent support. A close above the the last peak gets me back into CORN in anticipation of a big breakout.
Boise Cascade L.L.C. (BCC)
Last month, the 200DMA breakdown in Boise Cascade L.L.C. (BCC) appeared to confirm the bearish signals from collapsing lumber prices. However, the next day BCC finally found buyers. After BCC closed the next day higher, I bought shares for a rebound to overhead resistance. I dutifully took profits under the 200DMA, but the move did not stop. Last week, BCC broke out above its 50DMA resistance. The stock is a higher close away from being returning to a bullish position.
Nucor Corporation (NUE)
Materials companies experienced a resurgence along with industrials in the aftermath of the latest infrastructure spending deal. The chart of Nucor Corporation (NUE) reminds me how much I under-estimated the potential impact of the on-going news headlines on infrastructure spending. Just three months ago, NUE went parabolic and I expressed caution about holding on to a long-term investment. I exited shortly after NUE dropped below $100 after spending two trading days above $100. Fast-forward through fresh all-time highs, a 50DMA breakdown, and a 50DMA breakout, NUE is on a parabolic march again! Needless to say I am not a buyer here, but I am left impressed with NUE. The stock is a buy on the dips as long as the former all-time high in June holds as support.
Advanced Micro Devices Inc (AMD)
A the end of July I marveled at the recent run-up in Advanced Micro Devices (AMD). I called the stock a buy on the dips. Last week, AMD stabilized after a dip. Friday’s 3.8% gain confirmed the buy signal. I will be looking to add long shares to a short iron condor ($105/$100 put spread and $115/$120 call spread) position I already have in AMD.
ON Semiconductor (ON)
An 11.7% post-earnings pop put ON Semiconductor (ON) on my radar. Last week’s cooling is creating what looks like a buyable dip. While I prefer to buy on a test of uptrending 20DMA support, a higher close from Friday provides a buy signal from this kind of mild pullback.
Cross Country Healthcare (CCRN)
A 24.7% post-earnings pop put Cross Country Healthcare (CCRN) on my radar. The company provides staffing solutions for health care institutions. These kinds of services have become increasingly important as doctors opt out of the hassle and expense of running private practices. Medical professionals in general are seeking better lifestyles and working conditions. After stalling for about 4 years, Cross Country Healthcare revenues look like they have suddenly soared. The recent surge finally pushed CCRN over its 2015 high, and it now trades near a 14-year high. I am a buyer here and a holder as long as the 50DMA maintains support.
Coinbase Global Inc (COIN)
Earnings generated a lot of buzz for cryptocurrency trading platform Coinbase Global Inc (COIN) last week. The stock reversed the 3.9% loss going into earnings but sellers quickly descended from there. After trading as high as $294/share, COIN closed at $278. Sellers returned the next day to gap COIN into a 7.9% loss. The market now looks completely confused. The technicals favor the building of a base of support starting with the abandoned baby bottom in mid-May. COIN successfully tested that low in June and July.
COIN probably needs to test 50DMA support to flush out additional motivated sellers. In the meantime, I wonder how long the runway really is for COIN given the multitude of competitors and crypto trading options. Moreover, a bitcoin ETF would make it easier and cheaper to trade Bitcoin.
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 #336 over 21%, Day #19 over 31%, Day #7 over 41% (overperiod), Day #30 under 51% (underperiod), Day #42 under 62%, Day #106 under 72%
Source for charts unless otherwise noted: TradingView.com
Grammar checked by Grammar Coach from Thesaurus.com
Full disclosure: long UVXY call spread, long BABA call, long KWEB call, long BIDU put spread, short AMD iron condor
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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.