Stock Market Commentary
The weight of deteriorating market breadth was undermining the stock market even as on-going rotations kept the indices floating higher. Last week, the tone made one of those periodic, yet still small, shifts. When news broke that Epic Games won a key provision of its lawsuit against Apple and its Apple Store, a small swell of selling pushed its way right into the close of trading for the week. Apple’s big loss turned into the stock market’s loss: Apple’s $2.5 trillion market cap maintains a leadership position in the S&P 500 and the NASDAQ. The dust will soon settle on Apple’s big loss. Will the stock market emerge with yet another shallow sell-off and a fresh desire to rally ever higher?
The Stock Market Indices
The S&P 500 (SPY) is on a 5-day losing streak. Only the last day of selling was significant. The 0.8% loss took the index below its uptrending 20-day moving average (DMA) (the dotted line below) for the first time in 3 weeks. This small pullback moved in sympathy with Apple’s big loss.
The NASDAQ (COMPQX) is on a 3-day losing streak. The week-ending 0.9% loss moved in sympathy with Apple’s big loss. Uptrending support at the 20DMA remains untouched.
Apple is not a member of the iShares Trust Russell 2000 Index ETF (IWM), but the index of small cap stocks still fell 1.0%. IWM once again confirmed the tight ceiling on its 2021 trading range. The test of 50DMA support is par for the course for an ETF that just pivots over and over around its 50-day moving average (DMA) (the red line below).
Stock Market Volatility
The volatility index (VIX) put on a rare show of strength. Apple’s big loss likely helped maintain the rush for put protection which in turn helped propel the VIX to a close at its intraday high. Not only did the VIX gain 11.4%, but also it closed above the 20 level. However, if previous patterns hold, the faders will tolerate this surge for at most just one more day before pushing the VIX back toward the recent lows between 15 and 16. If the VIX somehow manages to surpass the highs of the previous surge, then I will assume sellers are finally serious and strong enough to sustain downward pressure on the market longer than the recent typical 2-3 days.
The Short-Term Trading Call With Apple’s big loss
- AT50 (MMFI) = 42.0% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 51.0% 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, followed the S&P 500 with 5 down days in a row. AT50 finished reversing the breakout that started in late August. A new downtrend has emerged with the last peak as an anchor. Since August’s low broke a months-long pattern of subsequent lower lows, I am not anticipating a trip to oversold conditions (AT50 below 21%) in the coming week or so. However, a breach of the August low immediately opens up the possibility of imminent oversold conditions. In the meantime, my short-term trading call remains neutral even as I keep an eye on trading through the stock market’s most dangerous months.
AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, is in worse shape than AT50. This longer-term indicator of market breadth plunged right back to August’s closing low. That low was in turn a 9+ month low. While the S&P 500 and the NASDAQ continue to comfortably ride uptrends, half the stocks in the stock market are either broken down or breaking down. This unfavorable longer-term trend accelerated starting in July. I do not expect this bearish trend to end until at least a true oversold period hits the stock market. Oversold conditions should have the power to peel back some of the overriding complacency that overlooks the spreading deterioration underneath the stock market. The stock market’s most dangerous months should be up to the task.
Stock Chart Video Review
Stock Chart Reviews – Below the 50DMA
The Boeing Company (BA)
Industrial stocks have floundered for a month or more. The Boeing Company (BA) peaked in March and only now looking back do I notice the subtle downtrend at work. BA looks weak and a break of the July lows makes BA an even stronger short. I even like fading BA on a rally into overhead resistance at the 50DMA and/or 200DMA (the blue line below).
Wynn Resorts (WYNN)
A 5.6% surge on Tuesday looked like a strong continuation move for Wynn Resorts (WYNN). WYNN printed a 50DMA breakout from a brief period of consolidation following a surge off the August lows. As a result, I did not wait to make a bullish trade in a call spread after WYNN pulled back toward the 50DMA. Friday’s 2.3% loss almost finished a reversal of the 50DMA breakout move. Suddenly, WYNN does not look quite as strong.
Deere & Company (DE)
The industrial trade looks a bit better in farm machinery company Deere & Company (DE). The August pullback found support at the 50DMA. DE is testing its 50DMA again. I am a buyer if DE bounces from here. The window for a short looks too narrow given a confirmation of a 50DMA breakdown may not happen until a test of August support. That support in turn will sit just above 200DMA support.
iShares U.S. Home Construction ETF (ITB)
The poor post-earnings response to PulteGroup (PHM) is dragging on the sector of home builders. The iShares U.S. Home Construction ETF (ITB) is now losing its grip on 50DMA support. I am on alert for a test of 200DMA support which might set up an early buy on the seasonal trade on home builders.
Zoom Video Communications, Inc. (ZM)
Suddenly, Zoom Video Communications, Inc. (ZM) looks like it is bottoming. The 16.7% post-earnings plunge marks the most recent low. Buyers have stepped in for all but one of the trading days since. The week ended with ZM notching a post-earnings high despite a fade off the intraday high.
Stock Chart Reviews – Above the 50DMA
Apple Inc (AAPL)
The court decision in the Apple App Store case sent Apple (AAPL) down 3.3%. Apple’s big loss brought the previous parabolic move to a definitive end. Still, per rule, I bought into AAPL weekly call options (two tranches). I see a decent chance of an imminent rebound for AAPL given the judge determined that Apple is not a monopolist.
Electronic Arts (EA)
The search for beneficiaries of the Apple decision has begun in earnest. For example, video game companies with significant app-based businesses jumped on the legal news. Electronic Arts (EA) jumped off its 50DMA support for a 2.0% gain. However, the move is buried in the noise of an extended trading range. I see no trade here until EA breaks out.
Bumble (BMBL)
Bumble (BMBL) started the day on a gap down in the wake of news of a stock secondary priced at $54. The AAPL big loss turned into BMBL’s big gain. The stock quickly reversed into a 4.5% gain even after a small fade from intraday highs. With a close above $54, BMBL is a buy per rule. BMBL is a confirmed buy on a breakout above the September high.
Match Group (MTCH)
Match Group (MTCH) started the week with a 7.5% gain on news of the stock joining the S&P 500; on-line dating is officially mainstream. As MTCH melted toward 50DMA support, I prepared for the buying opportunity. The AAPL big loss, turned into a big gain for MTCH. The stock closed with a 4.2% jump although it fell sharply away from its all-time highs set in February. I am still keen on buying MTCH when the opportunity presents itself.
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 #356 over 21%, Day #39 over 31%, Day #14 over 41%, Day #3 under 51% (underperiod), Day #62 under 62%, Day #126 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 AAPL calls, long WYNN call spread
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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.