Above The 40 – An Unenthusiastic Rebound For The Stock Market From Stretched Conditions

I flipped cautiously bullish last week. As I suspected, the prospects for a bounce were not as good as the previous time the stock market was similarly over-stretched. The S&P 500 (SPY) gained 1.1% in a week of choppy, sometimes slow-motion, trading action. On Monday, the index trickled higher into its short-term downtrend line. It gapped down on Tuesday only to bounce right back for a breakout. On Thursday, the index gapped up. The index stopped short of its all-time high, and I decided to take profits on my SPY call options. While the 20-day moving average (DMA) held well as support, I did not see enough strength to justify the risk of hanging around much longer (calls had an expiry this coming Friday). I will recharge the trade on the next dip to or toward the 20DMA (the dotted line in the graph).

The S&P 500 (SPY) found support at its 20DMA to rally back toward the all-time high set at the end of August.

The S&P 500 (SPY) found support at its 20DMA to rally back toward the all-time high set at the end of August.

The NASDAQ and the Invesco QQQ Trust (QQQ) were a little more definitive than the S&P 500 in their bounces away from 50DMA support. The 20DMA looks ready to become support for the current upswing.

The NASDAQ pivoted around its 20DMA in a wide range before breaking out of the latest churn. The intraday lows found support above the 50DMA.

The NASDAQ pivoted around its 20DMA in a wide range before breaking out of the latest churn. The intraday lows found support above the 50DMA.

QQQ swung widely below its uptrending 20DMA while finding support at its uptrending 50DMA. The week ended with a breakout holding.

QQQ swung widely below its uptrending 20DMA while finding support at its uptrending 50DMA. The week ended with a breakout holding.

While the major indices tentatively reached higher, the volatility index, the VIX, definitively imploded all over again. The VIX fell every single day of the week. Friday’s drama beat Tuesday’s drama by swinging all the way from above Thursday’s intraday high to a close at a 3-week low. The overall swift return to complacency supports a bullish bias for the coming week even with the renewed headlines generating trade war angst.

The volatility index, the VIX, rapidly reversed the previous week's angst-filled trading.

The volatility index, the VIX, rapidly reversed the previous week’s angst-filled trading.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, sealed my impression of a tentative week. My favorite technical indicator swung around from lows to highs but barely made any progress: it closed the previous week at 48.0% and ended the week at 51.6%. AT40 did little to confirm the stock market’s bounce. The coming week could then hold good upside potential as loitering stocks get moving. The alternative scenario is a break of the 45% level that has held as support since late April. Such a move would require the kind of selling that creates oversold conditions (AT40 below 20%). Needless to say, I am still holding my trading hedges.

CHART REVIEWS
While AT40 exposed the lack of enthusiasm in the overall stock market rebound, there are of course, as always, dramatic stock moves of interest.

Advanced Micro Devices
When the herd is right, it is a powerful sight. The upward surge in AMD continues apace much to my surprise. Per my trading strategy, I jumped into AMD call options once the blow-off topping action was invalidated. With analysts continuing to chase AMD with upgrades and bullish commentary, stubbornly betting with the herd has become the clear winner on AMD.

Advanced Micro Devices (AMD) continues to barrel upward through its upper Bollinger Band (BB) channel.

Advanced Micro Devices (AMD) continues to barrel upward through its upper Bollinger Band (BB) channel.

BHP Billiton 
I used the latest sell-off in commodities to finally switch around my BHP vs Rio Tinto (RIO) pairs trade. The latest wave of selling in BHP reached a crescendo after the stock gapped down well below its lower Bollinger Band (BB). Subsequent buying interest was strong enough to close BHP with a gain on the day. I bought call options near the close of that day. The stock has been off to the races ever since. Despite this show of strength off the lows, I still think of the commodity space as overall weak and suggesting that the global economy is not well.

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Disclosure:Full disclosure: long BHP calls, long RIO puts, long UVXY calls, short FB, long INTC calls, long MU shares and calls, long SNAP 

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