Not A Bear - Just A Bull Looking for Lower Prices

SPCFD:SPX   S&P 500 Index
AT40 = 31.0% of stocks are trading above their respective 40-day moving averages ( DMAs ) (was as low 28.1%)
AT200 = 46.7% of stocks are trading above their respective 200DMAs
VIX = 14.0 (was as high as 15.8)
Short-term Trading Call: neutral

So much for a small bounce before continuing a decline toward oversold conditions!

The jobs report for September seemed to be a non-event as the S&P 500 ( SPY ) opened slightly higher and drifted higher for the first 15 minutes of trading or so. By the second breakdown to an intraday low, it was clear that sellers were eager to hit the exits. For the S&P 500 , the selling ended just below its 50-day moving average (DMA). Buyers took over from there and pulled the index back from an ominous 50DMA breakdown.

{The S&P 500 ( SPY ) briefly broke down below its uptrending 50DMA support before buyers rallied the index back to its intraday low from the previous trading day.}

Like the S&P 500 , small caps gave some faint hope of a bottom as buyers picked the iShares Russell 2000 ETF ( IWM ) off the very critical support of an uptrending 200DMA.

{The iShares Russell 2000 ETF ( IWM ) closed at a 4-month low after buyers picked the small cap index off 200DMA support.}

The parallel selling in the NASDAQ confirmed a 50DMA breakdown. The selling in Invesco QQQ Trust ( QQQ ) created the 50DMA breakdown that the tech-laden index barely avoided the previous trading day.

{The NASDAQ closed near a 3-month low as sellers confirmed the previous day's 50DMA breakdown.}
{The Invesco QQQ Trust ( QQQ ) reversed all its gains from late August with its 50DMA breakdown.}

The selling even took down financials which had rallied going into Friday’s jobs report. The Financial Select Sector SPDR ETF ( XLF ) lost 0.4% after 50DMA resistance rejected it and sent XLF to a fresh 200DMA breakdown.

{The Financial Select Sector SPDR ETF ( XLF ) turned back neatly from 50DMA resistance and again broke down below its 200DMA.}

At the height of the selling, the volatility index, the VIX , soared to a 22.1% gain. This move was below the previous day’s 36.4% intraday high. The VIX closed with an even smaller gain of 4.2% as the volatility faders went into hyperdrive after buyers started defending critical technical levels on the indices. The VIX even closed below the 15.35 pivot in a demonstration of the continued stubbornness of bullish sentiment that keeps tilting toward complacency.

{Faders pushed so hard on the volatility index, the VIX , that it swung from a 22% intraday gain to a 4% close below the 15.35 pivot .}

Finally, AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped into the 20s for the first time in 6 months. The buying off the lows only took AT40 back to 31.0%. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, dropped to a 5-month low by closing at 46.7%. So while the shorter-term indicator is at levels that have frequently marked bottoms in this bull market, the longer-term indicator is not yet creating the kind of breakdowns that overwhelm bulls with bargain signs.

This spot is particularly tough for making a short-term trading call. I left the short-term trading call at neutral only because the risk of new short positions is pretty high at this juncture. I closed out some shorts and put positions last week even and have nothing new on my list of shorts. This is a better time to prepare to buy. In other words, I am purposely avoiding getting bearish so that I can be ready to buy the market at lower prices. Recall that October is one of the riskiest months of the year in terms of potential drawdowns. Yet, with November and December offering two of the lowest risk months of the year, October can offer some timely buy-the-dip opportunities.

{August, September, and October are the S&P 500's most dangerous months on an average basis. On a median basis, maximum drawdowns do not have such a dramatic spread of performance.}

I am guessing that October is all the more dangerous this year given the exceptionally strong stock market performance in the third quarter (July to September). In other words, the market is “due” for more than a garden variety 1% or 2% drawdown on the S&P 500 .

I think technician Carter Worth made a good case for a retest of the 2800 level on the S&P 500 . See below.

The 2800 level was important as resistance in June and then important as support from July to August. By the time the S&P 500 gets back to 2800, uptrending 200DMA support should be there to meet the index with a kiss. More importantly, AT40 should also be at or near true oversold levels (20%).

Even with this mental model, I am preparing for the possibility that last week’s selling was about as good as it well get. After all, sellers dramatically failed twice to keep the VIX elevated. If I see enough sign of buying power, small caps, IWM specifically, would be the obvious place to start under the assumption that 200DMA support is holding. A complete reversal of Friday’s losses would be a good first sign.
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