Breadth Responds Poorly To Latest 1-Day Oversold Rally
Dr. Duru | Oct 26, 2018 03:23AM ET
AT40 = 12.3% of stocks are trading above their respective 40-day moving averages (DMAs) – 7th day of oversold period following 4-day oversold period (as low as 10.3%)
AT200 = 27.8% of stocks are trading above their respective 200DMAs
VIX = 24.2 (as low as 22.1)
Short-term Trading Call: bullish
Commentary
The stock market soared, but AT40 (T2108) and AT200 (T2107), respectively the percentage of stocks trading above their 40 and 200-day moving averages (DMAs), only gained a few percentage points and failed to reverse the previous day’s loss. This combination is a sign of just how much technical damage has been done to the market.
The S&P 500 (via SPDR S&P 500 (NYSE:SPY)) gapped up and closed with a 1.9% gain but well off intraday highs.
Also note that the S&P 500’s 200DMA turned downward for the second straight day. As a reminder, this critical long-term trendline last declined on a daily basis in May, 2016.
The NASDAQ gapped up significantly and closed with a 3.0% gain but well off intraday highs.
The Invesco QQQ Trust (NASDAQ:QQQ) gapped up significantly and closed with a 3.5% gain. More importantly, QQQ faded from 200DMA resistance.
The volatility index, the VIX, dropped just 4.0% after a rebound off its low. The fear gauge still looks poised to go higher before the next volatility implosion.
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The volatility index, the VIX, maintained its uptrend from the recent low with a rebound off its intraday low.
The currency markets are flashing new dangers in the form of the Australia dollar (NYSE:FXA) versus the Japanese yen (NYSE:FXY). Overnight, AUD/JPY plunged and broke the important September low and hit a near 2-year low. At the time of writing, AUD/JPY bounced just enough to recover that low. As a reminder, AUD/JPY can provide an important tell on the market’s current risk tolerance . Right now, it looks like that tolerance just got a lot lower.
AUD/JPY plunged at one point to a near 2-year low while breaking through critical support from September.
Source: Trading View
Focusing on the bullish opportunities is still paying off with call options on SPY. I expected to hold the two tranches I bought into Wednesday’s sell-off until next week, but the S&P 500 soared enough to move me to take profits (in other words, I did not want to risk losing the profits to another swoosh lower that fades the day’s strong rally). I will continue to exercise oversold trading rules in buying SPY call options (essentially buying when the S&P 500 plunges along with a surge/spike in volatility).
With the oversold period stretched into essentially 11 days, the second derivative of the stock market is in full swing. As I prepare for a more extended oversold period of churn and 200DMA resistance levels holding firm, I am back to hedging in small bits. Per the strategy I laid out on Netflix (NASDAQ:NFLX), I faded its rally Wednesday. I sold a call spread expiring Friday.
With Alphabet (NASDAQ:GOOGL) Inc (NASDAQ:GOOG) and Amazon.com (NASDAQ:AMZN) earnings pulling down big cap tech in after hours, it looks like my trade will work out. I also wanted to buy a calendar put spread on NFLX, but my order never filled. As another hedge, I bought a single put option on Goldman Sachs (NYSE:GS) expiring Friday. To avoid swinging myself to the bearish side, I added call options on Splunk Inc (NASDAQ:SPLK) expiring next week.
CHART REVIEWS
Apple (NASDAQ:AAPL)
AAPL is still the north star for tech stocks. The calamity in the rest of the market has yet to hit AAPL much. With earnings next week, I was bracing for a major test for the stock and the rest of the stock market. The poor response to GOOG and AMZN earnings may deliver the test ahead of schedule.
Apple (AAPL) continued its pivot around its 50DMA as it holds a trading range.
Align Technology Inc (NASDAQ:ALGN)
ALGN collapsed in the wake of its earnings on extremely high trading volume (a 16-month high). The loss of 20.2% took ALGN to an 8-month low. In less than a month, ALGN lost its entire gain for 2018. This kind of punishment for high-flying, high valuation stocks is more technical damage to add to the growing carnage.
Align Technology (ALGN) confirmed its 200DMA breakdown with a post-earnings gap down and a 20.2% loss.
Goldcorp Inc (NYSE:GG)
GG took me aback with a 18.7% post-earnings loss that took the stock all the way back to early 2002 levels. My whole experience on miners has taught me to just stick with the yellow metal itself. The miners just add unnecessary operational risk. I am dumping my position soon. When (if?) the stock closes this post-earnings gap down, I will reconsider my positioning.
Goldcorp (GG) lost 18.7% on a massive post-earnings loss. The stock is at a 16+ year low.
Meritage Corporation (NYSE:MTH)
MTH reported earnings on the right day. The stock received some serious tailwinds to the tune of a 9.5% gain. The next test for the stock is resistance from its steeply downtrending 20DMA. If sentiment is truly turning around, buyers will soon slice right through this resistance. Otherwise, it will be back to the same ol’ fade.
Meritage Homes (MTH) soared 9.5% post-earnings. The stock closed with a small fade from the downtrending 20DMA.
O'Reilly Automotive Inc (NASDAQ:ORLY)
ORLY printed an intriguing pattern going into earnings. It slowly sagged as its 20 and 50DMAs converged. The stock dropped 5.1% ahead of earnings and gapped down following earnings. This trading action looks too much like topping action, so this is a dip I will NOT buy this time around.
Oreilly Automotive (ORLY) sagged into earnings and barely closed flat after a strong fade from post-earnings highs.
Tesla (NASDAQ:TSLA)
Another week, another whacky set of events for TSLA. While the stock market sank this week, TSLA soared. A dramatic pop of 14.2% occurred on the heels of TSLA announcing it would deliver earnings a week earlier than originally planned. Even Citron caught on to the bullish implications.
Sure enough, TSLA delivered earnings results that pleased the market. The stock finished with a 9.1% gain and a 200DMA breakout. However, sellers did manage to push the stock back to the previous day’s intraday high at one point. The drama caught me flat-footed as I was positioning for a bullish pre-earnings play the NEXT week. While things worked out OK, I could have easily been caught with a pre-earnings warning. This drama just reminded me of the whacky (upside and downside) risks inherent in trading this stock. Going forward, the stock still has major overhead resistance in the mid-300s. I am also still not interested in holding the stock for an extended period until I see what happens after TSLA’s next funding round.
Tesla (TSLA) printed a 200DMA gap up post-earnings. Yet at one point it managed to fade all the way to the previous day’s intraday high.
Twitter Inc (NYSE:TWTR)
After seeing TWTR pop 15.5% post-earnings, I heaved a major sigh of relief. The bullish case remains intact for TWTR, and I will certainly use weakness from general stock market malaise to add to my position.
Twitter (TWTR) gained 15.5% post-earnings but faded from 200DMA resistance.
“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.
Active AT40 (T2108) periods: Day #7 under 20% (oversold), Day #12 under 30%, Day #19 under 40%, Day #24 under 50%, Day #40 under 60%, Day #93 under 70%
Daily AT40 (T2108)
Black line: AT40 (T2108) (% measured on the right)
Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%)
Weekly AT40 (T2108)
Be careful out there!
Full disclosure: long UVXY puts, long GG shares, long GS put, short NFLX call spread; long TSLA shares, short a call, long put spread, long call spread; long TWTR
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