From Bearish Divergence To Breakdown

Apparently, this animated GIF was a popular meme on a day where the S&P 500 (SPDR S&P 500 (NYSE:SPY)) broke down from its recent trading range.

The bears perked up before the bulls. The S&P 500 (SPY) finally broke down yesterday. I am sure the move got a lot of attention, especially from the bears, because of the suggestive visual.

The S&P 500 (SPY) breaks down. Note how buyers forced an obligatory close right at the bottom of the recent trading range

While buyers managed to close out the index a hair’s length above the bottom of the trading range (see the thick black horizontal line in the above chart), I still consider this move a confirming breakdown. It is “close enough” particularly because T2108 slipped down so far with a close of 59.9%.

Note that yesterday’s bearish divergence and T2108’s drop out of overbought conditions presaged the index’s breakdown. Accordingly, I have shifted the short-term trading call from cautiously bearish to bearish. This change means I completely stop looking for buying opportunities and focus on short opportunities.

Per my plan, the index’s breakdown triggered a purchase of put options on ProShares Ultra S&P500 (NYSE:SSO). I chose a September expiration to give plenty of time for bears to shake out the most aggressive bulls who have been buying every minute dip for the past two weeks. (I sat on my SPY call options as they dropped so much in value to make them worth more as a hedge than a truncated loss).

The volatility index, the VIX, printed a second day of gains but still could not close above the recent intraday highs. This failure surprised me given the ominous nature of the index’s breakdown.

The VIX manages a second day of gains but remains well below the critical 15.35 pivot

Apple (NASDAQ:AAPL) was one of the more notable casualties on the day. The stock is still above 200DMA support, but it reversed all of its impressive gains from the previous day.

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This turned a confirmed 200DMA breakout into a much more questionable one. Needless to say, I quickly sold my calls per plan soon after the open proved the day would likely be rough for AAPL.

Chipotle Mexican Grill (NYSE:CMG) also stood out, as sellers turned out in volume for a second straight day. The 1-day post-earnings recovery is a distant memory now. I failed to mention my latest trade in the last T2108 Update, but hopefully those who are interested know the drill from my discussion of the technicals after CMG reported earnings and earlier observations of CMG’s volatile behavior.

Yesterday, I bought a small number of shares and a put option with the intention of playing the next sudden burst in the stock. CMG delivered with a 2.8% loss that confirmed its 50DMA breakdown. I managed the position a little more closely this time around by stopping out of the shares and then riding the put option for a few more points lower. This fortuitous combination stretched out my profits. The breakdown, combined with my bearish trading bias, means that future CMG trades may consist of just put options. Stay tuned.

Chipotle Mexican Grill (CMG) confirms its 50DMA breakdown as its impressive 1-day post-earnings recovery becomes a complete fake-out

Tumbling stocks in retailers, auto, and travel caught my particular attention today.

Retailers took a major hit yesterday. The post-Brexit recovery rally in SPDR S&P Retail ETF (NYSE:XRT) looks like it is over. However, can converging support at the 50 and 200DMAs hold?

I am betting that they both eventually fail. Macy’s (NYSE:M) is a good example of the technical damage that occurred to individual retailers. On July 26th, Macy’s made a valiant effort in closing the huge May post-earnings gap down. Yesterday’s fresh 50DMA breakdown on high volume makes it very likely post-earnings selling is ready to resume.

August 11th earnings will be an important performance marker.

The recovery rally in SPDR S&P Retail ETF (XRT) hits a brick wall of heavy selling

Macy’s (M) breaks down all over again

Macy’s lost a whopping 7.3% on the day. Other department stores like Nordstrom (NYSE:JWN), with a 6.9% decline, lost big as well. Skechers (NYSE:SKX) saw a major and bearish extension of post-earnings selling with a 3.9% loss on the day. My previous bullish bias got me into the “value play” too early.

Last week, Expedia (NASDAQ:EXPE) put on an impressive post-earnings recovery that almost reversed the entire gap down. Yesterday reversed all those gains. Buyers barely managed to get a close at 200DMA support. Given the re-appearance of high-volume selling, I doubt the support will hold. I will fade any bounce in anticipation of that support eventually failing.

Like CMG, perhaps EXPE’s earnings really should be sold, not bought. Support at the 200DMA is not likely to hold, and I am guessing the 50DMA will only slow down a coming resumption of selling pressure.

Delta Airlines (NYSE:DAL) ran into trouble with its July report on passenger revenue. I noticed that Delta claimed the numbers were exactly as they expected. So, the depths of the selling surprised me; if I were bullish, I might be looking to buy this dip.

Instead, I am noting that the high-volume selling confirmed 50DMA resistance. DAL is now down a whopping 28% year-to-date. With oil prices tumbling again, I have to resist the urge to think of the selling in DAL as a buying opportunity for now. On a technical basis, DAL is one to fade in a bearish market on any rallies up to the 50DMA.

Delta Airlines hits resistance at its 50DMA and fails…

Last week, Ford Motor (NYSE:F) gapped down significantly. At the time, I did not think about sympathy trades. However, Toyota Motor (NYSE:TM) now looks like a juicy target with the stock gapping down below 200DMA support yesterday. Moreover, the Japanese yen (Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)) is back in a strengthening phase and should hamper TM’s performance. Even though TM manufactures a lot of its North American fleet in the U.S. and Mexico , whatever gets exported from Japan will suffer from yen appreciation.