Above the 40 (October 18, 2018) – A Second Oversold Period Gives 200DMAs A Fresh Challenge
October 19, 2018 by Dr. Duru
AT40 = 15.8% of stocks are trading above their respective 40-day moving averages (DMAs) – 2nd day of oversold period following 4-day oversold period
AT200 = 33.9% of stocks are trading above their respective 200DMAs (up 6 percentage points)
VIX = 20.1 (15% increase)
Short-term Trading Call: bullish
Commentary
The 200-day moving averages (DMAs) still feature prominently in the market’s now protracted struggle to slog through oversold trading conditions. Almost like magic, the S&P 500 (SPY) closed the day right on top of its 200DMA after a 1.4% loss.
{At the intraday low, the S&P 500 (SPY) almost completed a full reversal of the gains from the day of the oversold breakout. Buyers rallied just enough to close the index right at its 200DMA.}
The NASDAQ was not quite as fortunate. Its 2.1% loss on the day pushed it just below its 200DMA. The Invesco QQQ Trust (QQQ) lost 2.3% but stayed above its 200DMA support the entire day.
{The NASDAQ closed below its 200DMA for the 4th trading day out of the last six.}
The Invesco QQQ Trust (QQQ) lost 2.3% but is still holding onto 200DMA support and an abandoned baby bottom.}
Sellers added emphasis to the return of bearish sentiment with a return of the volatility index, the VIX, to the “elevated” level of 20.1. The VIX immediately went from looking poised to drop below the 15.35 pivot to looking like it is ready to launch higher than the last high.
{The volatility index, the VIX, gained 15% to close right at the 20 level which is considered the start of "elevated" readings.}
On the currency side, the Australian dollar (FXY) versus the Japanese yen (JPY) faded from 50DMA resistance but at least it did not make a new low. At the time of writing, AUD/JPY reversed the previous loss and thus printed a potentially bullish sign for Friday’s trading. (For more background on the relationship of AUD/JPY to the S&P 500 see “The Australian Dollar and Japanese Yen Are Still Useful S&P 500 Signals“).
{AUD/JPY is rallying in a direct reversal of the previous day's negative sentiment. AUD/JPY has yet to break down to a new 2018 low.}
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped to 15.8% for a second day of this latest oversold period. The trading action is starting to look similar to the churn that occurred from April to May of this year as the S&P 500 bounced from and dropped to its 200DMA support while only once closing below that support level. A friend of mine helped me realize the high potential for the market to get stuck in another protracted period of churn until at least the mid-term elections in the U.S. (November 6, 2018). After all, almost a week into earnings season nothing has happened to break the market’s back or to assure buyers to continue a journey out of and away from oversold conditions. I will keep this scenario in mind if the market starts to frustrate both buyers and sellers.
When the S&P 500 first hit its 200DMA I bought a fresh tranche of call options. I prepared to buy a lot more if sellers washed out the close. After buyers started taking the indices off their lows, I hit the reset button on my volatility fades with puts expiring in 2 weeks on the ProShares Ultra VIX Short-Term Futures (UVXY). I also took profits on more hedges. The largest outstanding hedge was a fist full of put options on Caterpillar (CAT). This phase of oversold trading always puts my convictions and analysis to the test. While the stock market struggles to bounce out of oversold conditions, I have a strong temptation to try to time and game the setbacks with bearish positions. The problem is not just in getting caught with too many bearish positions when the market suddenly snaps back from an oversold stretch but also in taking away time from identifying the even more attractive upside opportunities.
October 19, 2018 by Dr. Duru
AT40 = 15.8% of stocks are trading above their respective 40-day moving averages (DMAs) – 2nd day of oversold period following 4-day oversold period
AT200 = 33.9% of stocks are trading above their respective 200DMAs (up 6 percentage points)
VIX = 20.1 (15% increase)
Short-term Trading Call: bullish
Commentary
The 200-day moving averages (DMAs) still feature prominently in the market’s now protracted struggle to slog through oversold trading conditions. Almost like magic, the S&P 500 (SPY) closed the day right on top of its 200DMA after a 1.4% loss.
{At the intraday low, the S&P 500 (SPY) almost completed a full reversal of the gains from the day of the oversold breakout. Buyers rallied just enough to close the index right at its 200DMA.}
The NASDAQ was not quite as fortunate. Its 2.1% loss on the day pushed it just below its 200DMA. The Invesco QQQ Trust (QQQ) lost 2.3% but stayed above its 200DMA support the entire day.
{The NASDAQ closed below its 200DMA for the 4th trading day out of the last six.}
The Invesco QQQ Trust (QQQ) lost 2.3% but is still holding onto 200DMA support and an abandoned baby bottom.}
Sellers added emphasis to the return of bearish sentiment with a return of the volatility index, the VIX, to the “elevated” level of 20.1. The VIX immediately went from looking poised to drop below the 15.35 pivot to looking like it is ready to launch higher than the last high.
{The volatility index, the VIX, gained 15% to close right at the 20 level which is considered the start of "elevated" readings.}
On the currency side, the Australian dollar (FXY) versus the Japanese yen (JPY) faded from 50DMA resistance but at least it did not make a new low. At the time of writing, AUD/JPY reversed the previous loss and thus printed a potentially bullish sign for Friday’s trading. (For more background on the relationship of AUD/JPY to the S&P 500 see “The Australian Dollar and Japanese Yen Are Still Useful S&P 500 Signals“).
{AUD/JPY is rallying in a direct reversal of the previous day's negative sentiment. AUD/JPY has yet to break down to a new 2018 low.}
AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped to 15.8% for a second day of this latest oversold period. The trading action is starting to look similar to the churn that occurred from April to May of this year as the S&P 500 bounced from and dropped to its 200DMA support while only once closing below that support level. A friend of mine helped me realize the high potential for the market to get stuck in another protracted period of churn until at least the mid-term elections in the U.S. (November 6, 2018). After all, almost a week into earnings season nothing has happened to break the market’s back or to assure buyers to continue a journey out of and away from oversold conditions. I will keep this scenario in mind if the market starts to frustrate both buyers and sellers.
When the S&P 500 first hit its 200DMA I bought a fresh tranche of call options. I prepared to buy a lot more if sellers washed out the close. After buyers started taking the indices off their lows, I hit the reset button on my volatility fades with puts expiring in 2 weeks on the ProShares Ultra VIX Short-Term Futures (UVXY). I also took profits on more hedges. The largest outstanding hedge was a fist full of put options on Caterpillar (CAT). This phase of oversold trading always puts my convictions and analysis to the test. While the stock market struggles to bounce out of oversold conditions, I have a strong temptation to try to time and game the setbacks with bearish positions. The problem is not just in getting caught with too many bearish positions when the market suddenly snaps back from an oversold stretch but also in taking away time from identifying the even more attractive upside opportunities.