AT40 = 48.0% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 53.1% of stocks are trading above their respective 200DMAs
VIX = 14.9
Short-term Trading Call: cautiously bullish
Commentary
Almost a month ago, the stock market was in a similar technical position to the one it is in now.
At the time, I talked about a shaky market that had become over-stretched to the downside. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed at 47.0%, its lowest close since early May. At the end of last week, AT40 closed at 48.0%. This time, AT40 has declined 5 out of the last 6 days. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, closed the week at 53.1% almost exactly the same as its 53.0% close on August 15th. At these levels, my favorite technical indicators are over-extended to the downside relative to behavior since May.
AT40 (T2108) has quickly returned to recent support. A break below 40% or so could lead to a loner overdue return to truly oversold levels.
Whether the major indices are ready to bounce as a result of AT40 and AT200 hitting important support levels is up for interpretation. Last month, my call for a rebound was made easy by the S&P 500 (SPY (NYSE:SPY)) bouncing neatly off the 2800 support level. On Thursday, the S&P 500 bounced neatly off its uptrending 20DMA, but proceeded to FADE back to its 20DMA support on Friday. The index is thus locked in a neat and tidy mini-downtrend from its all-time high. I see no natural point of bounceback from Friday’s close.
The S&P 500 (SPY) is struggling to hold onto its uptrending 20DMA support.
The NASDAQ and the Invesco QQQ Trust (QQQ) are already below their respective 20DMAs and are approaching 50DMA support – bad signs for the prospects of the S&P 500 holding its 20DMA support line.
The NASDAQ failed to hold its uptrending 20DMA support. 50DMA support is in play.
The Invesco QQQ Trust (QQQ) is close to a critical test of uptrending 50DMA support.
The volatility index, the VIX, has an upward bias again. However, the inability to press through the 15.35 pivot for two days straight makes the VIX look a little less ominous.
The volatility index, the VIX, continued to grind higher this week. Volatility faders were able to press the fear gauge back below the 15.35 pivot.
The Australian dollar (FXA) was a big disappointment last week. I was fortunate to close out my long AUD/JPY at a small profit on the last part of its bounce. I soon decided to get right back into the fray with the bullish monetary policy announcement from the Reserve Bank of Australia (RBA) still weighing favorably on my mind.
AUD/JPY broke down this week to a new 10-month low. The move may be part of a renewed downtrend.
Taking all these signals together I switched the short-term trading call from neutral to cautiously bullish. I will be quite surprised if Friday turns out to be the bottom of a short-term dip, but I also did not want to wait until Monday to make a bullish play. I accumulated two tranches of SPY call options on Friday. I will spend the coming weak buying weakness more and more aggressively. In the background, I have a renewed hedge in call options on ProShares Ultra VIX Short-Term Futures (UVXY), my on-going put options in Caterpillar (NYSE:CAT), and I added put options on Boeing (NYSE:BA) and Whirlpool (NYSE:WHR).
CHART REVIEWS
Amazon.com (NASDAQ:AMZN)
AMZN’s trip to the $1 trillion club was quite brief: the call for a pullback was even more timely than I expected. The stock fell all the way back to $952B of market cap at Friday’s close. I made a play for a bounce with a one week calendar spread with the short side expiring last Friday. On further weakness, I will likely cap the play by selling an out-of-the-money call option (thus leaving the door open for a strong close of the week).
Amazon.com (AMZN) exhausted buyers at and above its upper Bollinger Band for 4 straight trading days. The subsequent pullback is trying to find support at the uptrending 20DMA.
Alibaba (NYSE:BABA) Group Holding Limited (BABA)
China-related stocks have mightily struggled since a June swoon. BABA fell from an all-time high that looked like a breakout from an extended trading range. So, BABA looked like a giant amid weakness. Last week, BABA finally broke through the lower bound of its trading range. I am not sure how the news of Chairman Jack Ma’s retirement will impact the stock, but the timing seems unfortunate from a technical perspective. I was itching to buy BABA ahead of November’s “Single’s Day” in China. Now I will wait for BABA either to get over-extended to the downside and/or recover its previous support level.
Alibaba Group Holding (BABA) this week broke through critical support levels and closed this week at a 13-month low.
BHP Billiton (LON:BLT) Limited (BHP)
BHP fell almost 10% last week. I sold my put options at least two days too early!
BHP Billiton (BHP) confirmed a 200DMA breakdown and approached its low for the year.
Chipotle Mexican Grill (NYSE:CMG)
CMG is making a convincing bid to hold support at its 50DMA. I bought a call option on an intraday dip on Friday. I decided to take profits into the close despite my new bullishness on the market. I will be looking for the next entry point.
Chipotle Mexican Grill (CMG) held support at its 50DMA.
Goldman Sachs (NYSE:GS)
Last month’s 50DMA breakdown looked like a resumption of weakness for GS. Instead, the stock quickly bounced back. After a convincing rejection from 200DMA resistance, GS is right back at its 50DMA support. If GS bounces from here, I will assume the stock is finally bottoming with higher lows and higher highs.
Goldman Sachs (GS) returned to its losing ways after failing at 200DMA resistance. Now it must hold 50DMA support.
Netflix (NASDAQ:NFLX)
I may have been premature in thinking NFLX printed a bottom with its late August sprint higher. I bought a calendar call spread with the stock trying to break free of 50DMA resistance. NFLX instead decided to plunge off its 50DMA in a move that makes this moving average look like convincing resistance.
Netflix (NFLX) confirmed resistance at its 50DMA, making its topping pattern look even more ominous.
Impinj (PI)
I kept watching PI for a new entry point, but the search is on hold now. The stock is stuck in “no-man’s land” with the pending resolution of financial compliance issues.
The stock is trying to hold 200DMA support soon after a convincing rejection at 50DMA resistance. The stock gapped down below its 200DMA on August 3rd after issuing upside earnings guidance. The stock soon bounced despite PI announcing a delay in filing its required 10Q. I will now stay on the sidelines until at least the time PI gets back into compliance.
The comeback for Impinj (PI) may be coming to an end after its 50DMA provided effective resistance. Can the stock continue to pivot around its 200DMA?
Red Hat (RHT)
I keep checking on RHT from the “corner of my eye.” RHT’s implosion in June looked like it could signal the end of the impressive upward momentum in so many software stocks. That topping impact was short-lived, and RHT itself bottomed in another week. Now the stock looks like it is conveniently consolidating right as its 50 and 200DMAs converge in a support formation. I am a buyer on a new post-earnings high.
Red Hat (RHT) stopped going down a week after its huge post-earnings loss. The stock is now churning as its 50 and 200DMAs converge in an attempt to provide support for the recovery.
Toll Brothers (TOL)
TOL is still the latest poster child of investor skepticism on home builders. The stock closed Friday at a new post-earnings low and looks ready to finish reversing its surprising post-earnings gap up last month.
Toll Brothers (TOL) closed at a new post-earnings low and below 50DMA support. It now looks poised to finish closing its gap up.
Twitter (TWTR)
While CEO Jack Dorsey stood up well to the pressure of Congressional testimony, his stock did not. TWTR closed the week with a bearish 200DMA breakdown. I have already decided to stick by TWTR, but I am in no rush to accumulate a larger position under these circumstances. I am fine waiting for a bigger discount from the market…assuming one is coming.
Twitter (TWTR) confirmed a 200DMA breakdown and put its April low into play.
Workday (WDAY)
WDAY suffered a big post-earnings disappointment. Like RHT before it, the loss looks like a momentum-stopper for the sector right now. Indeed, many SaaS (Software As A Service) stocks sold off in WDAY’s wake. I am keeping a closer eye on WDAY for further clues on market sentiment.
Workday (WDAY) tumbled sharply off its all-time high in the wake of poorly received earnings. The 20DMA provided resistance over two days of recovery.
Zillow Group (Z)
Z suddenly dropped to a 7-month low last week. With no apparent news to explain the renewed weakness, I decided to hold onto my puts (which are left over from my RDFN long vs short Zillow trade) for a little while longer in case this sudden renewal of weakness is indicative of more to come.
Zillow Group (Z) broke down to a 7-month low and looks poised for a fresh round of selling.
Tesla (NASDAQ:TSLA)
The “$420 or bust” trade in TSLA looks like it is heading toward bust.
First there is the now well-known and infamous stunt of CEO Elon Musk smoking weed (and drinking alcohol) on a comedian’s podcast.