AT40 = 49.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 55.6% of stocks are trading above their respective 200DMAs
VIX = 10.4 (volatility index)
Short-term Trading Call: cautiously bullish

Commentary
Here we go again.

Last week, the S&P 500 slipped but did not fall off the edge. In my “Above the 40” post describing the trading action, I recounted the multitude of times this year that AT40 (T2108) – the percentage of stocks trading above their respective 40-day moving averages (DMAs) – faded from overbought conditions and the nature of the subsequent selling. AT40 has faded again, and again the nature of the selling is different from past episodes. The S&P 500 did not respond to the first fade, but took a quick intraday dive on the same day as the second fade. AT40 has continued to slide since then, yet the S&P 500 is holding firm.

In fact, AT40 has slipped all the way from 66.8% to 49.5% while BOTH the S&P 500 and the Nasdaq have held their ground; ditto for the PowerShares QQQ Trust (QQQ) which has a chart similar to the Nasdaq. It appears small caps and mid-caps are suffering the brunt of the current selling pressure.

The S&P 500 took a spill last week but, in a familiar scene, sellers have failed to come up with follow-through.

Like the S&P 500, the Nasdaq has fought off the sellers since last week’s quick spill. Notice the uptrending 20DMA holding support and the Bollinger Band (BB) squeeze starting to form.

The iShares Russell 2000 ETF (IWM) has suffered selling pressure ever since notching a new all-time high last week. The uptrend formed by the 50DMA broke, but IWM is still clinging to a series of higher lows and higher highs.

The chart for the SPDR S&P MidCap 400 ETF (MDY) is very similar to IWM.

The danger level as measured by the volatility index, the VIX, has barely come off the recent 24-year closing low and all-time intraday lows.

The volatility index, the VIX, jumped off historic lows last week, but has since been stuck around its own 50DMA.

With volatility so low and AT40 sinking into a bearish divergence with the S&P 500, I decided the time was ripe to get back into buying call options on ProShares Ultra VIX Short-Term Futures ETF (UVXY). Since I am keeping my short-term trading call at “cautiously bullish,” I consider this trade as a hedge and NOT a bet on a big bearish outcome. In other words, I will be treating dips in the short-term as buying opportunities and not just confirmation of my earlier claim that the S&P 500 has precious little additional upside from here for the next few months. My UVXY call option expires in 2 weeks. Over the next week I will add to it if it gets cheaper. I currently plan to continue this roughly 2 week cycle through October.

With the major indices holding their ground so far, AT40 could swing toward oversold levels very quickly without much additional selling. In other words, I find it difficult to get bearish under these conditions. Come September, I will likely change my tune. Recall that my last projection for a significant pullback timed such a move for September. The analysis was based on the surprisingly (short-term) bullish implications of extremely low volatility.

Now some drama in individual stocks…

U.S. Steel (X)
As I expected last week, X sellers have pushed the stock into a retest of 50DMA support. I like a speculative buy here. I will even tolerate a small breach of the 50DMA under the assumption that the July low will hold.

U.S. Steel (X) quickly reversed impressive post-earnings gains. The stock is now struggling to hold onto its recovery-driven uptrend.

AMC Entertainment Holdings (AMC)
Investors trashed AMC after it reported earnings this week. I considered a buy based on the close so far below the lower-Bollinger Band (BB), but the all-time lows dissuaded me. In after hours AMC released news that it authorized a $100M buyback. Suddenly, this stock looks like low-hanging fruit for a major reversal and recovery. I will be making a move to buy quickly. With shorts comprising 19% of the float, I think there is plenty of rocket fuel here.

AMC Entertainment (AMC) plunged to an all-time low after posting disappointing earnings. A bottom MAY be in the works as AMC printed a hammer-pattern ahead of news of a major stock buyback.

Sysco Corporation (SYY)
“Amazon Panic” is receding fast for many stocks. SYY is a stock I pounced on in the immediate wake of an Amazon Panic by first buying shares (which I have since sold for a profit) and then selling a put option. I am likely to keep holding the put option through at least the next earnings report (August 14th) at which time I expect a lot more premium to implode.

Sysco Corporation (SYY) recently finished a reversal of Amazon Panic but now is struggling to break through converged resistance from its 50 and 200DMAs.

Kroger (KR)
Like SYY, KR recently overcame Amazon Panic. However, the stock has an even bigger challenge in making a dent on its initial post-earnings loss. I see lots of potential upside, so I am going to keep holding the put option I sold short. KR made such a clean bottom that I never got the opportunity to accumulate a larger position at cheaper prices.

Kroger (KR) made a classic bottom with a surge off intraday lows that were well below its lower-Bollinger Band (BB). The stock now faces a major hurdle against its downtrending 50DMA.

Dominos Pizza (DPZ)
DPZ put on a technical clinic. The stock bounced near perfectly off the 200DMA support that I noted last week and delivered my second best trade of the week. I locked in profits on my call options with the stock up another 2.5% on the day and ended up leading yet more money on the table as DPZ closed with a 3.1% gain (an 8.2% gain since the 200DMA test).

Dominos Pizza (DPZ) bounced off 200DMA support on a surge of buying volume. A test of 50DMA resistance looks very likely for the near future.

Apple (AAPL)
AAPL was my best trade of the week and one of my best of the year (similar in magnitude to the trade on Whole Foods Market (WFM)). I returned to trading the stock from the bullish side just in time. My latest tranche started as a pre-earnings trade. A bit surprised by the continued weakness on Monday, I decided to triple down on the position (from one to three call options): the previous week’s sell-off still looked overdone to me. I managed to grit my teeth and hold even as the position soared back to even going into the pre-earnings close. AAPL gapped up around 6% the next day, and I quickly locked in my profits. Sellers have since taken the stock through the previous all-time high as all the usual suspects have stumbled in recent days. Note that AAPL’s gap up is exaggerated by the near panic selling the stock experienced going into earnings. That pullback made a post-earnings surge all the more likely.

Apple (AAPL) jumped to a post-earnings all-time high but sellers have dominated the action ever since. I am looking for the next buying entry – perhaps around $153 which is the lower part of the upper-BB channel.

Cognizant Technology (CTSH)
I hoped that CTSH could become more than a quick trade, and the stock has delivered nicely. Its stellar performance has encouraged me to keep holding five months and running. CTSH performed well after reporting earnings. The stock cleanly reversed the previous day’s loss by bouncing off 50DMA support and printing a bullish engulfing pattern.

Investors in Cognizant Technology (CTSH) got a little nervous ahead of earnings and took the stock off its all-time high. The stock now looks poised for a fresh run-up.

Next up, the U.S. jobs report!

“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.

Active AT40 (T2108) periods: Day #370 over 20%, Day #184 over 30%, Day #51 over 40%, Day #1 under 50% (underperiod ending 19 days over 50%), Day #7 under 60%, Day #130 under 70%

Daily AT40 (T2108)

Black line: AT40 (T2108) (% measured on the right)

Red line: Overbought threshold (70%); Blue line: Oversold threshold (20%)

Weekly AT40 (T2108)

*All charts created using freestockcharts.com unless otherwise stated

Be careful out there!