Right Back Where The Stock Market Started, But Worse

The S&P 500 (SPY) lost 2.3% and closed right at the November low. The 2018 low is in play.

That November low was important because it matched the October low which marked deep oversold territory. That oversold period was so extreme that I described a “second derivative” moment:

It is a “second derivative” moment when the selling becomes so extreme that the bull market itself gets questioned and scenarios for a bear market loom more possible. It is a moment when the extreme of an oversold condition itself reaches historical extremes, and market participants should start considering a wider range of potential outcomes. This is the point where I expect the next rally out of oversold conditions to lead to an opportunity for selling and/or shorting. Resistance at 200DMAs loom larger and larger.

AT40 created a bullish divergence with the S&P 500 . The second rally also followed a bullish divergence that was milder than the first, so I did not act on it until a rise in the S&P 500 seemed to confirm the divergence. With these observations in mind, I will act aggressively on another bullish divergence. However, I fully expect this latest sell-off to plunge the market into oversold conditions before it ends. The short-term trading call stays at cautiously bullish in deference to the possibilities for an imminent rebound.

AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, remains an important part of the technical picture. AT200 closed at 23.4% and a fresh 34-month low. So while the market is still able to deliver rallies in the short-term, the longer-term picture continues to deteriorate. These are more signs of bear market action. Traders should still sell rallies. As an example of my creeping longer-term bearishness, I started reducing my equity exposure in longer-term investment accounts (I still intend to plow those funds back into the market on a steeper sell-off).

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The NASDAQ and the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) have yet to reach the dire positioning of the S&P 500 (SPY). Both tech laden indices are still well off their November lows. However, this achievement may mean little considering they breached their October lows. In other words, these indices may be headed for another lower low; such moves would be consistent with the bearish action unfolding on the failures at MA resistance and the associated lower highs.

The NASDAQ lost 3.1% and almost finished reversing the gains from the last low.

The Invesco QQQ Trust (QQQ) plunged again for a 3.3% loss and put its November low back into play.

The volatility index, the VIX, is supportive of an imminent bounce. The fear gauge closed with a gain from Thursday but never surpassed the intraday high for Thursday. I chose to accumulate put options on ProShares Ultra VIX Short-Term Futures (NYSE:UVXY).

The volatility index, the VIX, jumped 9.6% but never broke the intraday high from the previous day.

The iShares Russell 2000 (NYSE:IWM) remains worrisome. This small cap index ended the week at a closing 15-month low. The index too easily confirmed resistance at its 50DMA. Still, I have IWM in my sights for speculating on call options if the market flips oversold. I would target the rapidly declining 50DMA resistance for a rebound.

The iShares Russell 2000 ETF (IWM) closed at a new 15-month closing low with a 2.2% loss on the day.

Financials are in the same leaky boat as small caps. The Financial Select Sector SPDR ETF (NYSE:XLF) lost 1.9% with a new 15-month closing low. I have returned to betting against financials with a focus on the hapless Goldman Sachs (NYSE:GS). I took profits on my latest calendar put spread after GS punched right through my $180 strike price. I was hoping the short side would expire worthless and leave me positioned for the coming week with a fistful of long GS put options. GS closed the week at a 26-month low and finished reversing its entire post-election breakout. This is a notable end to an important Trump trade! Dare I say it is a sign of more to come? The arrows are certainly pointing that way…

The Financial Select Sector SPDR ETF (XLF) lost 1.9% with a new 15-month closing low.

Finally, at the time of writing, the currency markets are pointing to more weakness to start the week. The Guggenheim CurrencyShares Australian Dollar (NYSE:FXA) versus the Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)) confirmed a 50DMA breakdown. AUD/JPY is back in bearish territory and completes a net worsening picture for the stock market. I am sticking by my long position only because the fundamentals for the Australian economy looked good based on last month’s employment report (those of you who read and listen to market pundits are very familiar with this kind of rationale for stubborn bullishness!).

AUD/JPY continued to drop below 50DMA support. The recent lows are back in play.

h3 CHART REVIEWS/h3

Acacia Communications Inc (NASDAQ:ACIA)

Given all the drama with U.S. versus China trade relations, I am very surprised that ACIA has held up relatively well. Although it broke through 50DMA support, the stock is still holding onto a gain from the November gap-up. I want to go back to shorting this stock, but I do not like going after relatively strong stocks even in a weak tape.

Acacia Communications (ACIA) broke down below its 50DMA on a 6.3% loss.

Applied Materials (NASDAQ:AMAT)

I bought AMAT on the confirmation of the 50DMA breakout. Last week, the stock fell right back. This is another example of bear market type behavior. I was planning on adding shares to my call options, but now I am on hold.

Applied Materials (AMAT) lost 3.0% and confirmed a fresh 50DMA breakdown.

Advanced Micro Devices (NASDAQ:AMD)

I bought puts in AMD ahead of what I thought was an imminent break of 200DMA support. That break is likely still coming, but the puts already expired worthless. I should have waited for what was a perfect fade at 50DMA resistance.

Advanced Micro Devices (AMD) lost 8.6% on a continuation of a confirmed failure at 50DMA resistance. Support at its 200DMA is back in play.

Boeing (NYSE:BA)

After mistiming a bullish play on BA on the early November 50DMA breakout, I did not return with a new trade. Too bad – the stock has swung widely and wildly from breakout to support to resistance and back to support. If BA slips further, I will assume the stock has printed a sustained top.

Boeing (BA) confirmed a lower high in what still looks like an extended topping pattern. The stock sliced right back through its 50 and 200DMAs.

Best Buy Co Inc (NYSE:BBY)

BBY is almost finished reversing its breakout from November, 2017. The stock closed at a 52-week low and confirmed its downtrending 20DMA as resistance. BBY was one of the stronger stocks in the retail space, so its persistent weakness is one more confirmation of what I called the top in retail stocks back in October (too bad I did not quickly recognize even bigger implications at that time). I completed taking profits from a calendar put spread. I am eyeing BBY for a fresh bearish position.

Best Buy (BBY) plunged from its declining 20DMA ending the week at a new 52-week low. A complete reversal of its late 2017 breakout is back in play.

Baidu Inc (NASDAQ:BIDU)

BIDU is yet one more stock that neatly failed at resistance. BIDU’s 50DMA continues to define the downtrend. I bought a call option in the middle of the big December 4th sell-off in anticipation of a quick bounce back toward resistance. The stock now looks like it wants to break down below support.

Baidu (BIDU) lost 0.6% after sellers swiftly faded a healthy intraday gain. Recent lows are critical support.

Caterpillar (NYSE:CAT)

CAT gapped right into 200DMA resistance and sold off from there. It was one of several early tells that the post-G20 euphoria would not last. I made two fresh trades in puts. I took profits on the second tranche given the potential for CAT to hold support from its November low. Whether the stock breaks down further or rallies, I will be buying more puts on CAT in the coming days and weeks.

Caterpillar (CAT) lost 3.8%. The stock confirmed another 50DMA breakdown but it is still well off its recent lows.

DexCom Inc (NASDAQ:DXCM)

DXCM was my big fish of the year that got away. The stock continues to hold up relatively well through the various sell-offs, granted the stock is stuck in a 4-month trading range where the 50DMA is looming ever larger as resistance. I am watching closely for a potential test of 200DMA support. Per AT200, DXCM is part of a very small group of stocks still trading above this important support.

Dexcom (DXCM) lost 6.2% and confirmed a new 50DMA breakdown. An extended topping pattern may be forming.

Fluor Corporation (NYSE:FLR)

My attempt to buy FLR on the cheap after post-earnings weakness failed spectacularly. With the stock trading at levels last seen in early 2009, I am even more interested in buying for a long-term play; pessimism on this important infrastructure company is extremely high. I am in NO rush to buy though.

Fluor (FLR) lost 2.2% to close at a more than 9 1/2 year low.

Written By: Dr. Duru