{"id":58393,"date":"2021-12-14T22:38:57","date_gmt":"2021-12-15T06:38:57","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=58393"},"modified":"2021-12-14T22:41:53","modified_gmt":"2021-12-15T06:41:53","slug":"oversold-conditions-loom-ahead-of-fed-the-market-breadth","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2021\/12\/14\/oversold-conditions-loom-ahead-of-fed-the-market-breadth\/","title":{"rendered":"Oversold Conditions Loom Ahead of the Fed – The Market Breadth"},"content":{"rendered":"\n

Stock Market Commentary<\/strong><\/h2>\n\n\n\n

The post-oversold divergence<\/a> resolved to the downside. The downward pressure was evident across a wide swath of stocks<\/a>, and big cap stocks were only strong enough to keep the S&P 500 (SPY) aloft for a day (at an all-time high). Now, the stock market looks toppy and heavy enough to dip back into oversold territory. This weighty price action is happening just ahead of another decision on monetary policy from the Federal Reserve. Is the stock market trying to scare the Fed into backing down? Or is the stock market bracing itself for the worst possible expression of hawkishness given current economic conditions? The answers lay just ahead as oversold conditions loom.<\/p>\n\n\n\n

The Stock Market Indices<\/strong><\/h2>\n\n\n\n

After a week where the S&P 500 (SPY) gained 4 out of 5 days, I am a bit surprised that this week did not feature a buyable breakout. Instead, the index lost 0.9% on Monday and 0.8% today. The end result is an index that looks toppy thanks to the congestion at and near the all-time high (see the black line below). However, support at the 50-day moving average (DMA) (the red line below) is beckoning with reassurances. The S&P 500’s 50DMA exerts an overwhelming force against selling pressure. Accordingly, do not count the S&P 500 out until a major support line breaks. In this case, major support sits at the December lows.<\/p>\n\n\n\n

\"The<\/a>
The S&P 500<\/a> (SPY) pulled back sharply from its all-time high but stopped short of testing its 50DMA. <\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The NASDAQ (COMPQX) came into this week already facing downward pressure from its 20DMA (the dotted line below). With a 50DMA breakdown already in play, the tech-laden index is staring down a test of critical support from the December lows. Losses in important stocks like Apple (AAPL) and Microsoft (MSFT) helped push the NASDAQ into a 1.1% loss.<\/p>\n\n\n\n

\"The<\/a>
The <\/b>NASDAQ<\/a> (COMPQX)<\/b> gapped down below its 50DMA support. It now faces a critical test just above a double intraday bottom earlier in December.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The iShares Russell 2000 ETF<\/a> (IWM) is on a 4-day losing streak. With a confirmation of 200DMA resistance (the blue line below) in the books, IWM is now working on support from its 2021 trading range. On Monday, I bought a weekly $224\/$221 calendar call as a play on a bounce from this support. I picked $224 for the short side given it corresponds to upside resistance. Even if IWM rallies sharply from support, I am not expecting the index of small cap stocks to easily break free of resistance.<\/p>\n\n\n\n

The bottom of the trading range has been even more reliable than the S&P 500’s 50DMA as a pivot for trades. So a change in behavior here will create a major red flag for trading.<\/p>\n\n\n\n

\"\"\/<\/a>
The iShares Russell 2000 ETF<\/a> (IWM) faded from a gain to a 0.9% loss. IWM is now right back to the bottom of its near year-long trading range.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n