{"id":46974,"date":"2019-01-22T23:55:43","date_gmt":"2019-01-23T07:55:43","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=46974"},"modified":"2019-01-23T00:08:18","modified_gmt":"2019-01-23T08:08:18","slug":"t2108-update-190122","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2019\/01\/22\/t2108-update-190122\/","title":{"rendered":"Above the 40 (January 22, 2019) – Overbought Conditions Abruptly End In A Flurry of Tests of Support"},"content":{"rendered":"\n

AT40<\/strong> = 66.4% of stocks are trading above their respective 40-day moving averages (DMAs) (ended 1-day overperiod)
AT200<\/strong> = 24.6% of stocks are trading above their respective 200DMAs
VIX<\/strong> = 20.8
Short-term Trading Call<\/strong>: neutral<\/p>\n\n\n\n

Commentary<\/strong>
<\/p>\n\n\n\n

Days like these remind me of the importance of technicals.<\/p>\n\n\n\n

Just one trading day after surging into overbought trading territory<\/a>, the stock market almost as quickly dropped out of overbought conditions. Instead of warming up for an extended bout of overbought trading, the stock market went into reverse. AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, fell from 76.3% all the way back to 66.4%. Per my overbought trading rules<\/a>, I downgraded my trading call, but I only went to neutral instead of bearish. Major indices sold off, some deeply, but key support levels at 50DMAs held firm. So, I can refrain from going bearish until, for example, the S&P 500 (SPY) confirms a 50DMA breakdown. For now, the index looks like it made a near picture-perfect bounce off that support. The index also closed right on top of the support that held from October to December last year.<\/p>\n\n\n\n

\"The
The S&P 500 (SPY) lost 1.4% but bounced off 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

The NASDAQ and the Invesco QQQ Trust (QQQ) each had their own close encounter with 50DMA support.<\/p>\n\n\n\n

\"The
The NASDAQ lost 1.9% but bounced off 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n
\"The
The Invesco QQQ Trust (QQQ) gained 4.3% to close just under its downtrending 20DMA.<\/figcaption><\/figure><\/div>\n\n\n\n

Even the iShares Russell 2000 ETF (IWM) came as close as possible to testing its 50DMA support just a day after confirming its 50DMA breakout.<\/p>\n\n\n\n

\"The
The iShares Russell 2000 ETF (IWM) lost 1.6% after coming within a hair of tapping its 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

Perhaps the biggest move I missed by strictly following my overbought trading rules was the surge in the volatility index, the VIX. The VIX soared right back to elevated levels (above 20). This gain was sharp enough to give the look of a bottom in the making. I was hoping to wait to go long volatility closer to the 15.35 pivot or at least the previous lows. The VIX’s surge makes me less enthusiastic about fading volatility until\/unless it goes a lot higher again.<\/p>\n\n\n\n

\"The
The volatility index, the VIX, soared 16.9% for its biggest gain since the December 24th peak of panic.<\/figcaption><\/figure><\/div>\n\n\n\n

The technicals on the indices are so obvious that I am hesitant to draw firm conclusions until confirmations occur of support or fresh breakdowns. Confirmed support would be VERY bullish for the stock market especially happening in the thick of earnings season. Conversely, a confirmed breakdown would be exceptionally bearish and would set the market up for a retest of December’s climactic low<\/a>.<\/p>\n\n\n\n

CHART REVIEWS<\/strong><\/h4>\n\n\n\n

Blue Apron <\/b>(APRN)<\/p>\n\n\n\n

APRN came to mind after I saw an online ad for a ready-made cooking product. Last month, APRN broke through the dreaded $1 barrier but last week surged above it after encouraging pre-earnings news<\/a>. The company promised to do more talking about its promising strategies. The most important piece of news came on reaffirmed guidance: “Based on its current view of the business, Blue Apron plans to reaffirm confidence in achieving profitability on an adjusted EBITDA basis both in the first quarter of 2019 and for full year 2019 as it actively pursues the appropriate strategies to create value for its stakeholders.” APRN jumped about 50% on the news and is now “digesting” that massive one-day gain. Earnings will be pre-market January 31st.<\/p>\n\n\n\n

Incredibly, 19.9% of APRN’s float is still sold short<\/a>. What are they waiting for? Complete and utter business failure? APRN once traded as high as $11 shortly after its IPO in June, 2017.<\/p>\n\n\n\n

\"Blue
Blue Apron (APRN) soared above 50DMA resistance following earnings guidance. Follow-through has yet to happen as the stock quickly went into consolidation mode.<\/figcaption><\/figure><\/div>\n\n\n\n

Amazon.com <\/strong>(AMZN)<\/p>\n\n\n\n

There was a time before October when a drop of over 3% in AMZN would be considered newsworthy and extremely alarming. Big cap tech stocks should NOT move in large chunks unless driven by company-specific news. Today’s 3.8% loss only created a test of 50DMA support. Still, the 200DMA looms as confirmed resistance.<\/p>\n\n\n\n

\"Amazon.com
Amazon.com (AMZN) confirmed a failure at 200DMA resistance with a 3.8% loss. The stock nearly tapped its 50DMA support as well.<\/figcaption><\/figure><\/div>\n\n\n\n

Boeing <\/strong>(BA)<\/p>\n\n\n\n

BA only lost 1.9% and stayed within its upper Bollinger Band. I post this chart because BA is one of a small minority of stocks trading above its 200DMA. Earnings are coming pre-market on January 30th. <\/p>\n\n\n\n

\"Beoing
Beoing (BA) lost 1.9% as it appeared to fail at its December high.<\/figcaption><\/figure><\/div>\n\n\n\n

Benefitfocus <\/b>(BNFT) <\/p>\n\n\n\n

Speaking of trading above 200DMA support, BNFT last touched this critical support line back in October. Since then, BNFT has delivered surprising out-performance. Even after a deep swoon in December on news of a $200M convertible offering (senior notes due 2023), buyers stepped right back into the fray. This is the kind of strength I want to buy on the dips.<\/p>\n\n\n\n

\"Benefitfocus
Benefitfocus (BNFT) lost a mere 0.2% as it holds onto a retest of a near 4-year high.<\/figcaption><\/figure><\/div>\n\n\n\n

Caterpillar <\/b>(CAT)<\/p>\n\n\n\n

CAT dropped sharply enough to convince me the stock will not break through 200DMA before next week’s earnings pre-market January 28th. I grabbed a single put option expiring this Friday as speculation that the stock could continue selling into the week. I was hoping to get a better entry point for my next hedge; I was hesitant to do so on Friday. I am still preparing to play earnings from the bearish side.
<\/p>\n\n\n\n

\"Caterpillar
Caterpillar (CAT) lost 3.2% but remained within a ragged uptrend around its upper Bollinger Band.<\/figcaption><\/figure><\/div>\n\n\n\n

Csx<\/strong> (CSX)<\/p>\n\n\n\n

This railroad company is a favorite of mine, yet I have not bought the stock (or calls) in a long time. I did not buy on last week’s post-earnings dip and watched in surprise as buyers ran the stock off the bottom and into resistance. Now, CSX looks like it confirmed converged and stiff resistance at its 50 and 200DMAs. This stock should be an important tell on the market. Note how the 20DMA (dashed line) is turning upward and the post-earnings low tapped it as support in picture-perfect form.<\/p>\n\n\n\n

\"After
After a full and impressive post-earnings recovery, CSX confirmed a rejection from 200DMA resistance with a 2,3% loss.<\/figcaption><\/figure><\/div>\n\n\n\n

Alphabet<\/strong> (GOOG)<\/p>\n\n\n\n

GOOG is another stock that failed at or near stiff 200DMA resistance. Ominously, GOOG pulled back from a topping “evening star” candlestick pattern. After the gap down open, I reached for a weekly put, but I low-balled my offer price too much. The put went on to double without me. On the positive side for the stock, its 50DMA is now rising to offer some support.<\/p>\n\n\n\n

\"Alphabet
Alphabet (GOOG) confirmed a rejection from 200DMA resistance with a 2.5% loss. A test of 50DMA support looms.<\/figcaption><\/figure><\/div>\n\n\n\n

Netflix<\/strong> (NFLX)<\/p>\n\n\n\n

The post-earnings selling continued in NFLX. The stock continued its return to bearish ways with a clean 200DMA breakdown. While the stock made an impressive run-up going into earnings, the stock’s 50DMA support is now in play as the fresh froth winds down a bit. I purchased a calendar put spread soon after the open with the $325 strike. <\/p>\n\n\n\n

\"Netflix
Netflix (NFLX) lost 4.1% as it followed through on post-earnings selling and broke through 200DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

Carmax <\/b>(KMX)<\/p>\n\n\n\n

KMX continues to suffer from a devastating analyst downgrade on Friday. The stock’s December low is in play. <\/p>\n\n\n\n

\"Carmax
Carmax (KMX) lost another 4.0% in a move that confirmed 50DMA resistance.<\/figcaption><\/figure><\/div>\n\n\n\n

The iShares US Home Construction ETF<\/strong> (ITB)<\/p>\n\n\n\n

ITB continued its underperformance as poor news on existing home sales<\/a> put additional pressure on home builders. With ITB call options remaining as my last play on the seasonal home builder trade, I decided to take a flyer on doubling down on my April calls. If 50DMA support fails to hold, ITB will again become part of my bearish\/cautionary narrative on the entire stock market.<\/p>\n\n\n\n

\"The
The iShares US Home Construction ETF (ITB) lost 1.7% as it continued to dribble toward a test of 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

Stanley Black & Decker <\/b>(SWK)<\/p>\n\n\n\n

SWK added pressure to the housing sector with a very poorly received earnings report. The stock’s plunge was particularly discouraging because the stock just broke through 200DMA resistance for the first time in 4 months. The small breakout also looked like further progress on the stock’s recovery with a higher high following a higher low.<\/p>\n\n\n\n

\"Stanley
Stanley Black & Decker (SWK) lost 15.5% after reporting earnings. The move not only confirmed 200DMA resistance but also gapped down below 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

PPG Industries<\/strong> (PPG)<\/p>\n\n\n\n

PPG was part of the bullish story last week as the market reacted very well to earnings despite lowered guidance. The subsequent selling of the last two days throws cold water on the story. The stock survived a test of 50DMA support, but it needs to soon recover 200DMA support.<\/p>\n\n\n\n

\"PPG
PPG Industries (PPG) continued to reverse its post-earnings gain with a 1.0% loss. The stock managed to bounce off its 50DMA support.<\/figcaption><\/figure><\/div>\n\n\n\n

Thanks again, David…!<\/p>\n\n\n\n

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