Above The 40 – S&P 500 Breakdown Confirms Earlier Bearish Signals

AT40 = 48.3% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 50.4% of stocks are trading above their respective 200DMAs
VIX = 17.9
Short-term Trading Call: bearish

Commentary

The trading action this week confirmed the bearish change in trading that occurred when AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), was quickly ejected from the last overbought period. Recall that shift in momentum also came with the Fed’s last pronouncement on monetary policy; the S&P 500 (SPY) has faltered after all four Fed meetings this year with a quick rebound and recovery coming only in the May meeting.

AT40 closed yesterday at 48.3%; it closed last week at 63.1%. The rapid decline over the last 2 of 3 days means the selling is getting a bit extreme, making the market prone to a sharp rebound and relief rally on even the slightest whiff of good news. I am maintaining a bearish short-term trading call, especially given the S&P 500 (SPY) cracked 50DMA support. On Monday, buyers were able to save the S&P 500 from a 50DMA breakdown. Not this time.

The S&P 500 (SPY) lost 0.9% on its way to slicing through 50DMA support and closing slightly below its lower-Bollinger Band (BB).

The S&P 500 (SPY) lost 0.9% on its way to slicing through 50DMA support and closing slightly below its lower-Bollinger Band (BB).

Yet another test of uptrending 200DMA support is in play for the S&P 500. Note well that the lower-Bollinger Bands (BBs) are starting to point downward.

Last week it was the S&P 500 cracking its uptrending 20DMA before the tech-laden indices. This week, the drama is around the 50DMA. While the S&P 500 failed 50DMA support, the Nasdaq and the Invesco QQQ Trust (QQQ) are still trying to hold this critical line of support. On Monday, buyers rushed in just above the 50DMAs right on schedule. Yesterday, the indices closed at their lows of the day making support look particularly precarious.

The NASDAQ tumbled 1.5% right to its uptrending 50DMA support.

The Nasdaq tumbled 1.5% right to its uptrending 50DMA support.

The Invesco QQQ Trust (QQQ) dropped 1.4% to close just above its 50DMA support.

The Invesco QQQ Trust (QQQ) dropped 1.4% to close just above its 50DMA support.

The perceived “safety” of tech and small cap stocks came to a conclusive end with iShares Russell 2000 ETF (IWM) losing 1.5% in parallel with the steep losses in tech stocks. IWM is in better shape though with still a bit of distance between Wednesday’s close and 50DMA support.

The iShares Russell 2000 ETF (IWM) is tumbling sharply off its high perch.

The iShares Russell 2000 ETF (IWM) is tumbling sharply off its high perch.

Source: TradingView.com

The volatility index, the VIX, gained 12.5% to close well above the 15.35 pivot again. The 2-month closing high confirms the bottoming I noted last week and underlines a change from complacency to growing fear. However, with the VIX closing with a 25.8% gain on Monday, history suggests that this is the beginning of the end of latest cycle of fear. At its high on Monday, the VIX gained over 40%.

1 2 3 4
View single page >> |

Disclosure: Long USCR, long NFLX calendar put spread, short AUD/JPY, long CPB call spread and puts.

Follow Dr. Duru’s commentary on financial markets via  more

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.