Right Back Where The Stock Market Started, But Worse

AT40 = 25.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 23.4% of stocks are trading above their respective 200DMAs (just off a 32-month low)
VIX = 23.2 (as high as 24.7)
Short-term Trading Call: cautiously bullish

Commentary
I am surprised the stock market has yet to close in oversold conditions. AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped to 25.5%. Its lowest close at the end of November’s sell-off was 23.4%. It is too much to expect that the stock market will once again bounce from these levels, but it just so happens that the S&P 500 (SPY) also closed even with that November low. 

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

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.

Above the 40 (October 24, 2018) – The Second Derivative Is Here for the Stock Market (New Oversold Extremes)

This bearishness played out in the form of two failed rallies which both got rejected from 50 and/or 200DMA resistance levels. The first rally started after 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).

The NASDAQ and the Invesco QQQ Trust (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 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 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 (UVXY).

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

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

The iShares Russell 2000 ETF (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.

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Disclosure: Long QQQ calls, long AUD/JPY, long UVXY puts, long GM calls, long INTC calls, long USO calls, long WYNN calendar call spread, long GLD, long BIDU call, short TSLA call spread, long TSLA ...

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