AT40 = 16.3% of stocks are trading above their respective 40-day moving averages (DMAs) – 3rd day of oversold period following 4-day oversold period
AT200 = 33.6% of stocks are trading above their respective 200DMAs
VIX = 19.9
Short-term Trading Call: bullish
Commentary
Friday was a day with a head-spinning mix of reassuring and ominous signals. Some important stocks lost big and/or suffered ominous fades. Some indices continued nasty slides or suffered new breakdowns. Two very important stocks delivered somewhat reassuring gains.
In the end, the S&P 500 (SPY (NYSE:SPY)) ended the day flat. AT40 (T2108), the percentage of stocks trading above their 40-day moving averages (DMAs), closed with a small gain after fading intraday from the oversold threshold (20%). AT200 (T2107), the percentage of stocks trading above their 200DMAs, closed with a small loss after fading from a downtrend line.
The computers and their technically-oriented programmers seem to be in control of the trading action. For the second straight trading day, the S&P 500 (SPY) managed to close exactly on top of its 200-day moving average (DMA).
The S&P 500 (SPY) lost of all of one point in what is becoming a clear pivot around its 200DMA.
It is always good to see the S&P 500 holding critical long-term support. The NASDAQ was not so fortunate. After early gains, the tech-laden index faded to close under its 200DMA for the second straight day. At least the NASDAQ is still well off its recent lows. The Invesco QQQ Trust (QQQ) faded but closed flat and above 200DMA support.
The NASDAQ put its recent low back into play with a second straight close below its 200DMA.
The Invesco QQQ Trust (QQQ) ended the day flat after a fade from intraday highs. Support at its 200DMA is still intact.
Small-caps were a locus of selling again as the iShares Russell 2000 ETF (IWM) faded from a gain to a 1.1% loss. The close finished a reversal of Tuesday’s promising gain. The close all kept intact tight resistance from the upper bound of the lower Bollinger Band (BB) channel.
The iShares Russell 2000 ETF (IWM) lost 1.1% and just barely made a new 7-month closing low.
The market delivered a resounding applause for earnings from Proctor and Gamble (PG). PG gained a healthy 8.8% and closed at a 9-month high. This rally and breakout was enough to push the Consumer Staples Select Sector SPDR ETF (NYSE:XLP) to a 2.3% gain. I took this opportunity to take small profits on my XLP call options. I am a bit skeptical of the prospects for XLP to break out above the recent highs in the short-term. More importantly, the risk/reward for holding out for more gains through a potential cycle of churn did not look attractive.
The Consumer Staples Select Sector SPDR ETF (XLP) gained 2.3% on a 50DMA breakout.
The volatility index, the VIX, signaled a market stalemate by ranging from high to low within the previous trading day’s high and low and closing the day down less than 1%.
The volatility index, the VIX, could not hold a small gain and instead closed down less than 1%.
The market is now in its third oversold day. Given this oversold period is separated from the previous 4-day oversold period by just one day, I am think about this period as an extended oversold period. In other words, the one-day push marginally above the oversold threshold was more noise than signal. As a reminder, the longer the market stays oversold and/or the more frequently it returns to oversold conditions, the more bearish the market gets. Such behavior demonstrates the power of sellers over buyers. The chart below suggests that a 7-day oversold period is right on the edge of deteriorating projections and expectations. If an oversold period extends to 10 days and beyond, I expect the S&P 500 to emerge from the oversold period with a loss. The S&P 500 has so far lost 1.5% this oversold period.
The performance of the S&P 500 for a given oversold duration (T2108 below 20%).
Earnings season revs up this coming week. I expect a lot more churn and big swings from bullish to bearish sentiment.
CHART REVIEWS
Apple (NASDAQ:AAPL)
AAPL faded from its high of the day and its 50DMA, but the stock still managed to gain 1.5%. For Friday at least, AAPL looked like a refuge from widespread selling in the tech sector.
Apple (AAPL) rallied to a 1.5% gain but faded from its 50DMA resistance.
Disney (DIS)
Disney (DIS) is another stock trying its best to cheer up the market. DIS gained a healthy 2.3% on Friday to close at a near 3-year high. I guess I will not get another buy-the-dip opportunity in DIS anytime soon! This bullish, counter-market behavior is quite ironic given the heavy dose of skepticism that weighed on DIS earnings after earnings primarily based on the trials and tribulations at ESPN and the persistent yawning at a series of blockbuster hit movie releases. I am even wondering whether money is moving from highly over-valued NFLX shares to under-valued DIS shares (pairs trade anyone?).
Disney (DIS) not only broke out to a new 2018 high, but also made a near THREE year high!
Advanced Micro Devices (NASDAQ:AMD)
After AMD went parabolic in late August, I thought the stock would form a classic topping pattern. Consistent with the stubborn bullishness of the times, AMD instead went on to gain another 28% before finally topping out. Friday’s 11.2% plunge finally filled the gap up from that August 27th parabolic move. AMD may have finally confirmed its top given the outsized loss also formed a 50DMA breakdown. The plunge also happened a day after Cowen reiterated an outperform rating along with boosting its price target from $30/share to $33/share. Earnings after the market closes on October 24th should have the final say.
Advanced Micro Devices (AMD) followed through on a topping pattern with a huge 11.1% downdraft and fresh 50DMA breakdown.
Lam Research Corporation (NASDAQ:LRCX)
LRCX reported earnings that seemed to finally turn the tide for the semiconductor sector. LRCX gapped up 5.0% but sellers took over from there. The celebration turned into a “gap and crap” which closed LRCX back under its downtrending 20DMA. Sellers finished closing the gap the next day.
Lam Research Corporation (LRCX) quickly gave back its post-earnings gap up and gains. The downtrending 20DMA holds as resistance.
Nvidia (NVDA)
NVDA has finally succumbed to the spreading weakness in the sector. The stock lost 4.3% on Friday and closed at a 5+ month low. The stock also confirmed resistance at its 200DMA…a very bearish turn of events.
Nvidia (NVDA) confirmed 200DMA resistance with a 4.3% loss and a 7 1/2 month low.
Caterpillar (NYSE:CAT)
In my previous Above the 40 post, I wrote about CAT sitting at a critical juncture. On Friday, CAT took the bearish road to resolve that juncture. On the heels of a 3.3% loss, CAT made a new 2018 closing low and closed below the gap up from October earnings. CAT is now set up for further losses. I interpreted this bearish action as an ominous sign for industrial stocks especially in light of the post-earnings 200DMA breakdown for Grainger (GWW) earlier in the week and the implosion of United Rentals (URI) on Thursday. Accordingly, I took a pre-earnings position in put options on Illinois Tool Works (NYSE:ITW).
Caterpillar (CAT) lost another 3.3% in a bearish move that pushed the stock to a 52-week.
United Rentals (URI)
URI ended the week near a 14-month low on the heels of a massive post-earnings sell-off. The stock gapped down and lost 15.0% on Thursday. Next support lies between $101/share and $107/share where URI churned out a bottom for 2017.
Post-earnings losses for United Rentals (URI) finished wiping out the stock’s entire breakout from August, 2017.
General Electric (NYSE:GE)
Not even the renewed interest in GE from a CEO change could keep the stock immune from the fresh pressures on industrial stocks. The stock recovered from a gap and crap that day and soon made a fresh 50DMA breakout. The stock faded from 200DMA resistance and now finds itself struggling to hold onto another 50DMA breakout.
General Electric (GE) neatly reversed all of its incremental gain from the big gap up on October 1st. It now looks like a fresh trading channel is emerging.
Atlassian Corporation PLC (TEAM)
The shine on cloud/SaaS stocks is officially tarnished. TEAM ran into a post-earnings buzzsaw that took the stock down 14.3% on extremely high trading volume in a move that effectively confirmed 50DMA resistance. With 200DMA support in play the stock is set to finish reversing its gains from July earnings.
Atlassian Corporation PLC (TEAM) essentially confirmed 50DMA resistance with a 14.3% sell-off and a press into the July post-earnings gap up.