drduru

A Bearish Divergence Intrudes On the Stock Market's Surface Calm

SPCFD:SPX   S&P 500 Index
AT40 = 48.0% of stocks are trading above their respective 40-day moving averages ( DMAs )
AT200 = 54.7% of stocks are trading above their respective 200DMAs
VIX = 11.8
Short-term Trading Call: neutral (downgrade from cautiously bullish )

Commentary
I am not even going to try to explain why emerging markets and trade-sensitive stocks started this week so well in the wake of the double whammy of increased tariffs between U.S. and Chinese trade and a surge in U.S. long-term bond yields. Explanations might require trite and worn hindsights like “the market has already priced in the bad news” or “the bad news is not as bad as the market feared.”

Instead, I am watching closely the emergence of another bearish divergence.

The S&P 500 ( SPY ) made a marginal gain to close just under its all-time high. The previous day, the index bounced neatly off uptrending 20DMA support. Yet, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages ( DMAs ), failed to follow. AT40 even sank on Wednesday to close at 48.0%, right back to its recent lows.

In recent posts, I have described the market as “stretched” when AT40 traded at these levels. Both times I traded SPY call options profitably. THIS time, I am watching warily as the divergent paths of AT40 and the S&P 500 , small as they are, created a bearish divergence. With the volatility index, the VIX , breaking hard below 12 again, I am expecting a downside resolution to the bearish divergence: complacency is getting back to an extreme and the VIX has not recently spent much time at these low levels. I will be looking to reload on call options on ProShares Ultra VIX Short-Term Futures ( UVXY ). If I am wrong, then the VIX will likely sink further into extremely low volatility (ELV) territory (below 11). Such a move would force me to evaluate whether to make some new long plays. In the meantime, I downgraded my short-term trading call back to neutral in deference to the increased downside risk for the stock market.
Thanks for the explanation. I'm going to start backing out my position.
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drduru altinAdam
@altinAdam, which position are you going to back out of?
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