{"id":45365,"date":"2018-10-05T01:09:16","date_gmt":"2018-10-05T08:09:16","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=45365"},"modified":"2018-10-05T01:09:16","modified_gmt":"2018-10-05T08:09:16","slug":"181004-t2108-update","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2018\/10\/05\/181004-t2108-update\/","title":{"rendered":"Above the 40 (October 4, 2018) – Extremes Prime Prospects for Market Bounce But Oversold Conditions Loom"},"content":{"rendered":"

AT40<\/strong> = 33.8% of stocks are trading above their respective 40-day moving averages (DMAs) (was as low 31.9%)
\nAT200<\/strong> = 47.8% of stocks are trading above their respective 200DMAs
\nVIX<\/strong> = 14.0 (was as high as 15.8)
\nShort-term Trading Call<\/strong>: neutral<\/p>\n

Commentary<\/strong>
\nThe S&P 500 is only 1.0% off its all-time high, yet extremes and critical tests of support abound.<\/p>\n

AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped to a fresh 6-month low and closed at 33.8%. AT40 has warned of underlying weakness in the stock market since it sliced through 40% and broke the lower bound of a multi-month range<\/a>. At the time, I was more focused on the potential bullish implications of the S&P 500’s ability to hold 20DMA support at the same time AT40 slipped…<\/p>\n

“So on a relative basis, the S&P 500 (SPY) is not likely to go much lower from here without a specific and very bearish catalyst. The S&P 500\u2019s ability to levitate above its uptrending 20DMA adds to the impression that support will hold.”<\/p><\/blockquote>\n

The S&P 500 is only a mere 0.4% lower from that point BUT 20DMA support gave way. It was a rare down day on which the S&P 500 lost more than 1% at one point. Buyers stepped in at the lows and closed the index with a 0.8% loss. The S&P 500 even came close to recovering its 20DMA support.<\/p>\n


\n
\"The<\/a>
The S&P 500 (SPY) broke 20DMA support. While 50DMA support is now in play, buyers may have already decided to step in just above that critical uptrending support line.<\/figcaption><\/figure>
\n<\/center><\/p>\n

The Invesco QQQ Trust (QQQ) DID break through 50DMA support but buyers managed to close the index right on top of it.<\/p>\n


\n
\"The<\/a>
The the Invesco QQQ Trust (QQQ) lost 1.9% in a critical test of 50DMA support.<\/figcaption><\/figure>
\n<\/center><\/p>\n

The S&P 500 managed to bounce away from 50DMA support, and the Invesco QQQ Trust (QQQ) held 50DMA support, yet the NASDAQ was not so fortunate. <\/p>\n


\n
\"The<\/a>
The NASDAQ lost 1.8% on its way to definitive 50DMA breakdown.<\/figcaption><\/figure>
\n<\/center><\/p>\n

These major indices effectively created a cascade toward critical 50DMA support. Along the way, small caps continue to roll over with 50DMA resistance fading away in the rear view mirror. The iShares Russell 2000 ETF (IWM) lost another 1.4% and closed at a 3+ month low. A test of 200DMA support seems imminent.<\/p>\n


\n
\"The<\/a>
The iShares Russell 2000 ETF (IWM) continues to sell off on its way to an apparent 200DMA test. The downtrend from the all-time high accelerated this week with IWM struggling to close above its lower Bollinger Band (BB).<\/figcaption><\/figure>
\n<\/center><\/p>\n

Together, this selling looks like a recipe for a larger sell-off with small caps and now the NASDAQ leading the way lower. However, AT40 closed at 33.8% and was as low as 31.8%. For the last two years in particular, these levels have represented “close enough” to oversold with two important exceptions from the February swoon and the election related sell-off in 2016 (see longer-term chart at the bottom of this post).<\/p>\n


\n
\"AT40<\/a>
AT40 (T2108) continued its weakness with a fresh 6-month low.<\/figcaption><\/figure>
\n<\/center><\/p>\n

The volatility index, the VIX, added to the case for an imminent bounce. The VIX soared as much as an extreme 36.4% before volatility faders stepped in to push the fear gauge to a 20.7% close underneath the 15.35 pivot. If recent patterns hold, this move suggests the latest surge in fear has already exhausted itself. In deference to the volatility faders, I quickly took profits on my latest tranche of call options on ProShares Ultra VIX Short-Term Futures (UVXY). I also did not want to make a bet on the jobs report delivering news strong enough to sustain higher volatility.<\/p>\n


\n
\"The<\/a>
The volatility index, the VIX, surged above the 15.35 pivot only to get faded sharply to a 20.7% gain on the day.<\/figcaption><\/figure>
\n<\/center><\/p>\n

Noted VIX expert Bill Luby also thought the market hit extremes and called for a bottom. I agree with Luby that a bottom here is very likely<\/strong>, but I do not think it will be a sustainable bottom.
\n

<\/p>\n
\n

My volatility+volume indicator suggests that stocks just bottomed $SPX<\/a> $VIX<\/a><\/p>\n

— Bill Luby (@VIXandMore) October 4, 2018<\/a><\/p><\/blockquote>\n