{"id":58888,"date":"2022-01-29T13:15:52","date_gmt":"2022-01-29T21:15:52","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=58888"},"modified":"2022-01-29T15:45:02","modified_gmt":"2022-01-29T23:45:02","slug":"churn-zone-stands-against-bear-market-the-market-breadth","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2022\/01\/29\/churn-zone-stands-against-bear-market-the-market-breadth\/","title":{"rendered":"A Churn Zone Stands Against A Bear Market – The Market Breadth"},"content":{"rendered":"\n

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

I started last week’s trading with a call for discipline over precision<\/a>. That post turned out to be timely as the bears and bulls took the stock market on a wild ride through the Fed’s latest monetary policy decision<\/a> (more on that in a future post). The indices plunged deeply on Monday but set the tone for the week with a spirited comeback. Subsequently, the market traveled similar distances every day in what became a distinct churn zone. The stakes are high for this churn zone. A bear market awaits financial markets if selling breaks the trading action to lower levels. <\/p>\n\n\n\n

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

The S&P 500 (SPY) fought through the churn zone (shown below) to end the week with a hard-earned 0.8% gain. As expected, the index jammed itself against overhead resistance from its 200-day moving average (DMA) (the blue line). I took profits on my calendar call spread and held my hopeful 450\/460 call spread expiring this Friday. I call this spread “hopeful” because the top of the spread targets a breakout above the churn zone for a test of 50DMA resistance (the red line).<\/p>\n\n\n\n

The churn zone describes the current conditions for support and resistance. The lower part of the churn zone markets the intraday low from Monday, a 12% decline from the all-time high. I fear that a breakdown below this bottom sets up the index for a steady decline that will feel like a bear market where rallies get sold. A technical bear market comes from a 20% decline from the all-time high. That level is around 3837. The S&P 500 last visited that level in March, 2021. The top of the churn zone loosely coincides with the December closing low and the October breakout.<\/p>\n\n\n\n

\"The<\/a>
The S&P 500<\/a> (SPY) is in a churn zone of major indecision. This zone is the last buffer between the bull market and a bear market.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The NASDAQ (COMPQX) already delivered a bear market scare. The tech-laden index lost 18% at its intraday low last week. Even Friday’s intraday low almost tested that level. Given my bullish short-term trading call, I refreshed a call spread on the Invesco QQQ Trust (QQQ) near that low. Interestingly, call options were a LOT more expensive put positions. The $350\/$360 call spread expiring February 11th cost 40% of the point spread (20-25% is more normal). I reduced the cost by selling short a $360\/$365 call spread expiring February 18th (200DMA resistance is at $365). <\/p>\n\n\n\n

In the last Market Breadth post<\/a> I asked: “Could a bellwether like Apple (AAPL) deliver results awful enough to cast a pall on corporate profits for the next quarter or two? Certainly, such a thing is possible, but I am not willing to bet on it.” Indeed, AAPL pulled off an amazing post-earnings rebound with a 7.0% gain. AAPL even closed above its 50DMA.<\/p>\n\n\n\n

Even with AAPL back in a bullish zone, the NASDAQ remains in a precarious technical position. A breakdown below the churn zone will essentially mark the beginning of a bear market for technology stocks. The top of the churn zone closely coincides with the October low and the June breakout point. A breakout above this point still leaves the NASDAQ to contend with declining 200DMA resistance.<\/p>\n\n\n\n

\"The<\/a>
The NASDAQ<\/a> (COMPQX) has its own churn zone of indecision. A fresh breakdown would plunge the NASDAQ right into a bear market.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The iShares Russell 2000 ETF (IWM) started last week piercing into bear market territory. On Thursday, IWM actually closed in bear market territory. Friday’s 2.0% gain barely saved IWM from ending the week in bear market territory. This slippery trading action did not create the buffer of a churn zone that the S&P 500 and the NASDAQ secured. Accordingly, IWM still looks like it is in danger of erasing all its pandemic era gains before this selling cycle ends. Still, my short-term trading rules drew me into two separate call spreads on IWM with expirations on February 11th and the 18th.<\/p>\n\n\n\n

\"The<\/a>
The iShares Russell 2000 ETF<\/a> (IWM) slowed its descent to the pre-pandemic high. However, IWM is struggling to stay out of bear market territory.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n