Overbought Conditions Abruptly End On A Reversal Day
Dr. Duru | Jan 17, 2018 01:49AM ET
AT40 = 64.0% of stocks are trading above their respective 40-day moving averages (DMAs) – ended a 1-day overbought period
AT200 = 62.7% of stocks are trading above their respective 200DMAs
VIX = 11.7
Short-term Trading Call: bullish
Commentary
It figures that just one day after the stock market finally crossed into overbought territory , it dropped right back out in dramatic fashion.
AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped from 70.01% to 64.0%. Before the S&P 500 (via SPDR S&P 500 (NYSE:SPY)) closed with a loss it rallied to a new intraday high in what seemed like another powerful follow-through of bullish sentiment. Instead, the index lost 0.4%. Once again, I found little use for the mainstream financial press’s search for explanations; even the hand-wringing over what was apparently the largest one-day reversal in almost a year rang hollow to me. For example, the S&P 500 did not even close below the low of the previous trading day. The index bounced slightly off that point of support. Once that low gives out, THEN I will start wondering about whether the index can crack the threshold that flips me to bearish . Ditto on the NASDAQ and the PowerShares QQQ Trust Series 1 (NASDAQ:QQQ).
The S&P 500 (SPY) gapped higher from its all-time closing high but ended the day with a loss: a small gap and crap.
The NADSAQ followed right along with the S&P 500.
The PowerShares QQQ ETF (QQQ) followed right along with the NASDAQ but came far short of challenging the previous day’s intraday low or the close.
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Small-caps suffered much greater damage. The iShares Russell 2000 (NYSE:IWM) closed below the low of the previous trading day and created a bearish engulfing pattern. The selling did not end until IWM tapped the bottom of its uptrending upper-Bollinger Band (BB) channel.
The iShares Russell 2000 ETF (IWM) tumbled from the top to the bottom of its uptrending upper-Bolling Band (BB) channel.
The U.S. dollar index (USD) also suffered a big move. The index extended a major breakout and finished the reversal of three years of gains. A bulk of the pounding is coming from the continuing resurgence of the euro. Last week, speculators increased net long contracts on the euro to levels not seen since at least 2008 – what I call “full bull.”
The U.S. dollar index (USD) broke down again and traded at its lowest point in the post-Trump era.
Speculators are getting ever more bullish on the euro with net long contracts at 10+ year highs.
In my last Above the 40 post, I noted how the volatility index, the VIX, looked like it was poised for a spike. Accordingly, I maintained a position in call options on ProShares Ultra VIX Short-Term Futures (NYSE:UVXY). The VIX finally spiked and the typical volatility faders were not able to reverse all the day’s gains. I decided to hold onto my call options for at least one more day just in case the upward momentum is truly not finished quite yet.
The volatility index, the VIX, gained 14.8% and a 1-month high.
STOCK CHART REVIEWS
SPDR Gold Shares (NYSE:GLD)
GLD is benefiting from the dollar’s weakness. Speculators are also back on board with net long contracts increasing every week for the last 4 weeks. Positions are reaching back to where they were when GLD last peaked in early September, 2017.
SPDR Gold Shares (GLD) continued its post-Fed rally. GLD is up 7.6% since the Fed HIKE interest rates.
Speculators are once again ramping up net long positions in gold.
“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 T2108 Resource Page . AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.
Active AT40 (T2108) periods: Day #475 over 20%, Day #289 over 30%, Day #89 over 40%, Day #37 over 50%, Day #28 over 60%, Day #1 under 70% (ending 1 day over 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 calls, long GLD, long and short currency pairs with the U.S. dollar
*Charting notes: FreeStockCharts.com uses midnight U.S. Eastern time as the close for currencies. Stock prices are not adjusted for dividends.
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