Above The 40 – Oversold Chronicles: Stock Market Delivers Major Reprieve For The Post-Trump Reversal

AT40 = 6.5% of stocks are trading above their respective 40-day moving averages (DMAs) (oversold day #7)
AT200 = 11.0% of stocks are trading above their respective 200DMAs
VIX = 30.4 (down 15.7%)
Short-term Trading Call: bullish

Commentary

Pick your favorite catalyst or explanation. I am sure there is good news (or the absence of bad news) out there to serve as a fortuitous launchpad to explain today’s tremendous day-after-Christmas rally. For example, there is President Trump’s Christmas Day reassurance that U.S. companies are a great buy:

“I have great confidence in our companies. We have companies, the greatest in the world, and they’re doing really well. They have record kinds of numbers. So I think it’s a tremendous opportunity to buy.”

Reuters, December 25, 2018

Whatever the reason, the rally seemed to validate my conclusion that it would not take much to spark a sharp rally I was specifically talking about government action, so I am leaning towards Trump’s proclamation as helping to grease the buying triggers (I somehow missed that news until Wednesday morning). However, the rally was not a straight shot. The stock market first gapped higher, sellers stepped in as has been their habit, and after grinding lower for almost 90 minutes, the buyers took over control for the rest of the day. The Post-Trump Reversal received a major and resounding reprieve. Individual stocks and whole indices recorded eye-popping gains.

The S&P 500 (SPY) gained a whopping 5.0%. It was a vertical move reminiscent of the wild one-day stock market comebacks during the 2008-2009 financial crisis. Suddenly, the S&P 500 December performance to-date is “only” down 10.6% and year-to-date the index is down 7.7%. Just three more trading days to get back to even for 2018 (2673.21 currently happens to neatly coincide with the rapidly declining 50DMA).

The S&P 500 (SPY) eliminated 2 days of losses with today's 5.0% gain. The upper bound of the lower Bollinger Band channel is directly in play.

The S&P 500 (SPY) eliminated 2 days of losses with today’s 5.0% gain. The upper bound of the lower Bollinger Band channel is directly in play.

The Nasdaq and the Invesco QQQ Trust (QQQ) jumped to 5.8% and 6.2% gains. Again, this kind of trading action is straight out of the financial crisis playbook.

The NASDAQ almost wiped out three straight days of losses with its 5.8% gain. The upper bound of the lower Bollinger Band channel is next up as critical resistance.

The NASDAQ almost wiped out three straight days of losses with its 5.8% gain. The upper bound of the lower Bollinger Band channel is next up as critical resistance.

The Invesco QQQ Trust (QQQ) jumped an incredible 6.2% with a strong finish at the intraday high.

The Invesco QQQ Trust (QQQ) jumped an incredible 6.2% with a strong finish at the intraday high.

The volatility index, the VIX lost 15.7% as fear cooled off enough to let the market soar.

The volatility index, the VIX, was mostly downhill for the day. It closed with a 15.7% loss and ended a streak of six straight trading days closing at or near its upper Bollinger Band.

The volatility index, the VIX, was mostly downhill for the day. It closed with a 15.7% loss and ended a streak of six straight trading days closing at or near its upper Bollinger Band.

Even with all these dramatic moves, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), only moved from a rock-bottom 3.6% to 6.5%. The technical damage to the mark runs deep indeed. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, managed to push into double digits. AT200 moved from 8.0% to 11.0%. The S&P 500 is now down 5.1% since closing in oversold territory on December 14th.

Per the chart below, if the oversold period ended today after its 7th day, the performance of the S&P 500 would be at the lower extremes of historical performance shown by the blue circles. There are three separate paths from here for ending the oversold period according to the projections shown by the red bubbles: 1) a rally in the next three trading days or so to get the S&P 500 close to a flat performance for the oversold period, 2) a lot of churn for as many as 10 more trading days where the downtrending 40DMAs fall low enough for a small rally to push stocks quickly over resistance, or 3) a very extended and historic oversold period that stretches beyond 17 total trading days. The first case sets up the market for a big January fade as the market’s remaining sellers seize the opportunity of higher prices. The second case keeps the market guessing and in suspense until the December jobs numbers are released and perhaps until companies begin releasing early earnings surprises. The third case is a bear market extreme that would be consistent with all the extremes of this month.

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Full disclosure: long SSO, long CAT calendar put spread, long QQQ puts; long AAPL calls, calendar call spread, and shares; long AMZN put spread and calendar call spread, long GLD, long ROKU shares ...

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