Health Care Archives - ONE-TWENTY TWO: Trading Financial Markets

AT40 = 65.3% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 51.5% of stocks are trading above their respective 200DMAs
VIX = 12.7
Short-term Trading Call: neutral

Commentary
Here we are again. The stock market looks like it is breaking free, but there are major caveats which keep me wary and sitting on a neutral short-term trading call.

First the positive developments.

The S&P 500 (SPY) managed to follow-through on its breakout above its 50-day moving average (DMA). Sure the index gained a tiny 0.2%, but it is good enough for now.

The S&P 500 followed through on its 50DMA breakout. Depending on the perspective, the triangle that has defined trading for three months also seems to be giving way to the upside.

The iShares Russell 2000 ETF (IWM) is just $0.12 from its all-time high. The small cap index has been able to keep pushing along its upper-Bollinger Band (BB). The index is firmly running with the bulls, but it also cannot afford to turn back here and create what will look like a triple top.

The iShares Russell 2000 ETF (IWM) is running with the bulls.

The volatility index, the VIX, fell yet again. The VIX has fallen 6 straight days and 10 of the last 12. The VIX closed below the start of the massive 2-day surge in February. The fear gauge is also just a hop, skip, and a jump away from “extremely low” territory (at or below 11)…which would be very bullish.

The volatility index, the VIX, is breaking away from the 15.35 pivot and plunging back to extremely low levels.

There are a few important caveats that keep me sitting on my neutral short-term trading call.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, closed at 65.3%. My favorite technical indicator is just 5 percentage points away from the overbought threshold. The last two trips here have preceded a massive sell-off and a pullback. Can the third time be a charm? I want to wait and see.

AT40 (T2108) is sneaking up on overbought territory again.

The tech-laden indices lost some steam right at a critical point. In March, tech stocks completed a resounding comeback from the February sell-off only to pull right back to the February lows. The NASDAQ and the PowerShares QQQ ETF (QQQ) gapped down from those highs to form a type of abandoned baby top, a very bearish chart formation. Both indices ended last week right at the bottom of the gap down. Buyers and bulls will really need to keep pushing through this gap to confirm bullish momentum. Since the market is rarely straightforward, I fully expect tech stocks to return to churn right here with lots of headfakes for bulls and bears alike.

The NASDAQ ended the day flat as it faces down the bearish gap down from all-time highs in March.

The PowerShares QQQ ETF (QQQ) also ended the day flat as it faces down the bearish gap down from all-time highs in March.

The Industrial Select Sector SPDR ETF (XLI) broke out above its 50DMA, but its fade from the day’s high makes the move look very timid and tepid. More importantly, the fade happened right at the downtrend line roughly in place since the January high. XLI has printed a consistent sequence of lower highs…this move could mark the next lower high. The industrials could weigh heavily on the general market even if big cap tech stocks continue powering forward.

The Industrial Select Sector SPDR ETF (XLI) rallied sharply off the latest low but volume has been anemic and even declined on the move. The fade from the intraday high weakened the case for the 50DMA breakout which is an attempt to break the pattern of lower highs.

Across the board, I am wary about generally weak volume patterns. Chart after chart I am seeing lower than average volume and in many cases declining volume over the course of this latest rally. I recognize that low volume has yet to stop the bull market from rallying, but a bounce from lows or critical support on anemic and even falling volume is just plain suspicious. Sure the sellers can continue to sit on their hands as prices float higher. The caution is to prepare for their return; the resulting downdraft will likely be steep and swift. With the VIX plunging, protection is cheap: the risk/return for staying on top of put options as protection for shorter-term traders looks as good, maybe better, than the placid waters flowing into the February sell-off.

CHART REVIEWS

Apple (AAPL)

Apple continued its sentiment-leading performance this week. I also learned a hard lesson with the stock going ex-dividend on Friday. I failed to close out a long call spread and got assigned shares from the short-side of the position. Much to my dismay I discovered that assignment put me on the hook to pay the dividend. Even worse is the fact that I did not recognize the ex-dividend as a fresh catalyst to drive the stock higher. I should have been a LOT more aggressively bullish on AAPL during the week. Monday’s close will be important to determining the likelihood of continuing the momentum in the coming days, maybe weeks. Note in the chart below, the upper-Bollinger Band suggests AAPL has plenty of room left for short-term upside.

Apple (AAPL) is riding the tailwinds like a champ. I am still eyeing the shrinking volume with a wary eye as soaring volume on a new all-time high is a more solid seal of approval.

AMZN (AMZN)

The short side of my calendar spread expired worthless, but I am now on the edge of my seat to see whether AMZN can return to its relentless upside behavior in the coming week. Last week, the stock surprisingly lagged the resurgence of tech stocks.

Amazon.com (AMZN) was one of the weaker big cap tech stocks. The stock almost reluctantly followed along the lower part of the upper-BB channel. Is the stock shying away from its post-earnings intraday high?

Best Buy (BBY)

BBY continues to impress me. I never did jump into the middle of all this upward momentum, and I am regretting it. I just didn’t think the last dip gave me enough discount for the risk.

Best Buy (BBY) rallied just short of its all-time high. The uptrend from the March low has been remarkably consistent.

BHP Billiton (BHP)

Last week definitely put my bearish thesis to rest on BHP! The stock stumbled out the gate for the week but ended up soaring another 4.4% for the week thanks to a 3-day upward sprint. The stock faded from its high and is hanging out in very overbought territory.

BHP Billiton (BHP) has a stellar week. The stock stopped just short of a new high for 2018. The gap up well above the upper-BB makes the stock extremely extended.

Rio Tinto (RIO)

I have not activated the bullish side of the RIO vs BHP pairs trade because RIO has yet to break out to a new high. This week’s gains were not nearly as impressive as BHP’s since RIO’s Friday fade closed it out even for the day. So far then, RIO has stopped well short of a fresh breakout.

Rio Tinto (RIO) needs to keep rallying to avoid a toppy head and shoulders chart pattern.

Chipotle Mexican Grill (CMG)

CMG faked me out last week as I made a failed attempt to play a fresh break out. I took a swing again for next week.

Chipotle Mexican Grill (CMG) almost looked ready to resume its post-earnings momentum. Now that it is lingering below the upper-BB channel, it is at greater risk for a pullback.

Deere (DE)

When DE broke down below its 200DMA, I thought it would take a very long time for the bearish move to reverse itself. The recovery took just two weeks. Still, the downtrending 50DMA looks like formidable resistance as most industrial stocks are facing challenges.

Deere (DE) is one of many industrial stocks struggling to break free of downtrends. While it faded from its rapidly downtrending 50DMA at least trading volume looks healthy and actually slowly increased this week.

iShares US Home Construction ETF (ITB)

ITB continues to tantalize. Its individual components are swinging all over the place. The net result is an index that remains trapped in a tightening wedge pattern. The odds are still favoring the bears as ITB consistently fails to hold itself above its 200DMA.

The iShares US Home Construction ETF (ITB) is as stuck as ever. Dangerously, it continues to linger just below its 200DMA as the 50DMA comes crashing down.

LGI Homes (LGIH)

My play on support for LGIH is hanging by a thin thread after the stock reversed sharply on Friday.

LGI Homes (LGIH) is clinging to 200DMA support. It is a stock desperately looking for a fresh catalyst in a market increasingly skeptical of home builders.

Monro (MNRO)

My play on support for MNRO worked out perfectly. I did not maximize profits, but I got a near double on my call options. I will take that reward any day.

Monro (MNRO) bounced perfectly off 200DMA support.

Match Group (MTCH)

MTCH suffered mightily after Facebook announced its entry into the world of online dating. Yet sellers could not follow through much after the first day of panic. So when the stock made a new low in the wake of earnings which came in just fine, I took a chance on buying call options. I was prepared to double down on a closer approach to 200DMA support, so I was quite startled when the buyers turned on the jets shortly after my buy to close the stock in positive territory on the day. I promptly took profits. When the buying continued the next day, I made a fresh trade and took profits on the subsequent Friday follow-through. With some analysts stepping up to defend MTCH now, I think it is good at least for a challenge of 50DMA resistance.

Match Group (MTCH) has likely bottomed. The negative pressure form the Facebook news is abating. Now investors will need to see actual results from Facebook’s efforts.

iPath Bloomberg Cocoa SubTR ETN (NIB)

NIB surprised me a month ago when it broke through what I thought was a topping pattern. Now NIB is looking toppy all over again. The same fundamental catalysts are in place that formed part of my thesis of a top, so I will not be surprised to see the current swirl result in a true (short-term) top for NIB. Regardless, I think fresh buys here are too high risk for too little potential incremental reward. I am looking out for a resolution of a Bollinger Band (BB) squeeze.

It is not quite a top but the churn and stalling at these lofty levels is starting to look more and more like one for iPath Bloomberg Cocoa SubTR ETN (NIB).

Impinj (PI)

PI is probably still my disaster of the year. So I got that sinking feeling when I realized that last week’s tremendous post-earnings rally was happening without me. I felt fortunate when the stock faded back to $17 where I had a limit order to buy waiting. I sold the very next day as the stock rallied well above its upper-BB again. I am looking to buy again…

Impinj (PI) finally ended the negative pressure with a resounding post-earnings gap up and surge. It looks like the February gap down will eventually fill.

U.S. Steel (X)

I nailed the call for a rally to 50DMA resistance, but I failed to make the trade on X. Now the stock looks ready to reverse itself.

U.S. Steel (X) hit the 50DMA upside target…and looks ready to resume the selling.

Health Care Select Sector SPDR ETF (XLV)

I remain bearish on XLV. This is one of the few plays where an Amazon panic led to sustained selling follow-through. Of course suffering an Amazon panic during a general market implosion is like a double whammy. XLV is one of the major indices that continues to lag the general market. It still looks bearish even with the strong end to last week’s trading.

The Health Care Select Sector SPDR ETF (XLV) once again poked above 50 and 200DMA resistance levels. Can it next make a higher high on the way to a recovery?

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“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 #60 over 20%, Day #29 over 30%, Day #24 over 40%, Day #6 over 50%, Day #3 over 60% (overperiod), Day #74 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Related links:
The AT40 (T2108) Resource Page
You can follow real-time T2108 commentary on twitter using the #T2108 or #AT40 hashtags. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag.

Be careful out there!

Additional disclosure: long AAPL call options, long BHP puts, long LGIH, long AMZN call, long CMG calls, short FB shares and long call spread

*Charting notes: FreeStockCharts.com stock prices are not adjusted for dividends. TradingView.com charts for currencies use Tokyo time as the start of the forex trading day. FreeStockCharts.com currency charts are based on Eastern U.S. time to define the trading day.

AT40 = 62.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 52.7% of stocks are trading above their respective 200DMAs (a near 4-month high)
VIX = 13.5 (down 12.8%)
Short-term Trading Call: neutral

Commentary
A day like this past Friday makes me want to be bullish about the entire stock market. The volatility index, the VIX, plunged solidly below the 15.35 pivot. The S&P 500 (SPY) regained some momentum with a 1.1% gain. The tech laden indices rallied just short of new all-time highs with the NASDAQ and PowerShares QQQ ETF (QQQ) jumping 1.5% and 1.6% respectively.

The volatility index, the VIX, plunged 12.8% and just about filled the gap up from the week’s tumultuous start.

The S&P 500 (SPY) started the week with a picture-perfect bounce off support at its 50-day moving average (DMA). It ended the week challenging the latest highs.

The NASDAQ broke out and closed above its upper-Bollinger Band (BB) in a show of strength that stopped just short of the all-time high set in March.

The PowerShares QQQ ETF (QQQ) broke out and closed above its upper-Bollinger Band (BB) in a show of strength that stopped just short of the all-time high set in March.

The week ended in spectacularly manic fashion compared to the angst that greeted the start of holiday-shortened trading in the U.S.

Still, as has been the case for some time, there are enough caveats preventing me from flipping the short-term trading call to bullish. Rallies in the stock market continue to expose uncomfortable divergences. Most importantly, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), barely budged on Friday’s big rally day: AT40 only gained less than 2 percentage points from 60.7%. My favorite technical indicator ended the week at 62.5% which is below where it ended the previous week at 64.0%. AT40 is still struggling to broaden the rally above the overbought threshold (70%). So from my perspective, the rally in the major indices still sits on very tenuous footing.

Next, the financials as a whole continue to languish suspiciously. The Financial Select Sector SPDR ETF (XLF) gained 1.1% to barely nudge to a high for the week. However, XLF did not fill Tuesday’s major gap down, and it faded from its downward trending 50DMA.

The Financial Select Sector SPDR ETF (XLF) is still stuck in a wedge or triangle pattern with upside limited by a downtrending 50DMA.

Small caps have been a bright spot with relative out-performance. Yet, the iShares Russell 2000 ETF (IWM) sold off sharply on Thursday’s down day, and the index gained less than 1% on Friday while fading slightly from the all-time high. This trading action is not bearish; it just does little to confirm or support overall market bullishness.

The iShares Russell 2000 ETF (IWM) is struggling to follow through on its latest breakout to all-time highs.

And then there is the iShares US Home Construction ETF (ITB). While the market celebrated another strong U.S. jobs report (with an early hint from President Trump that countered government practices), ITB hesitated. The index at one point traded back to the low of the week and only gained 0.4%. The further ITB falls behind the S&P 500, the more suspicious I get about ITB AND the underlying health of the stock market recovery itself.

The iShares US Home Construction ETF (ITB) still cannot break free of overhead 50DMA resistance.

This week’s trading was as mixed as the week was mixed. On Friday, I moved in two directions. I hedged with a fresh round of call options on ProShares Ultra VIX Short-Term Futures (UVXY) and repositioned my put on Caterpillar (CAT). See below for additional trades.

CHART REVIEWS

Amazon.com (AMZN)
AMZN is creeping higher again. It ended the week with an all-time high. AMZN is clearly one of the big cap tech-related stocks that continues to soak up a lot of investor’s funds. I am still holding my calendar call spread.

Amazon.com (AMZN) is bullishly riding along its upper-Bollinger Band (BB) in a fresh sign of buying strength.

Axovant Sciences Ltd. (AXON)
I must be a glutton for punishment. I am back in AXON as momentum from the lows builds in this stock. I have written optimistically before about AXON only to be disappointed. This time, the stock seems to be benefiting from a major restructuring of the company. This action is like hitting the reset button. The technicals are also encouraging with periodic waves of strong buying volume. This week’s 50DMA breakout even received follow-through buying. The 50DMA breakout itself was a bullish resolution of a multi-week consolidation triangle.

Axovant Sciences Ltd. (AXON) is bouncing off rock-bottom price levels. The follow-through from the 50DMA breakout is bullish.

Caterpillar (CAT)
CAT did not benefit from the market’s magical turnaround from the angst and turmoil from Tuesday. The stock ended the week with a loss and barely avoided the lows of the week. With interest waning again, CAT looks like its best bet is to bounce around an extending trading range.

Caterpillar (CAT) delivered a nice rebound from its vicious post-earnings fade. The stock is now struggling to make any more progress.

Dick’s Sporting Goods (DKS)
The early post-earnings optimism on DKS is waning fast. DKS is starting to fill its post-earnings gap. Now my rush to salvage my call option looks like a fortuitous move. It also looks like my covered call just might expire worthless after all and allow me to hold onto the stock for another similar trade.

Dick’s Sporting Goods (DKS) is starting to reverse its impressive post-earnings gap up. It closed the week at the high of its previous trading range. The stock needs to hold support here.

iShares MSCI Brazil Capped ETF (EWZ)
With emerging markets continuing a downward trend from the January top, I started checking in on my favorite play in the space, EWZ. This week’s gap down triggered my “buy on a 20% dip” rule for EWZ. The selling was so bad that EWZ actually reversed at one point on Friday while the U.S. market was rallying. I took that opportunity to nibble on my first tranche of shares at a 25% discount to the last high. EWZ is near a 52-week low and back into the large gap down that occurred when Brazil’s President was accused of bribery a year ago.

The iShares MSCI Brazil Capped ETF (EWZ) suffered mightily in May and only put in a half-hearted bounce back from Tuesday’s turmoil.

iShares 20+ Year Treasury Bond ETF (TLT)
As expected, interest rates are on the rise again even though I did not expect THIS swift a reversal of Tuesday’s gains. TLT looks like it has topped out again. I am expecting at least a retest of recent lows. I suspect that the next trip for the 10-year U.S. Treasury above 3% will not generate nearly the kind of angst it generated the last two trips…should be interesting!

This week, the iShares 20+ Year Treasury Bond ETF (TLT) pivoted around 2015’s close.

Twitter (TWTR)
I have stayed stubbornly bullish on TWTR even as my trading actions have not matched my convictions. My latest misses were failing to buy once the last post-earnings gap up filled and then failing to buy after (either) 50DMA breakout. So I can only cheer from the sidelines as TWTR punches through for a 2-year high.

Twitter (TWTR) broke out to a marginal new 2-year high as momentum continues.

Unity Biotechnology, Inc. (UBX)
Like AXON, UBX is a promising small bio-tech company. The company’s IPO was underwhelming: the stock priced at $17, opened at $19, and closed at $16.65. A close below the IPO price is almost always a red flag. In three more weeks UBX closed at its all-time low of $12.76. Starting the 25th, buyers finally started showing up in force. The stock has gained every day since then as analysts have initiated coverage: Goldamn neutral target @ $17, Morgan Stanley overweight target @ $25, Citigroup buy target @ $32. The stock faded all the way from $16 on Friday. I held back on buying as I want to see whether there is any “sell the news” action after the annual meeting of the American Society of Clinical Oncologists (ASCO) ends on June 5th. I am a buyer on a dip to $14 or so.

Unity Biotechnology, Inc. (UBX) stumbled out its IPO gate. Are investors finally warming up?

Ulta Beauty (ULTA)
Looks like I did good to take profits in ULTA ahead of earnings. The company disappointed “expectations” with a curious mix of downward guidance for earnings and revenue for Q2, reaffirming revenue growth for the year, and increasing EPS guidance for the year. It is tough for any expensive stock to survive earnings and a lot tougher when the company presents any chinks in the armor. I was impressed by the picture-perfect bounce from 50DMA support, but after the stock closed the gap I decided to fade with a put option. ULTA is bullish again on a breakout above the last highs.

Ulta Beauty (ULTA) gapped down to its 50DMA support and then bounced back in picture perfect form. At one point the stock was actually UP 5 points on the day before fading sharply to a 2 point loss.

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Active AT40 (T2108) periods: Day #73 over 20%, Day #42 over 30%, Day #37 over 40%, Day #19 over 50%, Day #2 over 60% (overperiod), Day #87 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long ULTA put, long UVXY calls, long EWZ, long TLT puts, long AMZN calendar call spread, long CAT put calendar spread, long AXON shares

AT40 = 69.6% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 57.1% of stocks are trading above their respective 200DMAs (a 4-month high)
VIX = 12.2
Short-term Trading Call: neutral (“almost bullish”)

Commentary
Friday started out in bearish fashion. Apple (AAPL) took a broadside from yet another one of those alarming supplier reports (this time Nikkei). The gap down and quick 1.5% loss seemed to dampen the mood across big cap techs. (I of course seized upon the pullback as a golden entry for my weekly Apple call-buying trade). Following the previous day’s slam against semiconductor stocks from a broad downgrade from Cowen, tech looked down for the count to close the week.

On Thursday, the volatility index, the VIX, managed its first gain after four straight down days. The follow-through on Friday seemed to confirm that buyers were finally exhausted. AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, piled into the alarm bandwagon. On Thursday AT40 traded above the overbought 70% threshold only to close below it. On Friday, it seemed to follow-through on this bearish rejection of overbought conditions.

After about 90 minutes of trading on Friday, buyers gained their resolution. After the dust settled, the VIX managed to hold onto a gain, but the NASDAQ and the PowerShares QQQ ETF (QQQ) rallied to close even on the day. The S&P 500 (SPY) did even better by rallying to a 0.3% gain and a fresh 3-month high.

AT40 (T2108) STILL cannot break through the 70% overbought threshold. The trading action is like tantalizing slow motion.

The NASDAQ made a fresh all-time high this week, but the achievement was overshadowed by a weak close to the week.

The PowerShares QQQ ETF (QQQ) tested the bottom of its upper-Bollinger Band (BB) channel before closing flat on the day.

The volatility index, the VIX, faded hard from its high of the day for a second day in a row. Still, the fear gauge looks like it is trying to hold the lows again.

The S&P 500 (SPY) closed the week on a strong note as it continues to follow-through on May’s breakout and successful test of 50DMA support.

The trading action took me right to the edge of flipping bearish and loading up on SPY put options. The tension could not be better placed given a G7 meeting that ended with President Trump demanding that the economic forum reinstate Russia’s membership and rankling the U.S.’s traditional allies. As I type, Trump is landing in Singapore for his summit with North Korea’s leader. Moreover, the Federal Reserve will almost certainly raise interest rates in its next policy statement due on Wednesday, June 13th. So far in 2018, the S&P 500 has consistently performed poorly in the aftermath of Fed statements (see chart above).

The currency markets are also on edge. While the U.S. dollar index (DXY) is in pullback mode, the Australian dollar (FXA) faded hard against the Japanese yen (FXY) in what looks like the fourth failure around the 84.4 level for AUD/JPY.

The Australian dollar versus the Japanese yen, AUDJPY, is once again failing to confirm the latest bullish sentiments in the stock market.

Source: TradingView.com

With alarm bells faintly ringing in my head, I decided to take a step back and look at a weekly chart of the S&P 500 (SPY). This view from the clouds provides a great reminder of the longer-term bullish price trend that remains underway.

This weekly view of SPY shows a strong upward price trend on an extended break. The week’s strong close puts the index in position for a major breakout that would challenge the all-time high.

CHART REVIEWS

Alcoa (AA)
I thought I missed an opportunity to buy back into AA at 200DMA support. The stock pulled off a gap and crap after another steel and aluminum tariff announcement, and I averaged into a position. Now AA is stuck in near neutral as it continues to cling to 200DMA support.

Alcoa (AA) is churning above its 200DMA….awaiting the next catalyst.

Amazon.com (AMZN)
I locked in profits on my calendar call spread ahead of AMZN’s near parabolic move that ended right around $1700. The three days of rest after the latest all-time high looks just like the pause needed to refresh…

Amazon.com (AMZN) nearly went parabolic on Wednesday, the last three days have provided some healthy rest. Selling volume and depth dropped each day, so this is likely the pause that refreshes.

Camping World Holdings (CWH)
My hunt for beaten up stocks to play in the case of an extended overbought rally brought my gaze upon the RV stocks. CWH came first to my attention thanks to Jim Cramer. I was sloppy in failing to establish a starter position. Now the stock is already up 25%+ in three trading days and has to contend with downward trending 50DMA resistance.

Camping World Holdings (CWH) is up 25.7% in just 3 days on extremely high trading volume. A 50DMA breakout should make this stock even more bullish.

People misunderstood latest acquisition: CWH CEO Marcus Lemonis from CNBC.

iShares MSCI Brazil Capped ETF (EWZ)
For one day, I thought I managed to buy a fresh bottom in EWZ. Fresh selling started two days after that. On Thursday, the Brazilian Real hit a 2-year low against the U.S. dollar and EWZ dropped steeply. I bought another tranche of EWZ given what looked like panic selling to me. EWZ jumped 4.4% to end the week. At one point, it closed the gap from Thursday. Needless to say, if EWZ makes another low, the ETF could slide a lot further. Still, history has taught me to buy into turbulence in Brazil, and I do not think this time is any different.

The iShares MSCI Brazil Capped ETF (EWZ) soared 4.4% in a move that countered the previous day’s gap down on strong selling. The combination may have been sufficient to wash out most motivated sellers.

iPath Bloomberg Cocoa SubTR ETN (NIB)
I nibbled on NIB just in time. NIB made just about the best bounce off 200DMA support I could imagine. If NIB gets follow-through buying next week, I think it could easily challenge the now downward trending 50DMA. I will sell my holdings somewhere along that trajectory.

The iPath Bloomberg Cocoa SubTR ETN (NIB) surged 5.3% in a classic and picture-perfect bounce off 200DMA support.

Speaking of cocoa, I am making great progress on “Cocoa” by Dr. Kristy Leissle. It is a must-read book for anyone who wants to learn all about the entire history and supply chain of cocoa and along the way get a deep appreciation for the struggles and challenges of the farmers who profit the least from this prized food. Later this year, I hope to write a review.

Palo Alto Networks (PANW)
I am eyeing PANW like a hawk. I thought the stock topped out with a post-earnings gap and crap. Now the stock is valiantly holding on to critical 50DMA support. The lower-BB channel is turning downward, so this juncture is very important for PANW. I am a buyer on follow-through buying. I am a seller (long puts) on a close below last week’s intraday lows.

Palo Alto Networks, Inc. (PANW) suffered an ugly and toppy post-earnings gap and crap. Buyers finally showed up at 50DMA support.

Royal Caribbean Cruises Ltd. (RCL)
Cruise lines have suffered mightily this year. Investors put on brave faces in the wake of last season’s serious hurricanes but all for naught. Stocks like RCL are trading at or near 52-week lows. Buying interest in RCL has been fleeting at best as the stock suffers through a persistent downtrend in 2018. Still, if the stock market enters an extended overbought rally, RCL is exactly the kind of beaten up stock I expect to bounce sharply as “bargain hunters” look for perceived upside potential.

Royal Caribbean Cruises Ltd. (RCL) is completely missing out on the market’s rallies. The stock now trades around its 52-week low.

Unity Biotechnology, Inc. (UBX)
The dip I suspected was waiting around the corner for UBX arrived. I bought. Now I am looking for this recent IPO bio-tech stock to hold its all-time low as support.

Unity Biotechnology, Inc. (UBX) gained a healthy 5.0% as it tries to hold support at its all-time low.

Ulta Beauty (ULTA)
Looks like I was too quick to call a post-earnings top in ULTA. Buyers kept going and took ULTA back to the top of its trading range. I will have to flip back to an ULTA bull if the stock manages to break above this trading range.

Ulta Beauty (ULTA) continued its impressive post-earnings bounce off 50DMA support. That new momentum stopped cold at the top of the previous trading/consolidation range.

SPDR S&P Retail ETF (XRT)
All of the sudden, my retail comeback trade for 2018 is right back on the table. The move almost snuck right by me: XRT made a new 2018 high in the past week! This puts the index on the table for buys on the dip. If AT40 gives me the bullish go-ahead, I will not bother picking on any more individual retailers and will instead just ride call options on XRT.

The SPDR S&P Retail ETF (XRT) is back in business as it trades around a 3-year high.

In other trades: took profits on TWTR calendar call spread and entered a new one at the $42.50 strike.

NOT coming up short…

#DubNation, your 2018 Champs will arrive back home this afternoon and we want you there when the squad arrives! #StrengthInNumbers

Team's expected arrival time is 3:30pm and fans can begin lining up outside of Landmark Aviation (8433 Earhart Rd, Oakland) as early as 2pm. pic.twitter.com/9N0TxAYpcH

— Golden State Warriors (@warriors) June 9, 2018

Soak it in #DubNation. BACK-TO-BACK CHAMPS #StrengthInNumbers pic.twitter.com/7tpcUPjGIe

— Golden State Warriors (@warriors) June 9, 2018

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #78 over 20%, Day #47 over 30%, Day #42 over 40%, Day #24 over 50%, Day #7 over 60% (overperiod), Day #92 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY calls, long AAPL calls, long EWZ shares, long NIB shares, long UBX shares, long ULTA put options, long AA shares, long and short various positions against the U.S. dollar

The big index news of last week was General Electric (GE) getting dumped by the Dow Jones Industrial Average (DJIA) index. The index managers at the Dow picked Walgreens Boots Alliance (WBA) to replace GE.

A long and painful descent for General Electric (GE) into the abyss and out of the Dow.

Source: FreeStockCharts.com

I wish the entire Dow index could follow after GE. Traders do not use the Dow for anything except to check the temperature of the sentimental headlines attached to the Dow’s movements. As a price-weighted index of just 30 stocks, the Dow is not useful for much else. An interview on Nightly Business Report titled “Is the Dow Still Representative of American Economy” with David Blitzer, the Managing Director and Chairman of the Index Committee at the S&P Dow Jones Indices, was a glaring reminder of the Dow’s anachronistic and inferior standing among the major indices.

First of all, Blitzer claimed that replacing GE was not about GE itself. The move was about making the index “even better” and “more representative” of the American stock market and the economy. I claim that by definition these reasons suggest that continuing to keep GE in the index prevented the index from being as good as it supposedly can be. Next, Blitzer pointed out that GE’s low price meant that it had very little impact on the Dow (remember, the Dow is price-weighted, so the bigger the price, the bigger the impact). Again, I claim by definition, this drawback means that GE’s removal IS about GE.

This weak attempt to deflect from GE-specific deficiencies was a good segue to the real issue of price-weighting as a poor construct for an index. Blitzer admitted that price-weighting is an “odd way” to create an index, but he defended the practice as the “long-time standard way.” Fortunately, the host Contessa Brewer went straight for the contentious issue of price-weighting. She asked point blank whether price-weighting is still representative of the American economy and whether this method is still the right way to run a modern index. Blitzer squirmed just a touch, stiffened his composure, and admitted that “we” have been having a lot of these conversations in the last week. Here is how Blitzer defended the Dow’s price-weighting methodology:

“To change the Dow we would be tossing away about 125 years of financial history. A longer series of history than almost anyone else has that’s consistently reliable. We’d also have to rejigger it substantially, and it would come out looking very different, and it would probably come out looking more like the S&P 500. So I think we’re happy with the way it is. It’s not the only way to run an index, but it’s a tried and true way to run an index.”

Blitzer might as well have said he and his colleagues are keeping the Dow because it already exists. I submit that having history does not equate with value. Note that Blitzer did not provide a single point that referenced the utility or usefulness of the Dow. The Dow is like the first car your parents gave you to drive as a kid: sure you could keep it throughout your adult life, but you will have to go to greater and greater lengths to explain to people why that heap of junk is still sitting in your driveway.

The deficiency of the Dow was further exposed when Blitzer tried to answer why neither Netflix (NFLX) or Amazon.com (AMZN) were added to the Dow. Blitzer chose to focus on AMZN, pointing out that the Dow has enough technology representation. He also called AMZN a retail company presumably implying that Walmart (WMT) and Nike (NKE) already provide sufficient representation from the retail perspective. Blitzer was most enlightening when he rightfully pointed out that AMZN’s large price (currently $1715.67) would have such a large impact on the Dow that it would become the Amazon Index. So, if AMZN simply SPLIT its stock 10:1, then suddenly this $832B company would look a lot more attractive as an index member. Yet, a stock split would not change the fundamentals of the company or its relevance to the American economy and financial markets. AMZN’s massive market cap, over three times larger than WMT, would also stay the same. Ironically, NKE is barely bigger than GE…a fact that brings me to the glaring oddity of booting GE from the Dow essentially because its price got too small.

Despite its low price, GE’s market cap of $113B is still larger than four other members of the Dow: The Travelers Companies, Inc. (TRV) at a paltry $34B, Caterpillar Inc. (CAT) at $84B, The Goldman Sachs Group, Inc. (GS) at $85B, and United Technologies Corporation (UTX) at $100B. GE is not much smaller than index members 3M Company (MMM) at $117B, NIKE, Inc. (NKE) at $118B, or McDonald’s Corporation (MCD) at $129B. So if the Dow Index committee gave GE a chance to do a 1:10 reverse stock split, the case for removing GE would have become much weaker.

Enough already. I will continue ignoring the Dow in my own market observations, and I wish more people would do the same.

Tonight on Nightly Business Report with @contessabrewer: General Electric is booted from the Dow. We'll talk about whether the index is still representative of the US economy. And @sharon_epperson will join us to talk about travel fraud tactics you need to be aware of this summer pic.twitter.com/ms2tI4aG3a

— NBR (@bizrpt) June 20, 2018

Full disclosure: long GE call options

Another Amazon Panic broke out last week. Amazon.com (AMZN) announced its purchase of PillPack as part of its entry into the lucrative business of selling drugs. The news immediately took down pill pushers like Walgreens Boot Alliance (WBA) and CVS Health Corporation (CVS). While WBA looks like it is already bottoming, sellers followed through with fresh pressure on CVS.

A fresh Amazon panic dropped Walgreens Boots Alliance (WBA) to a fresh 50DMA breakdown and 3 1/2 year low.

CVS Health Corporation (CVS) made a 4 1/2 year low back in March. While last week’s 50DMA breakdown did not create a new low, it confirmed 200DMA resistance.

For WBA, buyers took the stock well off intraday lows. This pattern looks like a bottom awaiting confirmation which means a new closing low would be particularly bearish. For CVS, The stock is in no-man’s land with ominous looking resistance from 50 and 200DMAs. Over the longer-term, both stocks are technically damaged as implied by the downtrending 200DMAs and recent multi-year lows. Thus, even a bounce from current levels will likely present new opportunities to go short.

There is a huge irony in AMZN taking down WBA just days after the Dow Jones Industrial Average (DOW) decided to include WBA in its archaic index to replace General Electric (GE). Now that AMZN will be selling just about everything WBA does, AMZN’s deal delivers the double whammy of pressuring WBA’s valuation and worsening the Dow’s decision to skip over AMZN because of the stock’s price level.

Typically, I eagerly buy into these Amazon-inspired rush for the exits in anticipation of a relief bounce as panic subsides and calmer hands prevail. The trade has worked with remarkable consistency. THIS time around, I am not interested in buying. I think THIS time is different even if the obligatory bounce happens.

Through its acquisition, AMZN will succeed in driving drug prices downward because pharmacy prices are often inflated and highly variable. These high prices allow a true competitor like AMZN to flatten out the playing field. Just a week ago I discovered pharmacy price inflation after my wife decided to shop around for some very expensive drugs. She used a site called Good RX that she recently discovered. The site directed her to Walmart (WMT) and, lo and behold, what would have been a $1000+ bill at Walgreens turned into a bill under $200.

Astonished and baffled by the price differential, I checked on Good RX to try to get an understanding. After all, I always thought one pharmacy is just as good as the next one. Turns out I have been dead wrong. In a post titled “Shop Around to Save More on Your Prescriptions“, Good RX provided information from a recent study in the Journal of the American Medical Association (JAMA) about the wide price differential in pricing for heart medications in zip codes with more than 4 pharmacies. The article on the study, titled “Variability in Retail Pricing of Generic Drugs for Heart Failure,” reveals the following startling findings:

“…The price range was wide…for example, the cost of a 30-day supply of digoxin (0.25 mg) plus higher-dose lisinopril and carvedilol varied from $12.00 to $397.58 (median price, $70.68). Small percentages of pharmacies charged less than $25 for 30-day supplies and less than $100 for 90-day supplies for all 3 drugs (1.7% [n = 3] and 5.3% [n = 9], respectively). Digoxin was consistently the most expensive drug. Only 1 chain had consistent pricing across its stores.”

While the study is limited to three drugs, my personal experience added more power to these results. To the extent these kinds of discrepancies and variations are endemic to the industry, AMZN has found a great opportunity to grow market share and trim the profit margins of big pharmacies. Perhaps profits pressures will also cascade backward into the supply chain for drugs.

I am sure it will take time for investors to fully absorb this reality, especially since AMZN will not be able to establish a mass presence overnight. I will use that time to identify ideal opportunities for establishing shorts. New lows in WBA and/or CVS might be just the start to a fresh downdraft for these shares.

This past week, Amazon.com (AMZN) dropped from fresh all-time highs. Its 20 and 50DMA uptrends remain essentially intact.

Source for charts: FreeStockCharts.com

AT40 = 60.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 56.8% of stocks are trading above their respective 200DMAs
VIX = 13.4
Short-term Trading Call: neutral

Commentary
Until Friday’s 0.8% gain on the S&P 500 (SPY) in the wake of another strong jobs report, I was still expecting the bearish case for the market’s technicals to reassert themselves. Instead, bears lost control of the 50DMA pivoting action, and buyers pushed the index right through a now declining 20-day moving average (DMA).

The S&P 500 (SPY) broke away from its 50DMA pivot in a move that positions the index for a fresh upward push.

With the S&P 500 effectively breaking out, I backed off my bearish short-term trading call and flipped to neutral. AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, is adding to an apparent change in momentum with gains 4 straight days. The first day’s gain was marginal, but it came after my favorite technical inidicator gapped down to start last week’s trading. That gap down at first appeared to deliver further confirmation of the market’s bearish burden. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, added to the case of the bulls by soaring last week from a low of 48.4% to a close of 56.8%. This longer-term indicator is now less than two percentage points away from June’s peak.

The volatility index, the VIX, all but nailed the coffin on the bearish case. After looking like it would hold the 15.35 pivot line, the VIX freshly collapsed on Friday. The fear gauge dropped 10.7% and closed at 13.4. I still think the 12 level will hold as support. Some fresh tensions could build in the market as complacency presses for that support level at the same time AT40 reaches for the overbought level of 70%.

The volatility index, the VIX, has apparently come to the end of another (short) fear cycle.

Other indices are looking as bullish as ever. The NASDAQ gained 1.3% on Friday and confirmed a successful test of 50DMA support. The Invesco QQQ Trust (QQQ) gained 1.6% in a move that also confirmed 50DMA support. The iShares Russell 2000 ETF (IWM) bounced off 50DMA support after gapping down to start last week’s trading. Buyers steamrolled their way higher from there.

The NASDAQ created a bit of suspense over the test of its 50DMA support. Friday’s big breakout confirmed that support and put another all-time high into play.

The Invesco QQQ Trust (QQQ) is stretching for its all-time high after slicing right through its 20DMa and confirming 50DMA support.

The iShares Russell 2000 ETF (IWM) is sprinting higher off a successful test of 50DMA support. A new all-time high is easily within view.

The test of 50DMA support levels played out in slow motion. The dynamics kept me sitting on my short-term bearish call one day too long. I also became increasingly confident in my call given earlier successes with bearish bets. While I remain extremely skeptical of the stock market, I am respecting the successful test of a key support level. I do not want to overstay my welcome in the bearish camp yet another day. I ended this bearish cycle by buying fresh call options on ProShares Ultra VIX Short-Term Futures (UVXY) and doubling down on QQQ put options.

My abiding market skepticism means that if (when?) AT40 shoves its way back into overbought territory, I am NOT going to flip my short-term trading call back to bullish. Instead, I will stay neutral and wait for the next fall from overbought territory to get back to my new comfort zone in the bearish camp. A fresh breakdown below 50DMA support will of course be a freshly bearish event.

CHART REVIEWS

Apple (AAPL)
In my last AT40 post, I designated AAPL as a likely early indicator for ending my short-term bearish call. It turned out to be much more a follower than a leader. On Thursday, the NASDAQ recovered its entire loss from pre-holiday (U.S. Independence Day) trading. AAPL only gapped up slightly and barely hung out near its 50DMA support. Even on Friday, AAPL barely broke out above the recent churn. I will not be surprised if AAPL falls right back to 50DMA support at some point this week. Note that I failed to get a fill for my weekly call option trade, so I will likely be a buyer on the next AAPL dip.

Apple (AAPL) is slowly and somewhat reluctantly following its uptrending 50DMA support higher.

Axovant Sciences (AXON)
AXON seemed to achieve a near perfect test of 50DMA support last week. I bought back in just in time for that test. Yet with the stock closing in on $3 and up almost 25% in just two more days, I decided to take profits again. I am on the hunt for another entry point now.

Axovant Sciences (AXON) confirmed support at its 50DMA but faltered again at $3/share

Acuity Brands (AYI)
AYI has suffered mightily since peaking almost two years ago. When the stock gapped up over its downward trending 50DMA for a gain as high as 19%, I was tempted to believe AYI finally found bottom. Yet, the stock was trading at extremely high levels soaring well above its upper-BB. I did not think those levels could hold in what was then still a bearish market trading environment; so I decided to fade the stock. My put option doubled the same day, and I took profits. With my short-term trading call at neutral, AYI now looks like a nice buy with a tight stop at a new post-earnings low where the lower bound of the BB channel provided support.

Acuity Brands (AYI) soared well above its upper Bollinger Band (BB) before fading hard. Sellers took over and took stock back to the lower boundary of the BB band before the stock bounced again.

BHP Billiton (BHP) and Rio Tinto (RIO)
I did not take profits on my latest tranche of BHP put options, and I may end up regretting it again. I decided instead to buy a call option on RIO as a hedge. Now I have a different kind of pairs trade from my original strategy of waiting for RIO to breakout before buying calls on the stock. Both BHP and RIO rallied on Friday despite a surprisingly bearish report on future iron prices in the latest Resources and Energy report from Australia’s Department of Industry. Moreover, iron ore prices are sinking under the weight of a slowing Chinese economy and a growing trade war between the U.S. and China.

BHP Billiton (BHP) is starting to pivot around its 50DMA.

Rio Tinto (RIO) is barely avoiding a retest of 200DMA support.

The price of iron ore is slowly grinding lower, almost like it is holding out for a positive catalyst to save it from new lows.

Source of iron ore chart: Business Insider

Caterpillar (CAT)
CAT failed to join the market’s breakout. I fully expect the stock to break down on the next bout of general market weakness. CAT is once again a good hedge on bullishness, and I have the long side of a calendar put spread going into this week.

Caterpillar (CAT) is churning at its 9-month low (which coincides with the gap up from October earnings).

Dropbox (DBX)
I was hesitant to buy into DBX given I fail to understand how the company makes enough money to sustain its business model. Still, since that day of reckoning may yet be a ways away, I decided to buy into DBX clinging onto 50DMA support. DBX has experienced a WILD three weeks!

Dropbox (DBX) was one of many recent IPOs that found strong support from speculators in the first half of June. Sellers wiped out the entire breakout, and now the stock is struggling to hold to 50DMA support.

iShares Nasdaq Biotechnology ETF (IBB)
Speculation must be back in vogue when IBB is soaring. Friday’s breakout to a 3.8% gain put IBB within shouting distance of its 2018 high. IBB could have provided my early indicator to back off my bearish stance, particularly after the impressive bounce off 50/200 DMA support levels.

The iShares Nasdaq Biotechnology ETF (IBB) came alive last week with a 5.8% gain that confirmed 50DMA support.

Intel (INTC)
INTC is quietly trying to recover from the post-CEO fallout. I am surprised it did not test 200DMa support before making a run for higher prices. I suspect a 200DMA test is still in INTC’s future, so I did not buy into this latest dip. I will just wait until July’s earnings report to decide on the next between earnings play.

Intel (INTC) is steadily recovering from the fallout from the firing of the company’s CEO.

Tesla (TSLA)
TSLA is actually fading hard after reporting news. The latest production report sent the stock higher at first before sellers completely overwhelmed the stock. I speculated on the 200DMA holding with a calendar call spread. With TSLA moving on to crater through 50DMA support, the long side of this options play is in a very precarious position with expiration coming up this Friday.

Tesla (TSLA) sliced right through 200DMA support and then slipped over the edge of 50DMA support. With trading volume soaring are sellers finally gaining the upper hand?

Walgreens Boots Alliance (WBA)
WBA is making an impressive post-Amazon panic bounce. I did not want to buy into this panic because I believe the Amazon.com (AMZN) threat to pharmacies is very real. It is truly amazing how consistently stocks pull off bounces from Amazon panics.

I am now looking to short WBA given the fade from 50DMA resistance.

Walgreens Boots Alliance (WBA) is making a rapid recovery from the latest Amazon panic. Still, the stock closed the week with a picture-perfect fade from 50DMA resistance.

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #96 over 20%, Day #65 over 30%, Day #60 over 40%, Day #3 over 50%, Day #1 over 60% (overperiod ending 7 days under 60%), Day #16 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long QQQ puts, long BHP puts, long RIO call, long CAT put, long DBX, long TSLA call

AT40 = 49.3% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 53.7% of stocks are trading above their respective 200DMAs
VIX = 13.0
Short-term Trading Call: neutral

Commentary
The S&P 500 (SPY) managed to gain on the week, but it was not easy.

The S&P 500 (SPY) rose with its lower Bollinger Band (BB) and swung widely along the way.

Each day of the week delivered new and meaningful technical signals.

The index started the week modestly with buyers just barely saving it from heading toward uptrending support at the 20-day moving average (DMA). At the same time, AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, lost another few percentage points. The combination looked like more confirmation of the bearish divergence I described the previous week. The next day the index gapped up in a breakout move but failed to make progress from the day’s open. Again, AT40 lost two points – the bearish divergence deepened.

When the S&P 500 soared on the third day of the week on news that President Trump decided to make nice with the European Union (EU) in working toward completely free trade, the index’s move confirmed the breakout. Even though the bulk of the day’s gains were made near the close in the wake of Trump’s announcement, the S&P 500 still looked positioned for the long-awaited challenge of its all-time high. Yet, AT40 STILL refused to cooperate and quickly nailed down my skepticism; my favorite technical indicator did not even gain a point. My disbelief in the market’s rally was complete at that point.

AT40 finally woke up on Thursday by rallying back to where it closed the previous week. Ironically, buyers on the S&P 500 failed to follow-through on Wednesday’s move. While AT40 diverged to the upside away from the S&P 500, I do not consider such a move a bullish divergence because it is not contradicting weakness. A bullish divergence is meaningful, for example, when the S&P 500 is in the middle of a sell-off and trying to bottom. Friday’s steep reversal provided confirmation of the market’s underlying weakness as the index lost 0.7% and finished the reversal of Wednesday’s gain.

In a reversal of fortunes that likely presages more weakness ahead, the NASDAQ, Invesco QQQ Trust (QQQ), and the iShares Russell 2000 ETF (IWM) sold off steeply enough on Friday to record a losses for the week. This relative underperformance versus the S&P 500 was telling as it showed how aggressive selling in the market’s leaders can quickly damage the overall tone of the market. The NASDAQ and QQQ made 2-week closing lows while IWM logged a 3-week closing low. IWM closed below 50DMA support for the first time since early May and now looks ready to reverse all its gains for July.

The NASDAQ dropped from a new all-time high to a two-week low in two days. With a close below its 20DMA, the tech-laden index looks ready to retest 50DMA support.

The Invesco QQQ Trust (QQQ) also dropped from a fresh all-time high to a 2-week close in 2 days. Buyers managed to cling to 20DMA support. A test of 50DMA support is likely still in the cards given NASDAQ weakness.

The iShares Russell 2000 ETF (IWM) cracked 50DMA support for the first time in almost 3 months. A close below the June low would confirm the toppy action IWM has displayed all month.

The volatility index, the VIX, remained relatively calm. The VIX drifted lower ever so slowly until Friday’s selling popped it as high as 14.3. The fear gauge settled all the way back to 13.0 at the close of trading, almost in-line with the previous week’s close.

The volatility index, the VIX, tried to break free of the recent churn but failed. Still, the 12 level is looking more and more like solid support.

My short-term trading call remains at neutral even though last week’s trading action confirmed my skepticism in the market’s rally. With AT40 already at a 3-week low, a switch to bearishness might last just a few days as the NASDAQ and QQQ test 50DMA support. If THAT test fails, then I might find it worthwhile to go aggressively bearish for a few days as the S&P 500 (presumably) dives for its own test of 50DMA support. Such a move could actually push AT40 toward oversold levels for the first time in over 110 trading days. August is stacking up to be a very interesting month.

For now, I am sticking with a small fistful of put options on SPY, two fists full of call options on ProShares Ultra VIX Short-Term Futures (UVXY), and other selective short positions.

Earnings news last week made the biggest headlines, especially among big-cap tech stocks. From historical implosions to poor follow-through, key stocks revealed weakness uncharacteristic of the casual creep higher in prices that accompanied much of the trading action prior to last week. The charts below include brief explorations into the implications of some of these important moves. As always, there are bullish setups even when a lot else is crumbling around the setups.

CHART REVIEWS

Acacia Communications (ACIA)
I keep eyeing ACIA for the next round of weakness. Last week’s 50DMA breakdown may be the signal. My last round of puts went out with a whimper as I got caught in sideways churn. Earnings are coming after market on August 2nd, so I will have to wait on my next position.

Acacia Communications (ACIA) broke down below 50DMA support for a 2-month low.

Apple (AAPL)
AAPL earnings after-market on Tuesday are coming at a critical moment that I am sure is well-recognized. Big cap tech has under-performed relative to the usual enthusiasm for these market leaders. With overall market performance so heavily skewed to these giants, a good performance from AAPL could turn the tide back in favor of the bulls. For now, AAPL looks weighed down by a quick escape from these magnets of money. AAPL closed the week right back in the middle of the last region of sideways churn. With earnings coming up, I did not pull the trigger on the weekly call option play.

Apple (AAPL) made a very marginal new all-time high before succumbing to broad selling in the tech sector to close the week.

BHP Billiton (BHP)
BHP returned quickly to bullishness. Per my strategy, I faded the large gap up over 50DMA resistance by buying put options. I tried to double down on Friday but my limit order was left unfilled as the stock faded from its last peak.

BHP Billiton (BHP) gapped up above its 50DMA and even confirmed the breakout with another gap up on Friday. Still, the fade from the level of the last week may signal an end to the rally.

Caterpillar (CAT)
CAT is still under important 50DMA resistance. Still, last week it showed consistent strength. The bias higher blew up the long side of my calendar call spread. With earnings before the market opens on Monday, I have to assume a good amount of the push higher came from shorts covering positions in an abundance of caution.

Caterpillar (CAT) closed the week with a firm gain. With the upper-BBB channel pointing upward, the stock is poised to test downtrending 50DMA resistance.

Cleveland-Cliffs (CLF)
CLF captured my attention two Fridays ago with a very bullish post-earnings breakout. Buyers followed through the next trading day. The stock is now stalled. I am hoping to get some time to review the earnings report before the next big move! Until I get reacquainted with the fundamental drivers, I do not feel prepared to fade or hop on the bandwagon.

Cleveland-Cliffs (CLF) soared off 50DMA support thanks to a well-received earnings report. The stock still has a major challenge ahead in conquering the 2009 intraday low at $11.84. This resistance stopped a similar breakout and rally in February, 2017.

Chipotle Mexican Grill (CMG)
I gave up on the CMG bullish trade after the company’s analyst update was so poorly received. My disappointment proved premature. CMG quickly reversed that gap down, and on Friday a post-earnings gap up took the stock to new heights. I will look for new entries on pullbacks to/toward the lower part of the upper-BB trading channel.

Chipotle Mexican Grill (CMG) managed a new 13-month high thanks to well-received earnings. The 50DMA looks like firmer support now.

Dominos Pizza (DPZ)
DPZ is looking toppy again as post-earnings weakness continues. Last week the stock cracked 50DMA support on a big move downward. I will be trying to fade the stock on the next bounce.

Domino’s Pizza (DPZ) made a bearish 50DMA breakdown. With follow-thorugh selling from the last earnings report, DPZ is looking very toppy now.

Facebook (FB)
FB was perhaps the biggest story of the week. The stock closed with a 19% post-earnings loss on what headlines heralded as the largest one-day drop in dollar value in U.S. stock market history. Such history seems significant except that perhaps all the buying setting up the collapse is the true headline. The stock was given a major pass after selling off in the wake of the Cambridge Analytics scandal. The screaming negative headlines receded into the background of a near relentless rally that almost went parabolic ahead of earnings. Trading volume ahead of earnings even surged above the 90-day rolling average as FB made another all-time high. Buyers were promptly rewarded with a fresh collapse that should mark a lasting top. I also expect more weakness ahead given the 200DMA breakdown. The 169.8M shares traded was the 10th largest in FB history and easily surpassed the heavy daily trading volume from March’s sell-off.

Post-earnings Facebook (FB) crashed through both its 50 and 200DMAs in one fell swoop. A relief rally the next day failed in the wake of a strong fade. Resistance at the 200DMA looks like it will hold for a while.

Nielsen (NLSN)
While Facebbok (and then Twitter) captured the negative headlines on the business of monetizing digital data on users, NLSN “quietly” collapsed to a new all-time low. The ratings and measurement company essentially confirmed how much more difficult this business has become. From the Seeking Alpha transcript of the earnings call:

“…we are seeing some short-term pressure from GDPR and privacy changes that are impacting our second quarter results and our 2018 outlook…Our results are significantly below our expectations as revenues were impacted by GDPR and changes to the consumer data privacy landscape. We have several hundred clients and data partners in this space and market changes have been disruptive.”

The following details are very telling:

“There are a few dynamics that caused us to have a more conservative outlook for 2018. First, the digital advertising ecosystem saw a disruption in the second quarter as large digital platforms made changes to their offerings to increase security for consumer data. Second, we expect operational and policy changes on third-party targeting to contribute to a slowdown in the back half of the year. Third, GDPR and changes in the consumer data privacy landscape is a near-term challenge that has clients and data suppliers working towards compliance as it relates to targeting and data usage rights. Now, this is a short-term disruption, but it may take some time before the market stabilizes. As such, we’re moderating our second half outlook in Marketing Effectiveness accordingly.”

Clearly the market did NOT believe these disruptions are merely short-term blips. Of course, if NLSN’s stubborn optimism is warranted, then this sell-off is one major buying opportunity!

“Regarding our 2020 plan, we remain focused on all of the same initiatives to drive growth and margin expansion over time for both Watch and Buy. Given our 2018 forecast, the growth and margin trajectory will obviously change, but we’re committed to the same goals to return to mid-single digit top-line growth and annual margin expansion over time.

So to wrap up, look, this is a difficult and disappointing result, but we remain committing to turning around our performance. We’ve worked appropriately to de-risk the back-half forecast and we’re focused on delivering our revised guidance.”

Post-earnings, Nielsen (NLSN) crashed to an all-time low. The buying effort the next day looks strong enough to sustain a bottom for now.

General Electric (GE)
Fresh optimism was building in GE. Unfortunately, the company disappointed yet again. The post-earnings selling triggered my next buy of GE call long-term call options. I described the trade in “A Low Risk Way to Play Cramer’s Call for A Bottom In General Electric.”

General Electric (GE) failed to deliver in its last earnings report and now teeters precariously near its all-time lows.

Alphabet (GOOG)
Suddenly GOOG is vying for position as one of the remaining leaders for the market. The stock gapped up impressively post-earnings only to fade back to its upper-BB. Buyers swarmed right back over the next two days. Friday’s selling eliminated those incremental gains and set a new post-earnings low. The stock still has a lot of post-earnings cushion. A full reversal would be bearish.

Alphabet (GOOG) gapped and crapped after earnings but 2 days of follow-through buying immediately invalidated that bearish signal. Friday’s 2.4% loss off the all-time high to a post-earnings low puts GOOG’s bullish positioning back in danger.

Intel (INTC)
Friday’s post-earnings disaster was another reminder of why I prefer to play INTC between earnings. The stock made a 5-month low and crashed through uptrending 200DMA support. I am now on the hunt for the next entry point: either a point where the stock looks like it is stabilizing and/or a close back above the 200DMA.

Intel (INTC) lost 8.6% post-earnings and crashed through 200DMA support. With a new 5-month low, INTC is likely to go lower before stabilizing.

Microsoft (MSFT)
I give “Mr. Softee” credit. I thought the fade on the post-earnings gap and crap flagged a likely top. Instead, MSFT quickly invalidated the topping signal so much so that Friday’s selling did not re-establish a bearish topping pattern. The selling was of course still ugly though with a 1.8% loss and strong selling volume.

Microsoft (MSFT) conquered a post-earnings gap and crap in stellar fashion with a rally to $111 and a new all-time high. Buyers managed to soften the blow of Friday’s reversal and avoid a post-earnings low.

Netflix (NFLX)
NFLX further confirmed its topping action with new post-earnings lows this week.

Netflix (NFLX) made a new post-earnings low last week. With the lower-BB channel opening downward, more weakness likely lies ahead.

O’reilly Automotive (ORLY)
ORLY continues to shine in the wake of two past Amazon Panics. Last week it made more all-time highs and got a small pop out of earnings. I took profits on the post Amazon Panic trade a while back.

O’reilly Automotive (ORLY) is churning to a series of all-time highs. Still, the post-earnings pop this week already looks in danger of reversing.

Qualcomm (QCOM)
I made the case for buying QCOM over 4 months ago and re-asserted the case 2 months ago. Last week’s post-earnings breakout was a major validation of the strategy.

Qualcomm (QCOM) made a statement last week with a bullish post-earnings breakout. Sellers the next day could not even hold the stock at the upper-BB.

Rio Tinto (RIO)
I did well to hold onto my RIO call option left over from the last BHP vs RIO pairs trade. I was quickly rewarded with a gap up to start last week. I promptly took profits. I will not likely go long RIO again as part of the current pairs trade until/unless RIO closes above 50DMA resistance.

Rio Tinto (RIO) gapped into 50DMA resistance and got promptly rejected. The churn between 50DMA resistance and 200DMA support continues.

iShares 20+ Year Treasury Bond ETF (TLT)
My TLT put options quickly got “close enough” to my price target with last Monday’s 50DMA breakdown so I took profits. I am eagerly looking for the next relief rally to fade. I am guessing bond yields will likely go lower (TLT higher) before going higher (TLT lower) in the face of current stock market weakness.

The iShares 20+ Year Treasury Bond ETF (TLT) smashed through 50DMA support to start the week but could not make further downward progress.

Twitter (TWTR)
TWTR got slammed post-earnings with a 20.5% loss. Unlike other players in the space, I look at this selling as a buying opportunity. The technicals are clearly ugly even with the stock over-stretched well below its lower-BB, so I was not aggressive on Friday. I will double down at or near 200DMA support. I have a soft spot for TWTR because it has firmly established itself as the world’s major public square. President Trump has underwritten Twitter’s foundation at least in spirit (or is that in demonstrative outbursts?).

Twitter (TWTR) received a 20.5% post-earnings beatdown that made a mockery of 50DMA support. With a close at the intraday low and extremely heavy selling, a test of uptrending 200DMA support seems very likely.

United Parcel Service (UPS)
I had to wait a LONG time for this Amazon Panic play. Last week’s post-earnings breakout validated the strategy. Granted, I was initially wary, and I thought May’s breakout and June’s confirmation already validated the strategy…

United Parcel Service made a very bullish post-earnings 200DMA breakout. After two days of mild selling, the breakout still held.

Walgreens Boots Alliance (WBA)
The Amazon Panic trading strategy turned out to work wonders for WBA. While I feel like I am playing in my own irony by accumulating a short position, I am sticking by the claims I made in outlining the drivers of what looks like a secular decline for the major pharmacies.

Walgreens Boots Alliance (WBA) made a full recovery from the latest Amazon Panic. WBA even closed the week with a small breakout above 200DMA resistance.

Whirlpool (WHR)
WHR made new major lows in the wake of earnings. The stock never quite recovered from 2018’s early February swoon. The failure at 200DMA resistance was a death knell. The stock carries poor tidings for the global (retail) economy.

At one point Whirlpool (WHR) traded at a 5-year low following another poor earnings report. The stock now sits at the lows of early 2016.

Materials Select Sector SPDR ETF (XLB)
XLB has been extremely slow to recover from this year’s earlier sell-off. It held up well last week even after giving up another brief 200DMA breakout. For now, XLB stays in the “show me” category with peaks in June and then February/March still a ways off, looming as ready resistance.

The Materials Select Sector SPDR ETF (XLB) is showing surprising shade of strength. While XLB could not hold its small 200DMA breakout, its 200DMA is guiding the index higher ever so slowly.

— – —

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Active AT40 (T2108) periods: Day #110 over 20%, Day #79 over 30%, Day #74 over 40% (overperiod), Day #1 under 50% (underperiod ending 16 days over 50%), Day #13 under 60%, Day #30 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long SPY puts, long BHP puts, long TWTR shares and calls, short FB and long FB call (left-over from calendar call spread), long GE calls, long QCOM shares and calls, long UPS calls, short WBA

AT40 = 55.4% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 56.7% of stocks are trading above their respective 200DMAs
VIX = 12.6
Short-term Trading Call: neutral

Commentary
The recovery from the February swoon has been full of nearly predictable bounces: whether it was oversold trading conditions or support at the 50 and 200-day moving averages (DMAs). Such moves are the hallmarks of a bull market. At some point these bounces will not work. Last week was not that week. The 2800 level has become the latest fashionable support for the S&P 500 (SPY). I used this support level along with an AT40 (T2108) that was trading at recent lows to guess that the market was once again over-stretched to the downside.

The S&P 500 (SPY) punched its way to a high for the week and into last week’s gap down.

The S&P 500 closed the week strong enough to push into the previous week’s gap down. A fill of that gap will be a very bullish event because it will invalidate a bearish topping pattern as well as push the index to a long overdue new all-time high.

In a rare show of underperformance, the tech-laden NASDAQ and the Invesco QQQ Trust (QQQ) lagged the S&P 500 a bit by finishing the week struggling to stay aloft from their own consistent support levels (50DMAs). In fact, both indices are still in slight downtrends (short-term) from their last peaks.

The NASDAQ bounced away from 50DMA support to salvage its performance for the day.

The Invesco QQQ Trust (QQQ) bounced off the week’s low to close flat on the day.

The volatility index, the VIX, put an exclamation point on the market’s quick return to bullish tones. The VIX fell another 6.0% to 12.6.

Faders pressed the volatility index, the VIX, once again – back to the muck of the previous range.

My ProShares Ultra VIX Short-Term Futures (UVXY) put options doubled in value on Thursday, and I quickly took profits. On Friday, I returned to my typical hedging trade by loading up on UVXY call options. These options are now so cheap that I extended my expiration horizon from two to three weeks. This gives me a lot of runway to take a few more risks to the long side in the short-term. I will add S&P 500 put options on the next wave of buying in the index.

CHART REVIEWS

Apple (AAPL)
Remember when the usual suspects in big cap tech out-performed Apple (AAPL) and consistently left it in the dust? Well call this Apple’s revenge. AAPL gained a whopping 2% on a day when the NASDAQ and QQQ were lucky to close flat. This breakout is almost as bullish as they come and represents a smooth continuation move. I find it hard to get bearish on the market when AAPL is performing this well AND AT40 is on the upswing as well.

Apple (AAPL) launched into another all-time high as the upper-Bollinger Band (BB) provided ample support.

Applied Materials (AMAT) and VanEck Vectors Semiconductor ETF (SMH)
Semiconductors are on my “bear watch” list. AMAT’s post-earnings gap down and 7.7% loss to a near 52-week low confirmed 50DMA resistance and highlighted AMAT’s extended topping pattern. The chart below shows what is essentially the right side of a 10-month head and shoulders pattern.

The VanEck Vectors Semiconductor ETF (SMH) looks better than AMAT only because the ETF has managed to avoid retesting its 2018 lows set in February and May. For now, SMH looks like it is stuck in an extended trading range while AMAT points the way downward.

Applied Materials (AMAT) hit a near 52-week low as a post-earnings 7.7% loss seemed to confirm a massive topping pattern.

The VanEck Vectors Semiconductor ETF (SMH) is struggling with another 200DMA breakdown.

Tesla (TSLA)
Elon Musk allowed the shorts to get into his head and now his empire looks exposed. TSLA looks almost like “$420 or bust.”

In a late earnings season that seemed to feature heavily shorted stocks catching large post-earnings bids, TSLA looked like a storybook winner. TSLA enjoys a float with 29.6% of it sold short. At his last earnings conference call CEO Elon Musk decided to apologize to analysts for his rude behavior during the previous earnings conference call (from Seeking Alpha transcripts):

“I’d like to apologize for being impolite on the prior call. Honestly, I think there’s really no excuse for bad manners and I was violating my own rule in that regard. Certainly, I have some excuse. There are reasons for it in that I’d gotten no sleep and been working sort of 110-hour, 120-hour weeks. But, nonetheless, there’s still no excuse. My apologies for not being polite on the prior call.”

The stock market rewarded him and his stock with a 16.2% post-earnings gain and a 50/200DMA breakout. The momentum stopped cold there until Musk tweeted his desire to take the company private at $420 using the now infamous phrase “funding secured.”

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

This tweet came just two days after Musk made fun of TSLA shorts with this tweet which includes a YouTube video using what is now a quite popular “voiceover” (with subtitles) of the 2004 World War II film “Downfall” using the scene of Adolf Hitler in his bunker with his military staff…

Dang, turns out even Hitler was shorting Tesla stock … https://t.co/RLM1VQ5O3K

— Elon Musk (@elonmusk) August 5, 2018

The video includes references to squeezing shorts and names big fund managers who have gone public with their bearishness. My guess is that the Securities and Exchange Commission (SEC) has taken due note.

After Musk effectively tagged a (short-term) $420 value on TSLA, the stock quickly gained another 11.0% and a brief brush with its all-time high. TSLA has been mostly downhill from there.

A lot of ink has already spilled over the latest TSLA drama, so I will just conclude here that the NY Times interview with Musk seems to mark a near climax. Musk made explicit what was implicit in his apology to analysts: he portrayed himself as over-worked, stressed out, and fraying at the edges. The timing of this piece was surprising considering Musk knew he and his company are under SEC scrutiny. The piece almost seemed contrived to garner sympathy. Regardless of the intent, the effort backfired as it put Musk’s leadership in question and, more importantly, once and for all confirmed that NO funding was ever secured for Musk’s $420 going private deal. The market greeted Musk’s virtual plea for mercy with another 8.9% in losses that nearly completed a full reversal of TSLA’s post-earnings gains.

Sellers are secured in their advantage as they press Tesla (TSLA) into a near post-earnings roundtrip. Today’s 8.9% loss created a 50 and 200DMA breakdown.

NYT's @katekelly, the reporter behind the bombshell @ElonMusk interview, gives background on the story that triggered a $TSLA sell-off. pic.twitter.com/t7VqNFZjO1

— CNBC's Fast Money (@CNBCFastMoney) August 17, 2018

This is a bizarre saga for a stock and CEO that has generally curried a lot of favor and benefit of the doubt from a substantial fan base. Ironically, with a $420 going private billboard, TSLA looks like a lot of free money at this point. I have to assume that the current discount indicates significant doubt in the viability of TSLA going private or at least not for anywhere close to $420. The volatility presents bullish and bearish trading opportunities in a situation that is nearing a $420 or bust scenario.

Last week’s trading defied my imagination, and I found myself racing to keep up with the market’s growing bearishness on TSLA. I ended the week with shares, puts, and calls as I scrambled to figure out a palatable positioning for “$420 or bust.” I am currently biased long under the assumption that a reversal of post-earnings gains may have stretched the firepower of sellers. I will go back to scrambling if TSLA’s losses continue from here in trading this week. Stay tuned!

The Cheesecake Factory (CAKE)
A high short interest did not help CAKE after its latest earnings report. With 30% of its float sold short, CAKE imploded post-earnings to a 200DMA breakdown and a 12.4% one-day loss. Fortunately for CAKE, sellers have yet to make progress from that day’s disaster. Now, CAKE is quietly creeping higher in a post-earnings recovery. CAKE closed the week above its 200DMA. This breakout and post-earnings high puts 50DMA resistance in play for a swing trade. Assuming the breakout holds on Monday, I will be looking to position myself for more upside.

The Cheesecake Factory (CAKE) is quietly trying to make a post-earnings recovery with a close above its 200DMA.

Chipotle Mexican Grill (CMG)
I thought CMG would provide a new entry point to buy into its fresh post-earnings strength. Morgan Stanley had other ideas. An upgrade sent the stock soaring this week to a fresh 2 1/2 year high. While sellers nearly reversed those gains the next day, I held off buying into the dip. The stock seems very stretched up here, so I am in no rush to jump aboard with a new swing trade: I am having trouble envisioning enough upside from here to make the risk of going long worthwhile. I will keep watching for now.

Chipotle Mexican Grill (CMG) continues to provide fireworks as a major upgrade attracts buyers and then profit-takers.

Deere & Co. (DE)
I thought this post would describe how DE’s post-earnings gap down and loss this week confirmed weakness and bearishness in the industrial sector. Instead, I am writing about a potential bottom. Despite guiding down for revenue, DE gained 2.4% on extremely high volume in a move that formed a bullish engulfing pattern. This pattern marks a reversal of prior weakness. While DE faded from 50DMA resistance at its high of the day, I am fine jumping into the stock here with a stop below Friday’s intraday low.

Deere & Co. (DE) attracted enough buying interest to turn a bearish gap down toward intraday 2018 lows to a bullish engulfing bottoming pattern.

J.C. Penney (JCP)
Fifty-one percent (51%) of JCP’s float is sold short. These persistent bears have been right for a very long time. This week the death knell for JCP came in the form of a 27.0% post-earnings loss that closed the stock at a new all-time low and the notorious “dollar and change” level. While buyers stepped in to defend the intraday low on Friday, JCP still looks like it has officially enrolled in a hospice program. I hope I will be able to jack some decent threads at the bankruptcy clearance sale. It is hard to believe just two years ago I was staring at JCP above $9 and testing 50DMA support as a potential buy.

At the very edge of the abyss, J.C. Penney (JCP) attracted single-digit bottom-fishers a day after earnings crushed the stock into a new all-time low.

Nordstrom (JWN)
I have stayed bullish on JWN ever since it went through its own going private drama. I would like to say that the stock’s post-earnings surge is a potential lesson for TSLA, but JWN reports profits…and “only” 11.9% of its float is sold short. I just wish I had a position in play to capture JWN’s 13.2% post-earnings pop. I will be waiting and ready for a pullback…

Nordstrom (JWN) surged 13% post-earnings to a 20-month high.

Teva Pharmaceutical Industries (TEVA) and Mylan (MYL)
My stubborn patience with TEVA is paying off in the form of an extended recovery. The latest reward came in the form of an FDA approval for TEVA’s epinephrine generic. The company can now compete head on with Mylan’s EpiPen.

MYL actually gained fractionally despite news of the new competition for its EpiPen. Then again, the EpiPen story is now very old news for MYL; it is no longer a part of the investment or trading story. What is also old news is the bet that management was up to the task of qualifying for a bonus by driving up the stock price by March of this year. Instead, MYL’s January rally was cut short by the February swoon; the stock has yet to recover. MYL is down 9.8% year-to-date.

Teva Pharmaceutical Industries (TEVA) quickly recovered from a 50DMA breakdown thanks to the FDA’s approval.

Mylan (MYL) is down for the year and is struggling to go anywhere.

Overstock.com (OSTK)
OSTK fit the profile of a heavily shorted stock catching a bid post-earnings. On the heels of a float sold 42.8% short, OSTK gained as much as 24.3% before settling for a 7.9% post-earnings gain. However, sellers did not stop with this ugly gap and crap that took the stock all the way back to its upper-BB. The next day all of OSTK’s post-earnings gains disappeared. OSTK ended this week scratching at its 2018 lows. I have OSTK on the radar.

Investors had a quick change of heart in Overstock.com (OSTK) after a post-earnings gap and crap turns into a tide of selling back to 2018 lows.

Pandora (P)
A little over two months ago, I started looking for an entry point to jump into Pandora’s breakout. The entry point never came except for a pullback so sharp and abrupt I would not have touched the stock if I had been paying attention. The 3-day 16.7% loss ahead of earnings looked like an ominous warning. Instead, P jumped right back after earnings. With the stock resting on top of its 50DMA, it looks tempting for a buy. There is still the issue of the float which is 24% sold short…

Earnings saved Pandora Media (P) from a dramatic 50DMA breakdown.

Redfin (RDFN) and Zillow Group (Z)
The post-earnings pain continued for RDFN and Z. I kicked off my pairs trade idea long RDFN and short Z just as buyers finally showed a little sign of life in RDFN. Z is also attempting to print a bottom with a smaller hammer pattern than RDFN’s bottoming attempt. For both stocks, the bottom must be confirmed with follow-up buying and a higher close.

Redfin (RDFN) continues to suffer post-earnings selling although buyers stepped in today to lift the stock well off its lows and into a bottoming hammer pattern.

Zillow Group (Z) continues to slide down its lower-Bollinger Band (BB) channel.

Consumer Staples Select Sector SPDR ETF (XLP)
XLP is pushing ahead and confirming its new bullish momentum. Walmart’s (WMT) post-earnings explosion is the latest positive catalyst for XLP. One of my main plays in the space, Campbell Soup (CPB), is now getting left behind as it stalls out waiting for its next catalyst. Another play, General Mills (GIS), looks like it has formed a base from which to break out and join the XLP momentum. My short in Walgreens Boots Alliance (WBA) is on the edge of its own breakout (gulp!).

The Consumer Staples Select Sector SPDR ETF (XLP) broke out again and confirmed 200DMA support.

Yelp (YELP)
YELP returned to my radar after a huge post-earnings gap up above 200DMA resistance that ended with a 1-day 26.7% gain. The stock is pulling back and looking like a strong setup for accumulation. I plan to start as soon as YELP closes higher than Friday’s close.

The post-earnings enthusiasm in Yelp (YELP) is steadily subsiding.

— – —

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Active AT40 (T2108) periods: Day #125 over 20%, Day #94 over 30%, Day #89 over 40%, Day #2 over 50% (overperiod), Day #28 under 60% (underperiod), Day #45 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long GIS, short WBA, long CPB call spread, long AAPL calendar call spread; long TSLA shares, calls, and put spread; long TEVA, long UVXY calls, long RDFN calls, long Z puts

AT40 = 57.1% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 57.5% of stocks are trading above their respective 200DMAs
VIX = 12.9
Short-term Trading Call: neutral

Commentary
The momentum for FOMO (fear-of-missing-out) on the major indices effectively fizzled out with the start of post-summer trading.

At one point, the S&P 500 (SPY) traded through the bottom of its upper Bollinger Band (BB) channel. Buyers were able to neatly bounce the index off its intraday low for a close that looks like it is part of a very orderly and benign pullback.

The S&P 500 (SPY) closed neatly right on the bottom of its upper Bollinger Band channel.

The tech-laden indices are idling away.

The NASDAQ rallied from its intraday low to close steady with the last three closes and right under its all-time high.

The Invesco QQQ Trust (QQQ) bounced neatly off the lower part of its upper Bollinger Band channel but still closed a bit lower from the previous three days.

This lackluster moves are of course hardly the signatures of a market warming up for FOMO. So I more and more turn toward a read of the contrary signals.

The real story is AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs). AT40 fell all the way to 52.9% and erased its August breakout. AT40 is exposing underlying weakness in the market that is being masked by the few stocks attracting a large portion of the market’s buying power. The trading action is a borderline bearish divergence. AT200 (T2107), the percentage of stocks trading above their respective 200-day moving averages (DMAs), tumbled in similar fashion to AT40.

The Australian dollar (FXA) added its own confirmation of wariness as fresh selling pressure in emerging markets invaded what I saw as bullish talking points from the Reserve Bank of Australia (RBA). At the time of typing, the Australian dollar finished reversing all its post-RBA gains against the Japanese yen (FXY). I am staying long AUD/JPY for now as my trading thesis remains intact despite the setback. Still, this pressure makes me incrementally less convinced that the U.S. stock market is on the edge of going FOMO.

AUD/JPY is right back to scraping at its 10-month lows.

Source: Trading View

CHART REVIEWS

Advanced Micro Devices (AMD)
The AMD march higher looks far from over all over again. Analysts upgraded AMD and saved the day from a confirmation of a blow-off top. I was forced to flip from bearish to bullish by adding a calendar spread to my mix. Much to my surprise, my sell target, a near double, was hit within 90 minutes. I calculated the upside target of the calendar spread when AMD traded at $26.5; I concluded that the options market was anticipating a $28 close by the end of the week. I pinned my calendar call spread there. The stock hit that target by the close of the day and another all-time high.

Advanced Micro Devices (AMD) received analyst upgrades and launched right past last week's potential blow-off top. — Advanced Micro Devices (AMD) received analyst upgrades and launched right past last week’s potential blow-off top.

Amazon.com (AMZN)
A chart review for today has to include Amazon.com which celebrated hitting the $1 trillion mark. With my expectations for FOMO (fear of missing out) launching in earnest in September, I intended to be positioned for today’s latest AMZN surge. However, the calendar call spreads I put in place last week actually closed out at my first sell targets. I actually wanted at least one of them to experience the expiration of the short side leaving me with an unhedged call option to start this week.

I am not interested in chasing further, especially without enough of the market in FOMO mode. Fast Money’s resident technician Carter Worth anticipates an imminent pullback…the case makes plenty of sense to me.

Will $AMZN's amazing run come to an end? Chart Master Carter Worth takes a look at its technical picture. pic.twitter.com/E0fLKKydn3

— CNBC's Fast Money (@CNBCFastMoney) September 4, 2018

Amazon.com (AMZN) - the relatively steady drift toward $1 trillion in market cap. — Amazon.com (AMZN) – the relatively steady drift toward $1 trillion in market cap.

Facebook (FB)
In the above video, Worth also covered the bearish technicals in FB. The stock gapped down for a 2.6% loss that reconfirmed the growing bearishness in the stock. I faded the first intraday bounce to get a single put option (Sept 21 $165). If it gets cheaper, I will buy more. I am anticipating taking profits well ahead of expiration. This is my third trip going bearish on FB that started with a pre-earnings trade.

Facebook (FB) gapped down to a 2.6% loss and closed just above its post-earnings closing low.

BHP Billiton (BHP)
Commodities were a large part of the day’s contrary story. The stock lost 1.7% and gapped down one more time below its 200DMA. I promptly took profits on my put options. Needless to say the long side of the pairs trade went worthless some time ago (Rio Tinto (RIO)).

BHP Billiton (BHP) broke down below its 200DMA again in what is a critical test of the June low.

Electronic Arts (EA)
EA had been a good story this year and represented a strong play on the gaming culture. However, after a post-earnings gap down and a gap down following news of a game delay, EA is suddenly a broken stock. This is a definitive bearish pattern, but hope springs eternal given the bullish story was just around the last corner. The folks at CNBC’s Options Action discussed the merits of making a bullish play with a “risk reversal” options setup with November expirations after the October earnings report: sell the $100 put to help pay for a $120 call. Since I am not particularly interested in taking the risk of being put the stock under $100, I am considering selling a put spread instead. Like Guy Adami in the clip below, I would prefer to do this trade after the stock makes one more push downward.

Video game stocks just got slammed, but @RiskReversal has a trade to make money on $EA. pic.twitter.com/dI1gQyCZAf

— Options Action (@OptionsAction) August 31, 2018

Electronic Arts (EA) is now a broken stock with last week's 200DMA breakdown. — Electronic Arts (EA) is now a broken stock with last week’s 200DMA breakdown.

iShares MSCI Emerging Markets ETF (EEM)
EEM is a handy reminder that the synchronized global growth story ended earlier this year and has yet to revive itself. EEM is also a stark contrast to the U.S. price action.

The iShares MSCI Emerging Markets ETF (EEM) continues to follow-through downward from the February swoon.

Exact Sciences (EXAS)
I have wanted to participate in EXAS for a long time. I took it off my radar when it broke down in the Spring. I eyed an entry when it pulled back from a run-up in June and July, but the post-earnings gap down discouraged me again. Last month’s surge and recovery of course caught me completely off-guard. I waited each day for some cooling off that never arrived. I finally jumped in on today’s breakout with a “no regret” call spread. I was surprised at the low trading volume on the call options which also did not seem priced for much for upside. I stop out if the breakout reverses (below $72.50 for some buffer).

Exact Sciences (EXAS) broke out to a new all-time high on surprisingly light volume.

PVH Corp. (PVH)
PVH was a good retail story until its last earnings report. The post-earnings breakdown makes PVH a broken stock with an ominous topping pattern.

The PVH Corp. (PVH) followed through in convincing form on last week's post-earnings 200DMA breakdown. — The PVH Corp. (PVH) followed through in convincing form on last week’s post-earnings 200DMA breakdown.

Ulta Beauty (ULTA)
Do not lament retail just yet. There is always a great story around the corner. ULTA caught me completely off-guard. I am pretty sure the stock was trading down in after hours post-earnings. It opened Friday with a gap up and an impressive 6.4% despite a large fade off the intraday high. Buyers went right back to work on Tuesday and sent the stock up another 5.5%. THIS is what FOMO looks like. Needless to say, this breakout flips me right back to bullish on ULTA.

Ulta Beauty (ULTA) experienced a very bullish post-earnings breakout and follow-through even with the stock trading well above its upper Bollinger Band. This is a 14-month high.

Tesla (TSLA)
As I feared after CEO Elon Musk essentially admitted he never had funding secured for going private, the stock is becoming less and less attractive. No doubt disappointed it will not earn any banking fees from a massive TSLA going private deal, Goldman (GS) reiterated its bearish positioning on the stock. TSLA gapped down and closed at its intraday low for a 4.2% loss. The $280 support level looks like it is back in play. I am itching to dump my shares here, but I will hold for now as I ride another put spread through this selling.

Tesla (TSLA) made a new 3-month closing low on a confirmation of its 50/200DMA breakdown.

— – —

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Active AT40 (T2108) periods: Day #136 over 20%, Day #105 over 30%, Day #100 over 40%, Day #13 over 50% (overperiod), Day #3 under 60% (underperiod), Day #56 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long SPY puts, long AMD puts, long AUD/JPY, long FB puts, long EXAS call spread; long TSLA shares, call spread, and put spread

AT40 = 11.2% of stocks are trading above their respective 40-day moving averages (DMAs) (oversold day #2)
AT200 = 31.7% of stocks are trading above their respective 200DMAs ()
VIX = 23.0 (an increase of 44.0%)
Short-term Trading Call: bullish

Commentary
The market sell-off is unfolding quickly. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), plunged ever deeper into oversold territory. This time AT40 fell from 16.7% to 11.2% to end the day at closing levels last seen during the epic January, 2016 sell-off.

AT40 (T2108) fell off a cliff these past two trading days!

Now that AT40 is so low, AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, becomes a lot more important to monitor as an indicator of longer-term health. The weekly chart below shows the multi-year overall downtrend is well-intact. So just like almost every other rally from oversold levels, I expect the next rally to end at an even lower AT200 high. For now, the question is just how much lower will sellers push AT200.

AT200 (T2107) last closed this low in early 2016. Sellers still have plenty of room for pressing their points downward.

As the breadth indicators continue to drop deeper into oversold territory, the major indices are following gravity into new or worse breakdowns. The S&P 500 (SPY) wasted little time in breaking down below its 200DMA. The index stretched further below its lower Bollinger Band (BB) as it neared flatline with its 2017 closing price.

The S&P 500 (SPY) lost 2.1% to close with a 200DMA breakdown and a 3-month low.

Note well that for 2018 there has only been ONE Fed meeting where the S&P 500 did not tumble soon thereafter. The February swoon was of course the worst incident as the panicked selling started the day after. This time around, the panic took six trading days to get started.

The NASDAQ extended its 200DMA breakdown with a 1.3% loss. The Invesco QQQ Trust (QQQ) gave up its 200DMA support with a 1.2% loss.

The NASDAQ closed at a 5-month low as it confirmed its 200DMA breakdown.

The Invesco QQQ Trust (QQQ) closed at a 3+ month low as it broke down below its 200DMA for the first time since June, 2016.

Small caps are leading the way in erasing 2018’s gains. The iShares Russell 2000 ETF (IWM) lost another 1.9% and closed just one point above its 2017 close.

The iShares Russell 2000 ETF (IWM) closed at a 5-month low and is nearly flat year-to-date. IWM confirmed its 200DMA breakdown.

Much to my dismay, the volatility index continued higher today. The VIX gained 8.8% and was up as much as 25.6%. While the volatility faders were active for the 5th of 6 trading days, the VIX’s momentum is clearly higher. I added to my put options on ProShares Ultra VIX Short-Term Futures (UVXY) by rule, but the prospects for profits by next Friday are dimming.

The volatility index, the VIX, closed at a near 7-month high with an 8.8% gain.

I made my first purchase of call options on SPY soon after the index broke down below its 200DMA. Per the aggressive oversold trading strategy, I will continue adding to this position during the oversold period. However, I started with an expiration for next Friday, so it is possible I will be forced to reset my strategy (likely for November expiration). Until then, I will only add after the VIX has spiked at least 10% from my last purchase. At some point (soon?), I will also buy shares of ProShares Ultra S&P500 (SSO) to hold through the extent of the recovery from oversold conditions. Given the extent of the technical damage across the entire market, I have to assume a new bearish phase is unfolding where I will be setting price targets for taking profits at important resistance levels. Still, shorting at key resistance will be very case dependent.

CHART REVIEWS

Disney (DIS)
I am a long-term bull on Disney, so am looking to load up on the cheap. So far, DIS is holding up relatively well, and I have not jumped aboard just yet. I am targeting long-term call options expiring January, 2020. DIS broke through its 50DMA support but is one of the minority of stocks still trading comfortably above its 200DMA support.

Disney (DIS) held up well until the last two trading days. Today's 1.5% loss produced a 50DMA breakdown. — Disney (DIS) held up well until the last two trading days. Today’s 1.5% loss produced a 50DMA breakdown.

SPDR Gold Shares (GLD)
The fear in the market is now deep enough to stir up fresh interest in gold. GLD popped 2.5% for a 2+ month closing high. GLD made a double breakout: above its 50DMA resistance and above a 2-month consolidation period. I immediately moved to buy a call spread on GLD to add to my core position in GLD shares. I did not buy calls outright because I am worried that an implosion in volatility will hurt GLD call options particularly hard.

The SPDR Gold Shares (GLD) broke out in a move that looks like a bottom for the precious metal.

Goldman Sachs (GS)
Every time I look at GS in sell-off mode, I cannot help thinking something is seriously wrong with financials specifically and the stock market generally. I sold my batch of puts too early and did not benefit from Wednesday’s large drop. Today, GS closed at a new 17-month low.

Goldman Sachs (GS) is as ugly as ever. The stock lost another 0.9% for a 17-month low.

iShares 20+ Year Treasury Bond ETF (TLT)
There is now enough fear in the market to send interest rates back down and bond prices upward. TLT is up the last three trading days. I accumulated a sizeable position of call options in TLT during its sell-off in anticipation of just this kind of moment. However, the relief rally came a little later than I expected, so now the clock is working against me (expiration next Friday!).

The fear is pushing scared investors into Treasuries. The iShares 20+ Year Treasury Bond ETF (TLT) gained 1.2% as part of a sharp rebound.

Walgreens Boots Alliance (WBA)

I am still stubbornly short WBA and sticking by my long-term bearish thesis. WBA is clearly considered a “safety” play during the market sell-off. It took a mildly disappointing earnings report to send the stock down…and buyers still were able to close the gap down momentarily. I will clearly be hanging around for the long-term…

Consumer Staples Select Sector SPDR ETF (XLP)
Consumer staples are sometimes considered a place to hide away from the market’s storms. No longer for this sell-off. XLP broke down decisively below its 200DMA support after seemingly bouncing successfully off the support last week. Trading volume surged to its highest level since November, 2016, making for a very bearish setup. I decided to just ride out my call options in XLP.

Consumer Staples Select Sector SPDR ETF (XLP) lost a whopping 2.5% as part of a bearish 200DMA breakdown on very high trading volume.

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #2 under 20% (oversold), Day #2 under 30%, Day #9 under 40%, Day #14 under 50%, Day #30 under 60%, Day #83 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY puts, long GLD shares and call spread, long TLT calls, short WBA, long SPY calls

AT40 = 11.7% of stocks are trading above their respective 40-day moving averages (DMAs) (hit an intraday low of 9.4%, oversold day #3)
AT200 = 32.3% of stocks are trading above their respective 200DMAs (intraday low of 30.0%)
VIX = 21.3 (a decrease of 14.7%)
Short-term Trading Call: bullish

Commentary
AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), fell as low as 9.4% on Friday. AT40 dropped as low as 8.6% intraday during the February swoon (February 9, 2018 to be exact). Since 1986, AT40 has closed below 9.4% only 92 trading days, and AT40 last closed below this level on January 21, 2016 at 8.3%. The day before that, AT40 closed at 7.4% and traded as low as 3.8%. AT40 obviously cannot trade much lower than these levels.

AT200, the percentage of stocks trading above their respective 200DMAs, is very important now as an oversold gauge. AT200 closed the week at 32.3%. In January, 2016, AT200 managed to get as low as 9.0%, a level last seen around the historic March, 2009 bottom. In other words, while AT40 suggests the market is set up for a sustained bounce, AT200 reminds me that these oversold extremes can get yet more extreme if panic gets a fresh heaping of fuel.

Trading action around important technical levels also remind me that the market could go lower. The S&P 500 (SPY) is essentially back to flat for the year but is still 7.2% above this year’s double bottom. A retest will be in play if the index fails to win what is perhaps the stock market’s most important battle: a test of 200DMA support. During the February swoon, the S&P 500 only ONCE closed below its 200DMA. The index closed below its 200DMA on Thursday and set up Friday’s drama. The index gapped up just above its 200DMA in an effort to clear out bearish sentiment. Sellers quickly closed the gap and then failed to take the index lower. Buyers fought off a test of the intraday low and managed to churn the index toward the day’s open for a 1.4% gain on the day. It was a messy way to demonstrate the importance of the 200DMA! If buyers can follow through early this coming week, the technical pattern will look like a (short-term) washout of the market’s most motivated and panicked sellers. I call this a conditional reprieve in the middle of oversold conditions because of the criticality of this 200DMA pivot.

The S&P 500 (SPY) closed right on top of its 200DMA support after sellers almost ruined an opening gap up.

The NASDAQ had a battle similar to the S&P 500’s; the main difference came with an intraday pullback that did not create a complete reversal of the gap up. The Invesco QQQ Trust (QQQ) did not fully reverse its gap above the 200DMA. Its 2.8% gain on the day has the look of a successful, and bullish, reversal of a 200DMA breakdown.

The NASDAQ gained 2.3% with a gap up and then close just below its 200DMA.

The Invesco QQQ Trust (QQQ) made a convincing leap with the reversal of the opening gap up only touching 200DMA support. QQQ ended the day with a 2.8% gain.

While the big indices fared well at the end of the day, other indices did not. Their poor performance underlined Friday’s conditional reprieve. Some of these sectors need to wake up to help the stock market mount a credible and sustainable bounce out of oversold conditions.

The faders managed to keep these indices plastered with bearish sentiment. The iShares Russell 2000 ETF (IWM) closed flat after sellers completely reversed the opening gap up. The Financial Select Sector SPDR ETF (XLF) suffered a similar fate. This disappointment was even more critical given the wake of bank earnings from the likes of JP Morgan Chase (JPM). The iShares US Home Construction ETF (ITB) held no pretense of recovery as its fade resulted in a 1.0% loss and fresh 17-month low. ITB has dropped 17 of the last 18 trading days in a sign of a near complete market retreat from home builders.

The iShares Russell 2000 ETF (IWM) ended the day flat as it clings to the starting point of the big May breakout.

Bank earnings failed to save Financial Select Sector SPDR ETF (XLF). Sellers faded the opening gap up to a flat close on the day. At least buyers were able to bounce back from a fresh 2018 intraday low.

The iShares US Home Construction ETF (ITB) continued its epic slide with an 18th straight down day. The 1.0% loss closed ITB at a 17-month low.

As suggested by the breadth indicators, the sell-off is causing broad damage. The Health Care Select Sector SPDR ETF (XLV) had a solid uptrend coming out of the February swoon. XLV even broke out to a new all-time high in late August. Last week, XLV broke down solidly below its 50DMA support and nearly reversed all its gains from the breakout.

The Health Care Select Sector SPDR ETF (XLV) gained 1.5% in a return to the lower Bollinger Band. A 50DMA breakdown is not confirmed.

The volatility index, the VIX, dropped 14.7% to 21.3. The intraday high failed to top Thursday’s intraday high: a small positive for volatility faders. Still, the VIX is still considered elevated given its perch above 20.

The volatility index, the VIX, remains elevated despite a 14.7% pullback.

The VIX typically serves as a gauge of fear on the high side and complacency on the low side. If we had an equivalent for government economic policies, say a “GIX”, the GIX might be at record lows. Confidence is of course half the battle of economic performance and confidence is tangibly oozing from D.C. (from one side anyway!). With consumer confidence at record levels, unemployment down to historic levels, and economic growth impressively strong, the rhetoric accompanying policymakers represents a euphoria perhaps only matched by the complacency of the “Great Moderation” when the Federal Reserve (mostly under Chair Alan Greenspan) was heralded for ushering in a time of lasting economic prosperity…just ahead of the Great Recession. If you knew nothing about economics, you might conclude this time around that the U.S. really has figured out how to repeal the laws of economic cycles.

In particular, Larry Kudlow, the leader of President Trump’s National Economic Council, is beating a steady drum of unapologetic and triumphant confidence. In a CNBC interview, Kudlow issued a sound bite that *I* am confident will one day in the not-so-distant future sound cringeworthy to those of us who follow economics. Kudlow declared: “We are in a hot economic boom. There’s no end in sight.”

Other key points from this interview…

Not worried about the Fed killing the economy. It has staying power. {Me: This message is consistent with Treasury Secretary Mnuchin’s reassurances about monetary policy. Contrast these claims with President Trump’s worries over rate hikes.}
Biggest blue collar employment boom since the 1980s.
In 2018, U.S. entered an economic boom that no one thought was possible.
Loves the skepticism. Proved the skeptics quite wrong. Don’t think that’s going to change.

I fully understand why Kudlow is blowing the trumpets and beating the drums. For example, the display is an “eye-for-an-eye” response to the shrill skeptics who denounced the policies that helped kicked the economy into a higher gear. However, as an investor and particularly as a trader, I cannot help but think about the contrary implications of important government officials claiming that the economic good times will continue as far as the eye can see. Such claims defy experience and the laws of economic/business cycles. Such claims help form a foundation of hubris which can lead to policy errors. My unavoidable wariness feels even more poignant when in parallel I stare at charts showing a stock market violently and sharply falling off its all-time highs. I am not worried about over-optimism today or this quarter, but it is something that makes me stand up and take notice. (At the end of the chart review, I include a link to a Bloomberg Politics video for more context on Kudlow’s economic triumphalism).

For now, I am keenly focused on my strategy for trading oversold market conditions. The stock market is on day #3 of oversold conditions. The average oversold period lasts about 5 days and the median is around 2 (50% below 2 and 50% above 2). At the current oversold depths, it could easily take another 2 or 3 days to climb out of trouble. The longer an overperiod lasts, the more bearish the implications. Similarly, the more frequently the market returns to oversold conditions, the more bearish the implications. The drama at the 200DMAs is extremely important context for these bearish implications. A stubbornly oversold market with an S&P 500 and NASDAQ below 200DMAs is a recipe for fading rallies.

Mean and Median Duration Below Given T2108 Threshold

The drama at the 200DMAs made me a little less aggressive. I sold my S&P 500 call options immediately after the open. I added to my Caterpillar (CAT) put options. I took profits in other bullish positions. I selected two small fades with a short on Roku (ROKU) which was up as much as 10% at one point, and I bought shares in Direxion Daily Russia Bear 3X ETF (RUSS). On the bullish side, I doubled down on put options on the ProShares Ultra VIX Short-Term Futures (UVXY) and opened a calendar call spread on Nvidia (NVDA). I become an aggressive buyer of SPY and QQQ call options on a combination of indices trading well below their lower Bollinger Bands (BB), volatility surging, and AT40/AT200 reaching toward historic oversold lows. Again, with earnings season coming up, I am leery of taking on a lot stock-specific risk as part of the oversold trading strategy.

CHART REVIEWS

Apple (AAPL)
There are a few encouraging stocks left among the carnage. AAPL is the most important stock of that thinning crew. On Wednesday, AAPL closed below its 50DMA for the first time since June. Friday’s gap up and gain of 3.6% was made all the more bullish by the ability of buyers to close AAPL near its intraday high. AAPL can even still “see” its all-time high just up the street…

Apple (AAPL) looks like it can hold a trading range while the rest of the stock market wavers and implodes. AAPL is just another point away from a 20DMA breakout that could confirm the stock as a wall against the storm.

Autodesk (ADSK)
ADSK gained 5.6% on a very nice gap up and bounce from 200DMA support. With successful support inside the previous consolidation range, ADSK looks like a buy (outside of pre-earnings risk of course).

Autodesk (ADSK) bounced 5.6% off a successful test of 200DMA support.

Amazon.com (AMZN)
AMZN now has a “barbell” of bearishness and bullishness. The stock’s 50DMA breakdown confirmed a double-top. Friday’s 4.0% gain and gap up created an abandoned baby bottom. I would be more impressed if the bottom occurred closer to 200DMA support which I thought needed testing before AMZN could sustain upward momentum.

Amazon.com (AMZN) essentially created an abandoned baby bottom leaving behind a sell-off that left the stock extremely far below its lower Bollinger Band

Boeing (BA)
BA is one of the holdouts of strength in the sell-off. While the stock faded from its high on Friday, it held 50DMA support for the second straight day.

Boeing (BA) is fighting to hold onto support at its 50DMA

Alibaba Group Holdings (BABA)
BABA may have finally bottomed in time for a run-up to November’s Single’s Day in China. The bottom started with a surge of buying off Thursday’s intraday and 16-month low. I am anticipating at minimum a return to the top of the current downtrend channel defined by the 20 and 50DMAs.

Ali Baba Group Holding (BABA) gapped up 3.8% and quickly reversed a steep loss.

Baidu (BIDU)
BIDU gapped up for a 3.2% gain that looks very similar to BABA’s. The first upside target is the downtrending 50DMA.

Baidu (BIDU) gapped up 3.2% and almost reversed an entire week's loss. — Baidu (BIDU) gapped up 3.2% and almost reversed an entire week’s loss.

Caterpillar (CAT)
So much for the 200DMA breakout. CAT topped out right at the top of the previous consolidation period that dominated trading in the immediate aftermath of the February swoon. CAT broke down below its 50DMA and is at risk for retesting its 2018 low if bearish sentiment prevails in the market. This positioning makes CAT an even better hedge.

Caterpillar (CAT) plunged this week below its 50DMA and failed intraday at this new line of resistance.

EventBrite (EB)
A swath of recent IPOs had the misfortune of rolling out in the past few weeks. In a sign of the times, many traders and investors rushed in and bid these stocks to lofty and extremely optimistic post-IPO gains just ahead of the sell-off. EB is one of those stocks. The stock has traded nearly straight down since peaking at the end of September. The stock closed the week within $5 of its IPO price of $23.

EventBrite (EB) is 26% off its closing all-time high to an all-time low after an October of near non-stop selling.

Fluor (FLR)
FLR is the latest post-earnings disaster that has investors bracing themselves this earnings season. I started listening to the conference call explaining the pre-earnings warning to gather up clues and lessons about the economic environment. I am almost halfway through my review and have only heard company-specific issues. I am fascinated by the outright negativity and even despair I heard from analysts on the call. I hope to do a separate write-up on the FLR news. My teaser for that post: I think FLR is a buy on the discount.

Fluor (FLR) collapsed post-earnings and returned to its price level following the last earnings collapse.

Iqiyi (IQ)
IQ is called the Netflix (NFLX) of China. Given NFLX’s nearly unquestioned success that equation makes IQ a near automatic buy. I was an early buyer and sold in the low 30s after what I thought was an unsustainable and nearly parabolic run-up. I am glad I stayed patient before buying back in. Right now, I am focused on playing the trading channel. If IQ gets back to the low 20s, I will start building a core position again.

Iqiyi (IQ) is grinding lower through a well-defined trading channel with its 50DMA holding firm as resistance.

Nvidia (NVDA)
I meant to dive into NVDA in Thursday’s sell-off. I still bought into the gap up as I can see NVDA quickly rallying back to its 50DMA as market sentiment improves. I bought a calendar call spread to provide enough time for the trade to work and eliminate a lot of the premium for high volatility.

Nvidia (NVDA) gapped up right to 200DMA resistance with 4.9% gain on the day.

U.S. Concrete (USCR)
USCR is another “my bad” situation. I talked the praises of USCR based on two interviews I conducted with the CEO. The last interview was in April. At that time, the stock was bottoming as part of a recovery from the February swoon. A 50DMA breakout soon thereafter seemed to validate the buying opportunity. Unfortunately, June brought a fresh breakdown. October has so far delivered a near collapse in the stock of 21.6% in just these first two weeks. USCR is now down 57.0% year-to-date and is trading at a 3 1/2 year low. Of course the stock looks like an even better bargain, but I am no longer interested in fighting the market. I am reverting to technicals by waiting for buyers to return and confirm renewed interest. Until then, USCR has more downside risk to $25 around which the stock consolidated in 2014.

U.S. Concrete (USCR) continues to get crushed. Today's 1.1% gain was little consolation in the face of a 57% year-to-date drop and 3 1/2 year low. — U.S. Concrete (USCR) continues to get crushed. Today’s 1.1% gain was little consolation in the face of a 57% year-to-date drop and 3 1/2 year low.

Zuora (ZUO)
Zuo is one of the many “cloud” stocks falling from favor in this risk off environment. ZUO broke to an all-time low last week. Its IPO price was $14. I have a strong feeling a LOT of speculative IPOs from this year will not stop selling off until they make all-time lows or even reach/pass their IPO prices.

Zuora (ZUO) faded but avoided a fresh all-time low with a 1.5% gain.

Bonus material: The U.S. economy is “crushing it” (August 16, 2018)
(Video only available directly on YouTube)

Some key quotes from Kudlow’s monologue…

“By far, the single biggest event….this year is an economic boom that most people thought would be impossible to generate…a genuine economic boom.”
“Confidence is everything”
“…our economy, our investors, our workforce are crushing it right now. We are crushing it….any business economist worth their salt will tell you we’re going for a while.”
“We’re in the early stages here. We’re in the early innings. We’ve never had a cap goods boom, and now we’re starting one.”
“The single biggest story this year is an economic boom that is durable and lasting and that most people thought was impossible and they were wrong.”

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #3 under 20% (oversold), Day #3 under 30%, Day #10 under 40%, Day #15 under 50%, Day #31 under 60%, Day #84 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY puts, long AAPL calendar call spread, long AMZN call, long BA put spread, long BABA call spreads, long BIDU call spreads, long CAT puts, long ITB calls and calendar call spread, long NVDA call spread, long USCR

{editing note 10/28/18 – this is a restored version of this post after I accidentally over-wrote it in preparing for the next edition of Above the 40}
AT40 = 12.3% of stocks are trading above their respective 40-day moving averages (DMAs) – 7th day of oversold period following 4-day oversold period (as low as 10.3%)
AT200 = 27.8% of stocks are trading above their respective 200DMAs
VIX = 24.2 (as low as 22.1)
Short-term Trading Call: bullish

Commentary
The stock market soared, but AT40 (T2108) and AT200 (T2107), respectively the percentage of stocks trading above their 40 and 200-day moving averages (DMAs), only gained a few percentage points and failed to reverse the previous day’s loss. This combination is a sign of just how much technical damage has been done to the market.

The S&P 500 (SPY) gapped up and closed with a 1.9% gain but well off intraday highs.

Also note that the S&P 500’s 200DMA turned downward for the second straight day. As a reminder, this critical long-term trendline last declined on a daily basis in May, 2016.

The NASDAQ gapped up significantly and closed with a 3.0% gain but well off intraday highs.

The Invesco QQQ Trust (QQQ) gapped up significantly and closed with a 3.5% gain. More importantly, QQQ faded from 200DMA resistance.

The volatility index, the VIX, dropped just 4.0% after a rebound off its low. The fear gauge still looks poised to go higher before the next volatility implosion.

The volatility index, the VIX, maintained its uptrend from the recent low with a rebound off its intraday low.

The currency markets are flashing new dangers in the form of the Australia dollar (FXA) versus the Japanese yen (FXY). Overnight, AUD/JPY plunged and broke the important September low and hit a near 2-year low. At the time of writing, AUD/JPY bounced just enough to recover that low. As a reminder, AUD/JPY can provide an important tell on the market’s current risk tolerance. Right now, it looks like that tolerance just got a lot lower.

AUD/JPY plunged at one point to a near 2-year low while breaking through critical support from September.

Source: Trading View

Focusing on the bullish opportunities is still paying off with call options on SPY. I expected to hold the two tranches I bought into Wednesday’s sell-off until next week, but the S&P 500 soared enough to move me to take profits (in other words, I did not want to risk losing the profits to another swoosh lower that fades the day’s strong rally). I will continue to exercise oversold trading rules in buying SPY call options (essentially buying when the S&P 500 plunges along with a surge/spike in volatility).

With the oversold period stretched into essentially 11 days, the second derivative of the stock market is in full swing. As I prepare for a more extended oversold period of churn and 200DMA resistance levels holding firm, I am back to hedging in small bits. Per the strategy I laid out on Netflix (NFLX), I faded its rally today. I sold a call spread expiring Friday. With Alphabet (GOOG) and Amazon.com (AMZN) earnings pulling down big cap tech in after hours, it looks like my trade will work out. I also wanted to buy a calendar put spread on NFLX, but my order never filled. As another hedge, I bought a single put option on Goldman Sachs (GS) expiring Friday. To avoid swinging myself to the bearish side, I added call options on Splunk (SPLK) expiring next week.

CHART REVIEWS

Apple (AAPL)
AAPL is still the north star for tech stocks. The calamity in the rest of the market has yet to hit AAPL much. With earnings next week, I was bracing for a major test for the stock and the rest of the stock market. The poor response to GOOG and AMZN earnings may deliver the test ahead of schedule.

Apple (AAPL) continued its pivot around its 50DMA as it holds a trading range.

Align Technology (ALGN)
ALGN collapsed in the wake of its earnings on extremely high trading volume (a 16-month high). The loss of 20.2% took ALGN to an 8-month low. In less than a month, ALGN lost its entire gain for 2018. This kind of punishment for high-flying, high valuation stocks is more technical damage to add to the growing carnage.

Align Technology (ALGN) confirmed its 200DMA breakdown with a post-earnings gap down and a 20.2% loss.

Goldcorp (GG)
GG took me aback with a 18.7% post-earnings loss that took the stock all the way back to early 2002 levels. My whole experience on miners has taught me to just stick with the yellow metal itself. The miners just add unnecessary operational risk. I am dumping my position soon. When (if?) the stock closes this post-earnings gap down, I will reconsider my positioning.

Goldcorp (GG) lost 18.7% on a massive post-earnings loss. The stock is at a 16+ year low.

Meritage Homes (MTH)
MTH reported earnings on the right day. The stock received some serious tailwinds to the tune of a 9.5% gain. The next test for the stock is resistance from its steeply downtrending 20DMA. If sentiment is truly turning around, buyers will soon slice right through this resistance. Otherwise, it will be back to the same ol’ fade.

Meritage Homes (MTH) soared 9.5% post-earnings. The stock closed with a small fade from the downtrending 20DMA.

Oreilly Automotive (ORLY)
ORLY printed an intriguing pattern going into earnings. It slowly sagged as its 20 and 50DMAs converged. The stock dropped 5.1% ahead of earnings and gapped down following earnings. This trading action looks too much like topping action, so this is a dip I will NOT buy this time around.

Oreilly Automotive (ORLY) sagged into earnings and barely closed flat after a strong fade from post-earnings highs.

Tesla (TSLA)
Another week, another whacky set of events for TSLA. While the stock market sank this week, TSLA soared. A dramatic pop of 14.2% occurred on the heels of TSLA announcing it would deliver earnings a week earlier than originally planned. Even Citron caught on to the bullish implications.

$TSLA dropping earnings on top of $F tomorrow might be a bad sign for shorts. After reviewing all recent info on $TSLA dominating its categories, Citron is LONG Telsa for this quarter. Full report https://t.co/eZLSbtL0kg

— Citron Research (@CitronResearch) October 23, 2018

Sure enough, TSLA delivered earnings results that pleased the market. The stock finished with a 9.1% gain and a 200DMA breakout. However, sellers did manage to push the stock back to the previous day’s intraday high at one point. The drama caught me flat-footed as I was positioning for a bullish pre-earnings play the NEXT week. While things worked out OK, I could have easily been caught with a pre-earnings warning. This drama just reminded me of the whacky (upside and downside) risks inherent in trading this stock. Going forward, the stock still has major overhead resistance in the mid-300s. I am also still not interested in holding the stock for an extended period until I see what happens after TSLA’s next funding round.

Tesla (TSLA) printed a 200DMA gap up post-earnings. Yet at one point it managed to fade all the way to the previous day's intraday high. — Tesla (TSLA) printed a 200DMA gap up post-earnings. Yet at one point it managed to fade all the way to the previous day’s intraday high.

Twitter (TWTR)
After seeing TWTR pop 15.5% post-earnings, I heaved a major sigh of relief. The bullish case remains intact for TWTR, and I will certainly use weakness from general stock market malaise to add to my position.

Twitter (TWTR) gained 15.5% post-earnings but faded from 200DMA resistance.

— – —

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Active AT40 (T2108) periods: Day #7 under 20% (oversold), Day #12 under 30%, Day #19 under 40%, Day #24 under 50%, Day #40 under 60%, Day #93 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY puts, long GG shares, long GS put, short NFLX call spread; long TSLA shares, short a call, long put spread, long call spread; long TWTR

AT40 = 40.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 37.4% of stocks are trading above their respective 200DMAs
VIX = 16.4
Short-term Trading Call: bullish

Commentary
Financial markets made their votes very clear after the U.S. 2018 midterm election.

via GIPHY

Apparently, today’s rally in the S&P 500 (SPY) was the index’s largest one-day post midterm election rally since 1982. This exclamation of a data point does not take into account the gains (or losses) preceding the big day, but I suppose an extreme reaction makes sense on the heels of what was an extreme struggle with oversold conditions that included a declining 200-day moving average (DMA) for the first time in 2 1/2 years.

The S&P 500 (SPY) gapped up and soared 2.1% with a bullish breakout above 200DMA resistance. The index closed right at the peak following the first oversold period in October.

The S&P 500 closed at its high of the day, broke out above its 200DMA, and sliced through the 2800 level that proved so important starting in June (see the dark horizontal line in the above chart). The index is in a bullish position and looks ready to challenge its downward sloping 50DMA resistance directly overhead. The index will only flag the “all clear” after it finishes reversing all its losses from the big 50DMA breakdown that launched the market’s struggles with oversold trading conditions.

The NASDAQ and the Invesco QQQ Trust (QQQ) also gapped into 200DMA breakouts, adding to the market-wide exclamation points. Both tech-laden indices still have considerable headroom before challenging the first post-oversold high in October.

The NASDAQ surged 2.6% and sliced right through 200DMA resistance.

The Invesco QQQ Trust (QQQ) gained 1.3% after opening with a gap up that perfectly coincided with 200DMA resistance.

The iShares Russell 2000 ETF (IWM) lagged the bigger indices with a 1.8% gain. Small caps have the biggest challenge ahead as downtrending 50 and 200DMAs converge to provide what should prove to be stiff resistance. I am holding my core position of call options that I accumulated during the oversold period in anticipation of a rally into resistance by the end of next week.

The iShares Russell 2000 ETF (IWM) did not cross any critical technical milestones with its 1.8% gain. Still the rally confirmed the current upward momentum.

The volatility index, the VIX, featured prominently in my oversold trading strategy. The last tranche worked out spectacularly with one of the loudest exclamation points for this post-oversold period. I was focused on a post-election volatility implosion (again, without any prediction on the specifics of the outcome), and the market delivered. The VIX collapsed 17.8% and effectively reversed ALL its gains since the first oversold period began. This milestone is another bullish development. With a Federal Reserve pronouncement on monetary policy coming the next day, I did not want to take the risk of holding overnight my ProShares Ultra VIX Short-Term Futures (UVXY) put options which expire in just two days. In the near-term, I expect volatility gains to be more short-lived than during the oversold periods, so I am ready to continue fading the VIX.

The volatility index, the VIX, lost 17.8% on the day. It is perched right at a critical juncture with almost a month of gains from oversold churn now lost.

The ProShares Ultra VIX Short-Term Futures (UVXY) lost 10.7%, a much smaller loss than I would have expected given the size of the VIX's loss. — The ProShares Ultra VIX Short-Term Futures (UVXY) lost 10.7%, a much smaller loss than I would have expected given the size of the VIX’s loss.

As I wrote in the last Above the 40 post, long-term passive index investors should now feel comfortable returning to their regularly scheduled programming (a break of the oversold lows would change things of course). In the coming days, weeks, and months there will be a blitz of narratives and attempts to back into explanations of the market’s on-going machinations. The mid-term elections are over, but the same catalysts that the market has alternatively ignored and then obsessed over this year are largely still in place. This dynamic will provide plenty of fodder for distracting chatter that will open up short-term trading opportunities (swing trades) in what I expect to be an overall bullish trading environment through at least the end of the year.

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, soared today from 31.2% to 40.5% in a resounding confirmation of the bullish end to oversold trading conditions. AT40 rocketed off its historic low and kept slicing higher after the last oversold period ended. Even the conservative oversold trading strategy that triggers buys after the oversold period ends would have worked like a wonder. Note that between 40 and 60%, AT40’s level matters a lot less as it will be off the lower and upper extremes.

AT40 (T2108) is now a rocketship shining the path higher for the stock market. It closed at a 5-week high and wiped away all its October losses.

AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, remains important as it still bears the scars of all the technical damage done through the two oversold periods in October. AT200 closed at 37.4% and has yet to pass its high following the first October oversold period. This longer-term breadth indicator still has a LONG way to go to wipe out October’s damaging losses.

AT200 (T2107) printed a V-bottom from the epic lows of the last oversold period, but it is far from repairing the technical damage from October.

The Australian dollar (FXA) versus the Japanese yen (FXY) is confirming the bullish tone with flashing green lights. AUD/JPY has rocketed right past the previous high. I ended my hedge going short the currency pair and will soon flip to ride the tiger (I also want to collect the carry and not pay it anymore!)

AUD/JPY is in full bull mode as it has already sliced through resistance from its downtrending 200DMA and the previous highs.

Source: Trading View

CHART REVIEWS

Apple (AAPL)
AAPL was one of the last stocks to fall in the oversold period. Still, earnings were strong enough to push the stock right off its pedestal. Now, AAPL is right back in conquer mode. Today’s amazing 3.0% gain reversed the losses from Monday’s latest manifestation of iPhone fears. With my earnings play likely to go out with a whimper, I reloaded on AAPL calls in Monday’s weakness. I closed out that position into today’s rally. With AAPL in the market buying up its stock with many billions in hand, AAPL becomes an ideal buy-the-dip target for swing trades.

Cash-rich companies are set to pour $2.5 trillion into buybacks, dividends and M&A this year from CNBC.

Apple (AAPL) soared 3.0% in a move that reversed losses from the latest iPhone scare.

Amazon.com (AMZN)
AMZN is continuing an impressive post-earnings comeback. I had to rub my eyes twice when I saw its 113-point, 6.9% gain today. I was fortunate enough to open a fresh calendar call spread the previous day. Today’s gain triggered my sell point, but I definitely under-estimated the near-term upside potential!

Amazon.com (AMZN) gained a whopping 6.9% with a definitive 200DMA breakout.

CSX Corporation (CSX)
CSX was one of my most aggressive positions that I accumulated during the oversold period. I took profits on today’s small 50DMA breakout. I am assuming the remaining upside opportunity is not big enough to risk continuing to hold call options which expire next Friday.

CSX Corporation (CSX) gained 2.8%. Its (small) 50DMA breakout confirmed 200DMA support.

iShares MSCI Emerging Markets ETF (EEM)
I failed to add EEM to my shopping list during the oversold period. Fortunately, there is likely plenty of time to hop onto an emerging market recovery. EEM is 7.6% off its 19-month low, but it is well-defined by an on-going downtrend.

The iShares MSCI Emerging Markets ETF (EEM) broke out above its downtrending 50DMA resistance with a 1.9% gain.

Fluor (FLR)
What I learned during FLR’s pre-earnings warning was enough to get me to buy call options ahead of earnings. The post-earnings drop was a disappointment, but the stock is now in recovery mode. Today’s 2.2% pop was enough to take me out of my position at a profit. (I still have a write-up outstanding on FLR!)

Fluor (FLR) is very slowly repairing post-earnings damage.

Kors Holdings (KORS)
KORS dropped 14.6% post-earnings. The stock nearly closed its gap up from November, 2017 earnings. KORS dropped Q3 earnings guidance but guided in-line for the year. So this looks like a golden buying opportunity. I will get in as soon as I see signs of strong buying like a move above today’s intraday high and/or the next post-earnings closing high.

Michael Kors Holdings (KORS) lost 14.6% post-earnings and almost closed the gap up from earnings a year ago!

LGI Homes (LGIH)
LGIH ended the recent streak of home builders receiving positive post-earnings reactions. I will be warily watching to see whether the market returns to fading home builders. I will need to review LGIH’s earnings report for specific downside catalysts.

LGI Homes (LGIH) was rejected by 50DMA resistance after earnings disappointed investors.

M.D.C. Holdings (MDC)
MDC was the last home builder I would have picked to lead the sector higher relative to technicals. Yet, here MDC is fresh off a challenge of 200DMA resistance. MDC even reversed all its losses from October.

When M.D.C. Holdings (MDC) challenged its 200DMA resistance, the stock became one of the strongest home builders relative to the October losses.

Martin Marietta Materials (MLM)
MLM was in the middle of a sharp V-shaped recovery from its 2 1/2 year low until today’s sharp fade from intraday highs. The upward momentum will now likely give way to churn and consolidation.

Earnings helped propel Martin Marietta Materials (MLM) through its 50DMA for the first time since the breakdown in late July. However, today the stock faded sharply from intraday highs.

Match.com (MTCH)
Somehow MTCH kept itself above the market’s fray in October. The stock was no match for earnings though. The huge 17.0% post-earnings loss was enough to punch MTCH below its 200DMA for the first time in over 3 months. I am now looking for a reversal of August’s gap up before getting interested in buying the dip.

Match.com (MTCH) lost 17.0% post-earnings and closed below its 200DMA for the first time in over 3 months.

Mylan (MYL)
Much to my surprise, MYL did not even come close to hitting the $6 EPS target by March, 2018 that would have triggered a CEO bonus. The stock has now effectively gone nowhere for about 3 years with periodic bursts of excitement and disappointment. This week’s post-earnings pop saved the stock from what looked like a move to test the 2017 low. Still, MYL is down 13.6% year-to-date.

Mylan (MYL) sprung back to life post-earnings, but the stock still has plenty of work ahead to end its downward drift.

PulteGroup (PHM)
PHM is up 20.2% from its 21-month low. The stock took a rest right under 50DMA resistance and now looks ready to press higher. I am still hoping to get a dip to buy – at least 5%.

With its 20DMA turning upward, PulteGroup (PHM) looks like it is taking the pause that refreshes ahead of a 50DMA breakout.

Children’s Place (PLCE)
PLCE is a great example of the short-term opportunities I look for in the wake of the angst of an oversold period. PLCE’s announcement of executive departures sent the stock reeling. Yet, the company included reassuring news on its financial performance…

“We delivered positive comp sales every month in Q3 resulting in a positive high single digit comp for the quarter. In light of our strong performance, we are reaffirming our Q3 EPS guidance. Importantly, our inventory is in great shape as we enter Q4.”

That was all I needed to get ready to buy. With the stock two points off the bottom, I first bought shares and put in a low bid for a call option. The subsequent rally surprised me as I did not expect buyers to show up in such force so quickly. I was able to take profits on both positions as PLCE returned to its opening price.

Children's Place (PLCE) stumbled after news of executive departures. The stock is trading well above the intraday lows as strong guidance might still be worth something. — Children’s Place (PLCE) stumbled after news of executive departures. The stock is trading well above the intraday lows as strong guidance might still be worth something.

Splunk (SPLK)
SPLK delivered another kind of post-oversold angst buying opportunity. A simple downgrade to “market perform” was enough to send the stock reeling and a 2/3 reversal of its gains off the low from the last oversold period. I bought a single call option as I suspected I might get an opportunity to add more at lower prices. That opportunity did not come. Instead, SPLK surged the very next day with a 7.2% gain. Needless to say I took profits in the middle of the rally. I think the pop was a combination of the tailwind of a market rally and sympathy buying in the wake of strong post-earnings performances of other stocks in the sector like Tableau (DATA).

Splunk (SPLK) jumped 7.2% and reversed its entire loss from the previous day's downgrade. — Splunk (SPLK) jumped 7.2% and reversed its entire loss from the previous day’s downgrade.

United States Oil (USO)
While November provides relief for the stock market, oil continues its sell-off. USO has yet to notch a daily gain in November. Its lower Bollinger Band (BB) channel is guiding the trading action ever lower.

United States Oil (USO) did not get the memo: November has delivered a continuation of October's selling with no up day yet. — United States Oil (USO) did not get the memo: November has delivered a continuation of October’s selling with no up day yet.

Energy Select Sector SPDR ETF (XLE)
XLE is keeping pace with the market’s post-oversold rally despite oil’s sell-off. I am wondering how long this can last…

Energy Select Sector SPDR ETF (XLE) is following the market higher off its lows and now contradicting oil's continued decline. — Energy Select Sector SPDR ETF (XLE) is following the market higher off its lows and now contradicting oil’s continued decline.

Zillow Group (ZG)
I guess I should have triggered a third round of my long Redfin (RDFN) versus short ZG pairs trade! ZG suffered a stomach-churning post-earnings 26.6% loss. At least unlike RDFN, ZG did not seem to say anything which tanked home builders. (Yet another earnings report I need to review closely).

Zillow Group (ZG) cratered 26.6% in a post-earnings move that took the stock back to June, 2016 levels.

— – —

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Active AT40 (T2108) periods: Day #5 over 20%, Day #2 over 30%, Day #1 over 40% (overperiod), Day #33 under 50% (underperiod), Day #49 under 60%, Day #102 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

The charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long SSO, long AAPL calls, long IWM calls, long AUD/JPY

AT40 = 25.5% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 23.4% of stocks are trading above their respective 200DMAs (just off a 32-month low)
VIX = 23.2 (as high as 24.7)
Short-term Trading Call: cautiously bullish

Commentary
I am surprised the stock market has yet to close in oversold conditions. AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, dropped to 25.5%. Its lowest close at the end of November’s sell-off was 23.4%. It is too much to expect that the stock market will once again bounce from these levels, but it just so happens that the S&P 500 (SPY) also closed even with that November low.

The S&P 500 (SPY) lost 2.3% and closed right at the November low. The 2018 low is in play.

That November low was important because it matched the October low which marked deep oversold territory. That oversold period was so extreme that I described a “second derivative” moment:

It is a “second derivative” moment when the selling becomes so extreme that the bull market itself gets questioned and scenarios for a bear market loom more possible. It is a moment when the extreme of an oversold condition itself reaches historical extremes, and market participants should start considering a wider range of potential outcomes. This is the point where I expect the next rally out of oversold conditions to lead to an opportunity for selling and/or shorting. Resistance at 200DMAs loom larger and larger.
Above the 40 (October 24, 2018) – The Second Derivative Is Here for the Stock Market (New Oversold Extremes)

This bearishness played out in the form of two failed rallies which both got rejected from 50 and/or 200DMA resistance levels. The first rally started after AT40 created a bullish divergence with the S&P 500. The second rally also followed a bullish divergence that was milder than the first, so I did not act on it until a rise in the S&P 500 seemed to confirm the divergence. With these observations in mind, I will act aggressively on another bullish divergence. However, I fully expect this latest sell-off to plunge the market into oversold conditions before it ends. The short-term trading call stays at cautiously bullish in deference to the possibilities for an imminent rebound.

AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, remains an important part of the technical picture. AT200 closed at 23.4% and a fresh 34-month low. So while the market is still able to deliver rallies in the short-term, the longer-term picture continues to deteriorate. These are more signs of bear market action. Traders should still sell rallies. As an example of my creeping longer-term bearishness, I started reducing my equity exposure in longer-term investment accounts (I still intend to plow those funds back into the market on a steeper sell-off).

The NASDAQ and the Invesco QQQ Trust (QQQ) have yet to reach the dire positioning of the S&P 500 (SPY). Both tech laden indices are still well off their November lows. However, this achievement may mean little considering they breached their October lows. In other words, these indices may be headed for another lower low; such moves would be consistent with the bearish action unfolding on the failures at MA resistance and the associated lower highs.

The NASDAQ lost 3.1% and almost finished reversing the gains from the last low.

The Invesco QQQ Trust (QQQ) plunged again for a 3.3% loss and put its November low back into play.

The volatility index, the VIX, is supportive of an imminent bounce. The fear gauge closed with a gain from Thursday but never surpassed the intraday high for Thursday. I chose to accumulate put options on ProShares Ultra VIX Short-Term Futures (UVXY).

The volatility index, the VIX, jumped 9.6% but never broke the intraday high from the previous day.

The iShares Russell 2000 ETF (IWM) remains worrisome. This small cap index ended the week at a closing 15-month low. The index too easily confirmed resistance at its 50DMA. Still, I have IWM in my sights for speculating on call options if the market flips oversold. I would target the rapidly declining 50DMA resistance for a rebound.

The iShares Russell 2000 ETF (IWM) closed at a new 15-month closing low with a 2.2% loss on the day.

Financials are in the same leaky boat as small caps. The Financial Select Sector SPDR ETF (XLF) lost 1.9% with a new 15-month closing low. I have returned to betting against financials with a focus on the hapless Goldman Sachs (GS). I took profits on my latest calendar put spread after GS punched right through my $180 strike price. I was hoping the short side would expire worthless and leave me positioned for the coming week with a fistful of long GS put options. GS closed the week at a 26-month low and finished reversing its entire post-election breakout. This is a notable end to an important Trump trade! Dare I say it is a sign of more to come? The arrows are certainly pointing that way…

Finally, at the time of writing, the currency markets are pointing to more weakness to start the week. The Australian dollar (FXA) versus the Japanese yen (FXY) confirmed a 50DMA breakdown. AUD/JPY is back in bearish territory and completes a net worsening picture for the stock market. I am sticking by my long position only because the fundamentals for the Australian economy looked good based on last month’s employment report (those of you who read and listen to market pundits are very familiar with this kind of rationale for stubborn bullishness!).

AUD/JPY continued to drop below 50DMA support. The recent lows are back in play.

Source: Trading View

CHART REVIEWS

Acacia Communications (ACIA)

Given all the drama with U.S. versus China trade relations, I am very surprised that ACIA has held up relatively well. Although it broke through 50DMA support, the stock is still holding onto a gain from the November gap-up. I want to go back to shorting this stock, but I do not like going after relatively strong stocks even in a weak tape.

Applied Materials (AMAT)

I bought AMAT on the confirmation of the 50DMA breakout. Last week, the stock fell right back. This is another example of bear market type behavior. I was planning on adding shares to my call options, but now I am on hold.

Advanced Micro Devices (AMD)

I bought puts in AMD ahead of what I thought was an imminent break of 200DMA support. That break is likely still coming, but the puts already expired worthless. I should have waited for what was a perfect fade at 50DMA resistance.

Boeing (BA)

After mistiming a bullish play on BA on the early November 50DMA breakout, I did not return with a new trade. Too bad – the stock has swung widely and wildly from breakout to support to resistance and back to support. If BA slips further, I will assume the stock has printed a sustained top.

Best Buy (BBY)

BBY is almost finished reversing its breakout from November, 2017. The stock closed at a 52-week low and confirmed its downtrending 20DMA as resistance. BBY was one of the stronger stocks in the retail space, so its persistent weakness is one more confirmation of what I called the top in retail stocks back in October (too bad I did not quickly recognize even bigger implications at that time). I completed taking profits from a calendar put spread. I am eyeing BBY for a fresh bearish position.

Baidu (BIDU)

BIDU is yet one more stock that neatly failed at resistance. BIDU’s 50DMA continues to define the downtrend. I bought a call option in the middle of the big December 4th sell-off in anticipation of a quick bounce back toward resistance. The stock now looks like it wants to break down below support.

Caterpillar (CAT)

CAT gapped right into 200DMA resistance and sold off from there. It was one of several early tells that the post-G20 euphoria would not last. I made two fresh trades in puts. I took profits on the second tranche given the potential for CAT to hold support from its November low. Whether the stock breaks down further or rallies, I will be buying more puts on CAT in the coming days and weeks.

DexCom (DXCM)

DXCM was my big fish of the year that got away. The stock continues to hold up relatively well through the various sell-offs, granted the stock is stuck in a 4-month trading range where the 50DMA is looming ever larger as resistance. I am watching closely for a potential test of 200DMA support. Per AT200, DXCM is part of a very small group of stocks still trading above this important support.

Fluor (FLR)

My attempt to buy FLR on the cheap after post-earnings weakness failed spectacularly. With the stock trading at levels last seen in early 2009, I am even more interested in buying for a long-term play; pessimism on this important infrastructure company is extremely high. I am in NO rush to buy though.

SPDR Gold Trust (GLD)

GLD is on the move. The steady climb is consistent with a market that is getting ready for the Federal Reserve to capitulate on rate hikes. I should have bought last week’s breakout. I will be moving quickly to make a short-term trade to complement my core shares. For now, I am not even worried about looming 200DMA resistance. The wind is behind gold’s sails.

The SPDR Gold Shares (GLD) gained 0.8% for a 5-month high.

General Motors Company (GM)

The Trump Trade in GM is already a distant memory. I used last week’s sell-off to take another swing even as all the optimism over plant closures and layoffs has completely reversed. I am looking for the 50DMA to hold as support, but I am prepared for it to fail on further market weakness.

General Motors (GM) lost 2.8% and clung to 50DMA support. The stock confirmed a 200DMA breakdown and is close to filling the October 31st gap up.

Intel (INTC)

Intel finally dropped back to 50DMA support and gave me the next buying opportunity I was anticipating. This “opportunity” could quickly turn into fool’s gold as support gave way on Friday. This breakdown puts the October low into play. I have also duly noted that the 200DMA is confirmed as stiff resistance…as with so many stocks.

Nike (NKE)

NKE rejoined the vast majority of stocks now trading below their 200DMAs. Fortunately for NKE it still has firm support just below current levels. Unfortunately for NKE, a declining 50DMA is threatening to slowly but surely keep pressuring the stock downward.

iShares 20+ Year Treasury Bond ETF (TLT)

Even more than GLD, TLT is behaving as if investors anticipate a capitulation from the Federal Reserve. TLT launched off 50DMA support last week although the 200DMA held tight as resistance. Now can rate-sensitive stocks benefit? Home builders anyone?

Toll Brothers (TOL)

TOL made an impressive post-earnings rebound from a near disastrous low, but the stock has yet to show additional momentum. The stock conspicuously failed at intraday highs for 3 days in a row. The good news is that if/when TOL manages to break through this logjam, it will be a VERY strong buy at least to 200DMA resistance. I am on alert as always with home builders.

Tesla (TSLA)

TSLA is on an impressive counter-trend run. Lately, the stock almost seemed to feed off market weakness. I was wondering whether “someone” knew “something” and then I heard on Friday about the upcoming 60 Minutes interview with CEO Elon Musk. TSLA was on the edge of cracking its way to a new closing all-time high, but even TSLA ended up succumbing to the market’s selling pressure. It went from a healthy 4.5% gain to a 1.4% loss.

United States Oil (USO)

USO broke above its congestion. Per my prior discussion on USO, I assumed this move confirmed the bottoming pattern. I actually neglected to buy my call options on the breakout, but jumped on the trade on Thursday’s dip. I was very fortunate that the OPEC meeting resulted in a production cut. I decided not to take profits. With a January expiration, I have plenty of time to see whether buyers can continue some momentum. Sellers faded USO down to a 1.6% gain.

Wynn Resorts (WYNN)

WYNN was a huge beneficiary of the post G20 euphoria. The stock gapped up for a 50DMA breakout and 9.5% gain. It was a very bullish move. The next day, the sellers pushed the stock back under the 50DMA. WYNN lost another 6.6% on Friday. I had a calendar call spread in place ahead of the G20, but the move on Monday was so strong that I gained little (Dec/Jan $115). Ironically, I now have more profit on the position with the stock back down to $104.99.

Yelp (YELP)

My call options hit their profit target and sold at the gap open on Friday. Just in time: sellers took over from there. YELP stays on my radar for buying on the dips given the stock buyback program underway. YELP is slowly recovering from last month’s post-earnings disaster.

— – —

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Active AT40 (T2108) periods: Day #25 over 20% (overperiod), Day #1 under 30% (underperiod, ending 8 days over 30%), Day #3 under 40%, Day #53 under 50%, Day #69 under 60%, Day #122 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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long QQQ calls, long AUD/JPY, long UVXY puts, long GM calls, long INTC calls, long USO calls, long WYNN calendar call spread, long GLD, long BIDU call, short TSLA call spread, long TSLA put

AT40 = 19.7% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 20.7% of stocks are trading above their respective 200DMAs (34-month low)
VIX = 21.6
Short-term Trading Call: cautiously bullish

Commentary
The stock market is oversold again as a bearish divergence to start the week came to its “logical conclusion.” AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped to 19.7%, below the 20% threshold for oversold. By rule, I am supposed to switch my short-term trading call to bullish when the market goes oversold, but too much technical damage exists for me to switch off my “cautious” stance. For example, I am still actively hedging long positions even as I stay on alert for a sign to get fully bullish (short-term). I am anticipating a fresh spike in the volatility index, the VIX, as one of those signals.

AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, dropped to a 34-month low showing confirmation of the deepening technical damage happening in the stock market. The longer the market stays stuck in this oversold period, the more bearish I become about whatever rally the market manages to enjoy after the oversold period ends. If the stock market somehow rallies 10% to close the year as one unrepentant bull claims, I will almost certainly look to enter 2019 aggressively short no matter how long this oversold period lasts.

Raging bull Tom Lee @fundstrat says investors should buy stocks hand-over-fist right now. He explains why stocks could rally 10% by year-end pic.twitter.com/QxeybRwHCD
— CNBC's Fast Money (@CNBCFastMoney) December 14, 2018

The last oversold period ended in a surge on November 1st. Since then, the S&P 500 (SPY) has struggled mightily to regain upward momentum. For example, the index peaked after making just two more higher closes after that oversold period ended. The Federal Reserve helped mark the end of the rally. The index came short of that high after its last rally. That rally peaked in what is now an infamous post-G20 flourish that delivered more classic bear market action. That fake-out was underlined by the market’s refusal to respond when on Friday President Trump tweeted out a claim that the Chinese are eager and ready to make a trade deal. The end result was a 1.9% loss and a close just above the 2018 low.

The S&P 500 (SPY) dropped 1.9% and closed just above the 2018 closing lows.

The NASDAQ and the Invesco QQQ Trust (QQQ) avoided breaking important lows…just barely. The NASDAQ closed right at its closing low from November. QQQ still has a little bit of cushion above its November closing low. That cushion is exactly why I rushed in to buy a put spread on QQQ as a fresh hedge on my long positions.

The NASDAQ lost 2.3% and (re)approached its November low.

The Invesco QQQ Trust (QQQ) lost 2.4% and closed fractionally below the previous Friday's close. QQQ is still well above the November low. — The Invesco QQQ Trust (QQQ) lost 2.4% and closed fractionally below the previous Friday’s close. QQQ is still well above the November low.

The volatility index, the VIX, surprised me with just a 4.8% gain. In fact, the VIX surprisingly declined the entire week even as the bearish mood intensified. I have to assume a delayed spike is on the way this week, perhaps pivoting around the Federal Reserve’s next decision on monetary policy on December 19th. If the VIX does not spike on Monday, I will look to go long volatility with a target of closing out the position, profit or not, just ahead of the Fed meeting.

The volatility index, the VIX, declined all week until Friday's 4.8% increase. — The volatility index, the VIX, declined all week until Friday’s 4.8% increase.

The leaky boat of financials sank further. The Financial Select Sector SPDR ETF (XLF) was actually up early in the day, but it faded sharply for a new 15-month low. This drag keeps tempering my upside expectations for market rallies.

The losses continue with Financial Select Sector SPDR ETF (XLF). A fresh 15-month low on the heels of a 1.0% loss. XLF has declined 6 straight days and 8 of the last 9.

The iShares Russell 2000 ETF (IWM) also closed at a new 15-month low. My attempt earlier in the week to play IWM for a rebound blew up in my face.

The iShares Russell 2000 ETF (IWM) dropped another 1.5% to close at a fresh 15-month low.

In a bull market, traders and investors do not care about risk, love buying dips no matter the news, and can even treat bad news as temporary setbacks that offer positive interpretations. That high-flying sentiment is a hazy memory. Now, bear market action dominates as negative headlines get sold quickly and sharply (see below for some examples), bad news is actually interpreted as bad news, and good news is treated as temporary relief and a fresh opportunity to unload inventory of stocks. Under these circumstances, a Federal Reserve meeting and yet another battle over a government shutdown look like yet more headwinds. Their resolution will have to form the core of a rebound if one comes soon.

Speaking of headwinds, here is a quick check-in on the mess that is Brexit. Brexit is one of several growing macro-economic issues that are keeping comfortable company with negative domestic sentiment.

CHART REVIEWS

Apple (AAPL)

It seems like an eternity since AAPL was the bright light of a darkening market in October. Now, AAPL is one of the heaviest ankle weights around. The company’s stock buybacks are still not preventing deepening losses. I even traded a put spread last week in parallel to this coming week’s call option play.

Adobe (ADBE)

ADBE rejoined the growing majority of stocks trading below their 200DMAs. A post-earnings plunge created what is likely now stiff resistance at a converged 50 and 200DMA. I bought a calendar put spread.

Axovant Sciences (AXON)

I should have left well enough alone. After profiting nicely from the quick pop in June, I decided to give AXON another try after it looked like the 50DMA held as support on a near gap fill. After a long slog through what I thought was a bullish consolidation, AXON completely fell apart last week. The selling started with poor phase 2 results and the end of clinical development of nelotanserin . Next, the company announced a share offering and priced those shares at $1.00 in what looks like a very desperate move to save the company. Now I am looking for that important $1 line in the sand to hold before acknowledging defeat.

Best Buy (BBY)

BBY continues to put an exclamation point on the top in retail stocks. BBY closed at a 13-month low.

Caterpillar (CAT)

On a day of heavy selling, I was surprised to see CAT rebounding nicely enough off its intraday low for a positive monthly gain. The stock became an obvious target for puts as another hedge.

Costco (COST)

As if the top in retail needed any more confirmation, along comes COST to make sure. COST last closed below its 200DMA 13 months ago. Now COST is yet another stock on the wrong side of AT200.

Callaway Golf Company (ELY)

ELY never maintained upward momentum as I had hoped. I took my remaining profits on Friday. It now looks like the upper bound of the lower Bollinger Band (BB) channel will serve as stiff resistance.

Callaway Gold Company (ELY) gained 0.9%, but it is now churning after an attempted recovery lasted just one day.

Facebook (FB)

FB moved contrary to the market last week, but 50DMA resistance still held firm. I still have my pre-earnings position in play and last week’s rally gave it some fresh life. Looking back, I wish of course I just took the profits when I had them!

Gafisa S.A. (GFA)

At the time I pointed out the breakout in GFA, home builders and related stocks were displaying impressive strength. GFA is the lone survivor and clinging to its breakout. I still think the stock is in a bullish position.

SPDR Gold Trust (GLD)

GLD is not performing as I expected; it did not even challenge downtrending 200DMA resistance before falling backward. I expect GLD to soar if the Fed capitulates as so many expect and hope.

Johnson & Johnson (JNJ)

JNJ denied the damaging Reuters report titled “Johnson & Johnson knew for decades that asbestos lurked in its Baby Powder“, but the market did not care. Bear market action dictates sell first and assess later. Buyers did well to hold onto 200DMA support!

Normally, I would look to play a bounce given the stock trades so far below its lower BB and important support levels await nearby from the October low and the 200DMA. Instead, I took advantage of the high premiums and opened a $130 put calendar spread with the short side expiring on Friday. The long side expiring the same day. I expect sellers to manage at least one more push lower. JNJ was treated as a safety stock and a shelter from market weakness; I doubt all the panic from this kind of shock can be shaken out in one day.

Johnson & Johnson (JNJ) plunged as much as 13.5%, but bargain hunters dutifully closed JNJ above its 200DMA for a closing 10.0% loss.

Match Group (MTCH)

MTCH started a post-earnings recovery in mid-November. I hopped aboard this month for a play to converging resistance from the 50 and 200DMAs. Almost there…

Splunk (SPLK)

I am getting increasingly interested in the relative hardiness of many cloud and “big data” stocks. SPLK experienced a sharp rebound from the November low and still had enough juice to deliver an impressive post-earnings gain. The stock has been stuck since then, but given the market sell-off things could be a LOT worse! I tried a call calendar spread over the past two weeks. After failing to take profits on a mid-week bounce, I watched helplessly as everything fell apart on Friday’s gap down. SPLK is at the top of my list for playing a bounce from oversold conditions.

iShares 20+ Year Treasury Bond ETF (TLT)

I thought TLT would continue to rally all week given what I think is anticipation of a friendlier Fed this week. Instead, the market seems to be at maximum uncertainty here with TLT pivoting around its 200DMA all week.

Tesla (TSLA)

Until Friday’s drop, I thought TSLA might soar to $400 by the end of the coming week. TSLA’s resilience in the face of a bearish tape is still impressive. I see a yellow flag in the stock’s reluctance to deliver a convincing breakout above $380 resistance.

Upwork (UPWK)

I could be early, but it looks like UPWK is making a double-bottom…at least a bottom good enough for a swing trade back to the last peak.

Walgreens Boots Alliance, Inc. (WBA)

On Friday, Goldman Sachs (GS) issued a scathing downgrade of WBA to a sell rating. In a bearish tape, the sellers readily obliged and even closed WBA below its 50DMA. It is very possible that the selling in JNJ weakened other “safety” stocks in the health care sector. Regardless, I am staying short (and recently doubled down) even if GS’s issues are not the same as my issues.

Walgreens Boots Alliance (WBA) lost 4.4% and closed below its 50DMA for the first time in 5 months.

XPO Logistics (XPO)

Unlike the JNJ plunge, I looked at XPO’s plunge and instantly thought “buy.” XPO was taken down by a short-seller report. The company refuted each bearish point. XPO next announced a share repurchase plan of a whopping $1B. I want to be on the LONG side of this kind of firepower. I started buying early (the stock was down 13% and well below its lower BB at the time but continued to lose another 10 percentage points from there!).

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #1 over 20% (1st oversold day, ending 26 days over 20%), Day #3 under 30% (underperiod), Day #5 under 40%, Day #55 under 50%, Day #71 under 60%, Day #124 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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long AAPL calls, long ADBE calendar put spread, long AXON, long CAT puts, long FB calls, long GFA, long GLD shares and calendar call spread, long IWM calls, long JNJ puts, long MTCH calls, short TSLA call spread, long UPWK, short WBA; long XPO shares, short call, long calendar call spread

AT40 = 3.6% of stocks are trading above their respective 40-day moving averages (DMAs) (oversold day #6, 10-year low!)
AT200 = 8.0% of stocks are trading above their respective 200DMAs (9 1/2- year low!)
VIX = 36.1 (1-day gain of 20.0%, 10 1/2- month high)
Short-term Trading Call: bullish (oh so many caveats below!)

Commentary

Although it’s been said many times, many ways….the plunge continues….no Santa Claus rally for us.

In a day and month full of historic extremes, it is hard to pick any particular focus of calamity. Still, the epic reversal in small caps, iShares Russell 2000 ETF (IWM), stands out in stark relief. On Christmas Eve, just as we should be expecting gifts from Treasury Secretary Steven “Santa Claus” Mnuchin’s modern incarnation of the Plunge Protection Team, IWM officially reversed ALL of its 2016 breakout. The weekly chart below shows how little time it took to wipe out what was almost two years of breathtaking upside.

The iShares Russell 2000 ETF (IWM) officially reversed all the gains from its late 2016 breakout. A complete reversal of post-election gains is not much further away.

The market sell-off is so extreme that my favorite technical indicator, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), has had little else to say beyond the first day of this jarring oversold period. AT40 closed the day before Christmas at 3.6%; almost no stock in the entire stock market currently trades above its 40DMA. AT40 last traded this low in October, 2008 as the financial crisis was picking up steam. Before that chaotic period, I have to go back to the crash of 1987 to see AT40 plumb such epic depths. In the short-term, the stock market is completely washed out of any optimism.

AT40 (T2108) is at rock bottom levels sitting at just 3.6%.

There are almost no stocks left trading above their respective 200DMAs either. AT200 (T2107) closed at 7.8%, a 9 1/2 year low. Since the October sell-off, AT200 has consistently flagged deepening technical damage in the stock market; now AT200 just confirms and reconfirms the stock market is deep in bear market territory. This is a market where breakdowns and lengthening downtrends dominate the storyline.

AT200 (T2107) dropped into single-digits and a 9 1/2 -year low.

All the major indices sold off sharply going into Christmas. The shortened pre-holiday trading provided no relief. Not only was this the worst loss ever for the last trading day before Christmas, but also the S&P 500 had never before lost more than 1% on this day. The S&P 500 (SPY) dropped and did not stop until it lost 2.7%. The index is now down an incredible 15.8% month-to-date for December (the worst December since 1951 was a 9.4% loss in 1980) and down 12.1% for the year. For perspective, the index has suffered only two losing years since 2008’s gut-wrenching 38.5% loss. Those losing years were fractional losses in 2011 and 2015. We have truly been spoiled by the Federal Reserve’s easy money policies.

The S&P 500 (SPY) lost another 2.6% and closed at a 20-month low.

Ironically enough, after the stock market quickly wiped out its post-election (2018) euphoria last month, I wrote the following:

I am quite dismayed to note that the S&P 500 has sold off in the immediate wake of all but two of the Fed’s meetings this year….guess what I will be doing in preparation for December’s meeting!?

I did not position myself bearishly because by the time of the Fed meeting, the stock market was already deep in the throes of its third oversold day. Deeply oversold conditions offer poor risk/reward short trades. Yet, the S&P 500 has amazingly managed to lose another 6.2% in the three trading days since the Fed’s decision on monetary policy. This is a second derivative market if there ever was one!

The NASDAQ and the Invesco QQQ Trust (QQQ) sold off for 2.2% and 2.8% losses and new 17 and 15-month lows respectively.

The NASDAQ lost 2.2% and closed at a 17-month low.

The Invesco QQQ Trust (QQQ) lost 2.2% and closed at a 15-month low.

The sickening plunges are repeated over and over almost no matter where we look. The iShares Russell 2000 ETF (IWM) lost 1.9% for a 25-month low. The Financial Select Sector SPDR ETF (XLF) lost 2.1% for its own 25-month low (Goldman Sachs (GS) last week completed a post-election (2016) reversal and is leading the way for the entire XLF to do the same). The iShares US Home Construction ETF (ITB), which tried to warn us for much of the year of the coming calamity, lost another 2.0% and closed near a complete reversal of 2017’s gains. Even Health Care Select Sector SPDR ETF (XLV) got hit with a 2.4% loss as its roof of “safety” came tumbling down.

The iShares Russell 2000 ETF (IWM) lost 1.9% and closed at a 25-month low.

The Financial Select Sector SPDR ETF (XLF) lost 2.1% and closed at a 25-month low.

The iShares US Home Construction ETF (ITB) lost another 2.0% and is on its way to finish reversing all its 2017 gains.

The formerly "safe" Health Care Select Sector SPDR ETF (XLV) lost another 2.4% and is now challenging its 2018 lows. — The formerly “safe” Health Care Select Sector SPDR ETF (XLV) lost another 2.4% and is now challenging its 2018 lows.

In my last Above the 40, I described the volatility index, the VIX, as a “bright” spot for the oversold period because it finally showed a relatively greater level of fear. That fear really got going on Monday. The VIX surged 19.8% in a long overdue challenge of the closing high of 2018. With the 2012 intraday high behind it, the VIX can now aim for even higher heights of extremes.

The volatility index, the VIX, has shown a lot more life in recent days. The VIX gained 19.8% almost closed at a new 2018 high.

All this epic carnage and the historic depths beg the obvious question: is this a time to buy? Well, it SHOULD be an obvious time to back up the truck. My short-term trading call has stayed bullish ever since the first day of the oversold period. I was waiting for the VIX to spike before getting aggressive on the buy side. On Friday, I finally added to my shares of ProShares Ultra S&P500 (SSO). I did a little more buying in the middle of Monday’s even larger VIX spike. For example, I saw some key stocks burst into positive territory, and I responded by buying a few put options on ProShares Ultra VIX Short-Term Futures (UVXY).

Still, I have yet to get truly aggressive because I cannot fully shake the demotivating burdens of a bear market: no support, only fleeting signs of buying interest. Moreover, I have a working thesis in the back of my mind that pattern matches with the 2008-2009 period where the Fall sell-off was the setup for the even larger Winter sell-off. I want to believe the major January to March or so sell-off I am anticipating is getting condensed into December.

From the longer-term perspective, I never did unload any more of my longer-term positions after the first purge about two weeks ago. With almost all my hedges closed out, I get to watch this treacherous trading action in horror along with the majority of market watchers. Hardier long-term investors can start allocating a small fraction of cash here, like 20%, and then allocate in chunks of 10% for every additional 10% sell-off (I am borrowing from a strategy someone shared with me on StockTwits). This strategy should cover the worst of the worst sell-off scenarios.

However, in a second derivative market, the possibility horizon is very broad. Using the history of “the 200DMA Signal,” the theoretical worst case scenario is the 0.15 “warning ratio” from 2007 to March, 2013: an eventual 63% sell-off from 2018’s all-time high. Yes, I just gulped hard after typing that. The current warning ratio is 0.47 as the S&P 500 is currently 19.8% off its all-time high. This is the 10th worst of the 19 200DMA Signals since 1951.

The latest 200DMA Signal triggered on 10/24/18. The downdraft from the all-time high just missed the apparently critical negative 10-13% range.

The Post-Trump Reversal

This sell-off is so epic and so deep, it deserves a name that can immediately and easily identify it. I am now calling it the “Post-Trump Reversal.” The phrase “post-election” is too ambiguous. “Post-2016-election” or “post-election-2016” is too clumsy and does not fixate on a prime characteristic of this particular market. This reversal has wiped away a large portion of the stock market’s gains since the election of Donald Trump as President of the United States on November 8, 2016. In some cases, all gains and then some are gone. Just as ITB warned us almost all year of a coming calamity, Goldman Sachs, XLF, and IWM are all up next as big warnings of what could be in store for the rest of the stock market relative to the election of Trump. I am taking these warnings seriously: the market has to prove a LOT otherwise from here!

The S&P 500 (SPY) slammed into its 200-week moving average. The big run-up to the January high has only weak supports until the point of the 2016 breakout.

The NASDAQ is still above its uptrending 200-week moving average. A test coincides with 6000 and one of the few supports remaining on the way to a potential post-election reversal.

As traders and investors, we should focus on making money over making political points. I try to follow this guidance in this blog as much as possible, but sometimes, like now, the politics become unavoidable. In this case, President Trump has inserted himself into the center of the trials, tribulations, and celebrations of the stock market. He personally forged the market into his own gauge of popularity and performance. Trump’s market commentary in total is quite revealing about the fragility of financial conditions, and it provides important context. As full disclosure, I am not registered with any political party (I am a former Democrat), but I voted against Trump and for Hillary Clinton for President in 2016. I hope I have sufficiently kept my politics from distracting from my most important points below.

In mid-October, the stock market was in the early stages of its complete breakdown. I read and heard the exuberant platitudes coming from the administration over the economy and worried that the government was reaching a point of maximum hubris.

…Larry Kudlow, the leader of President Trump’s National Economic Council, is beating a steady drum of unapologetic and triumphant confidence. In a CNBC interview, Kudlow issued a sound bite that *I* am confident will one day in the not-so-distant future sound cringeworthy to those of us who follow economics. Kudlow declared: “We are in a hot economic boom. There’s no end in sight.”
…as an investor and particularly as a trader, I cannot help but think about the contrary implications of important government officials claiming that the economic good times will continue as far as the eye can see. Such claims defy experience and the laws of economic/business cycles. Such claims help form a foundation of hubris which can lead to policy errors. My unavoidable wariness feels even more poignant when in parallel I stare at charts showing a stock market violently and sharply falling off its all-time highs.
From “Confidence and A Conditional Reprieve Amid Oversold Lows” by Dr. Duru, October 13, 2018.

I only wish I had heeded my own wariness and just determined to go bearish and stay bearish! What unfolded in the following 2+ months pretty much confirmed my concerns. The final confirmation will come in the form of worsening economic numbers in 2019 that I am sure the administration (and the Fed?) will at first dismiss as “air pockets” or “temporary headwinds.” Note well that the economy need not go into a recession for the stock market to continue deflating given the stellar run-up was predicated on the kinds of lofty optimism expressed by Kudlow. Even now, consumer confidence is still hovering around 20-year highs. There is a lot of room to the downside to go to just more “normal” levels of confidence.

The hubris and the subsequent repudiation of that hubris is summed up well in the following tweet and commentary from CNBC’s Carl Quintanilla.

Since this tweet, the S&P is down 18.9%. pic.twitter.com/ICCr8oEruP
— Carl Quintanilla (@carlquintanilla) December 24, 2018

At the time President Trump celebrated the great news from Financial markets and wildly rising 401k’s, the S&P 500 had finally punched in a new all-time high after an extended recovery from the February swoon. The index had just another three weeks to go before reaching its ultimate top.

President Trump repeatedly and sharply blames the Federal Reserve for everything bad about the stock market since then. Yet, there is a legitimate argument on the side of Chair Jerome Powell. Here is Guy Adami from CNBC explaining the super easy money that Powell is now scrambling to draw down:

The vitriol towards Chairman Powell is misplaced. It should start with Greenspan, spike with Bernanke, and simmer with Yellen. The current chair is just cleaning up their mess. Markets will adjust and future generations will thank him. All my opinion
— Guy Adami (@GuyAdami) December 20, 2018

Ironically, President Trump is fully aware of the dangers of easy money. As a candidate, Trump warned Americans not to trust Wall Street with their money because the stock market was propped up on excessively low rates. From CNBC on August 9, 2016:

Count Donald Trump among the ranks of those who don’t think too much of the stock market as a sound place to put money.
A day after making a widely watched public address on his economic plan, the Republican presidential nominee advised against betting on Wall Street.

The big problem, as Trump sees it: The low interest rate environment fostered by the Federal Reserve that has coincided with a 227 percent market gain since the financial crisis lows.

“If rates go up, you’re going to see something that’s not pretty,” the billionaire businessman told Fox News during a Tuesday morning phone interview. “It’s all a big bubble.”
“Donald Trump on the stock market: ‘It’s all a big bubble’” by CNBC, August 9, 2016

Apparently, one man’s bubble is another man’s healthy rally. The stock market is still 7.8% higher than that bubble proclamation with rates a lot higher. I understand Trump’s underlying claim: the economy of the previous years was weak and only survived on easy money low rates. The stock market was of course a direct beneficiary of that easy money. Trump offers up the economy of 2017-2018 as a fundamentally healthy one that does not need low rates but can still suffer from suffocatingly high rates. His administration took a healthy economy and super-charged it with a lot of stimulus. The higher rates are a direct response to this strong economy. As the Fed is doing, the President technically should keep people’s focus on the positive reasons for the higher rates.

Trump’s unconventional and persistent badgering of the Fed over the rate hikes is putting a spotlight on a policy error that may be more imagined than real. The sharp and public critique is not only unusual for the way American Presidents treat an independent Federal Reserve, but also it is overshadowing the Fed’s attempt to assuage the market with its communications about flexibility and data dependence. In other words, Trump is likely heightening market fears about rate hikes.

These fears could crank up another notch or two higher in the wake of news that Treasury Secretary Steven Mnuchin assembled bankers as part of a “Plunge Protection Team (PPT).” Interestingly, the statement announcing Mnuchin’s efforts were only posted on Twitter and not directly in the Treasury’s news feed on the government web site (as of the time of this writing). I can only assume the intent was to put the news in a place that garner’s more of the general public’s attention (Twitter once again proving its core value!). From the Treasury’s tweet:

Secretary Mnuchin convened individual calls with the CEOs of the nation’s six largest banks. See attached statement. pic.twitter.com/IEb2kv6dx9
— Treasury Department (@USTreasury) December 23, 2018

The U.S. Treasury reaches out on Christmas Even, 2018 to reassure financial markets and the public. — The U.S. Treasury reaches out on Christmas Eve, 2018 to reassure financial markets and the public.
**Source:** **U.S. Treasury on Twitter**

I have seen references on Twitter calling this announcement “Liquidity Secured” as a sarcastic reference to Tesla CEO Elon Musk’s false claims that funding was secured to take the company private for $420/share. The move by the Treasury smells like desperation, but I am not taking it lightly. The move represents another sign that the Administration reached peak hubris and now recognizes all is not well. The market is so deeply oversold that the government likely does not have to do much to kindle a sharp rally. My only question now is can the administration or even the Federal Reserve do enough to prevent the Post-Trump Reversal from becoming a FULL reversal? For now, I am assuming that the stock market has to ultimately drive a lot lower still before the Fed is fully ready to capitulate.

President Trump keeps changing his story about an anonymous policeman who thanked him. Sounds legit! pic.twitter.com/MrD38gBAGH
— NowThis (@nowthisnews) September 15, 2018

CHART REVIEWS

So many charts look so similar: UGLY. After all, only 8% of stocks are still above their 200DMAs. Still, there are a few charts I to post with stories that stand out in the chaos whether bad or good. I used SwingTradeBot to help me find some of the last stragglers trying to hold up critical 200DMA support. (Other stocks still above their 200DMAs not shown below are McDonalds (MCD), Clorox (CLX), and Proctor & Gamble (PG)).

Autozone (AZO)

The auto retailers are standing head and neck above the hapless crowd. AZO is just off its all-time high with a mild pullback that looks like a routine test of 50DMA support.

Caterpillar (CAT)

After sharply pulling back from the premature post-G20 optimism, CAT held its ground while the rest of the market plunged this month. The stock’s surprising out-performance made it a poor hedge for about two weeks. That resilience finally ended over the past two trading days. The stock is still holding itself above its 2018 low.

Microsoft (MSFT)

MSFT is one of the last stocks suffering a 200DMA breakdown. MSFT effectively held this support through the October and November sell-offs. December’s bearishness was just too much even for MSFT. The stock market is finally taking down its strongest as investors get more and more desperate to move to cash.

Netflix (NFLX)

Like ITB and like retailers, NFLX was a warning sign that I did not extrapolate enough. I called a top in NFLX over the summer. After its fade from October earnings, I put NFLX on my short list of stocks to fade on rallies. That strategy has worked well, but I was not positioned short during the latest breakdown which took the stock to an 11-month low. NFLX is 44.2% off its all-time high and double-top.

Tesla (TSLA)

It took a while, but the burden of the bear finally caught up to TSLA. The stock plunged 7.6% in a 200DMA breakdown that finally forced TSLA into the company of the vast majority of stocks trading under their respective 200DMAs. Unlike so many stocks, TSLA simply remains stuck in its trading range. Its 2018 low and double bottom is still a 14% drawdown away.

Cracker Barrel (CBRL)

CBRL is one of the rare stocks still trading above its 200DMA. The stock faced down a test of that support on Christmas Eve. Like TSLA, a 200DMA breakdown for CBRL is far from disastrous given the stock’s extended trading range. The run-up in November provided a very brief breakout above this range that held not just in 2018 but also since 2014. Also like TSLA, CBRL is heavily shorted: 24.9% of its float is sold short. TSLA’s bear burden is 23.3% of its float sold short.

Chipotle Mexican Grill (CMG)

CMG is another stock that took some time joining the majority of stocks suffering a 200DMA breakdown. CMG’s breakdown was sharp with a subsequent 13.1% 3-day loss. CMG is still 34.6% above its 2018 low, but the stock looks ready to fill its large April post-earnings gap up.

Dexcom (DXCM)

DXCM finally closed below its 200DMA by the slimmest of margins. The stock now looks like it is carving out an extended topping pattern.

Okta (OKTA)

OKTA is at the top of my buy list for an oversold bounce. The stock suffered a 200DMA breakdown but almost rallied enough to recover that support. OKTA is still far enough above its November low. The stock is up 109.9% year-to-date.

— – —

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Active AT40 (T2108) periods: Day #6 under 20% (6th oversold day), Day #9 under 30%, Day #11 under 40%, Day #61 under 50%, Day #77 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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long SSO, long UVXY puts, long CAT calendar put spread, long ITB calls, long QQQ puts

AT40 = 6.5% of stocks are trading above their respective 40-day moving averages (DMAs) (oversold day #7)
AT200 = 11.0% of stocks are trading above their respective 200DMAs
VIX = 30.4 (down 15.7%)
Short-term Trading Call: bullish

Commentary

Pick your favorite catalyst or explanation. I am sure there is good news (or the absence of bad news) out there to serve as a fortuitous launchpad to explain today’s tremendous day-after-Christmas rally. For example, there is President Trump’s Christmas Day reassurance that U.S. companies are a great buy:

“I have great confidence in our companies. We have companies, the greatest in the world, and they’re doing really well. They have record kinds of numbers. So I think it’s a tremendous opportunity to buy.”
Reuters, December 25, 2018

Whatever the reason, the rally seemed to validate my conclusion that it would not take much to spark a sharp rally. I was specifically talking about government action, so I am leaning towards Trump’s proclamation as helping to grease the buying triggers (I somehow missed that news until Wednesday morning). However, the rally was not a straight shot. The stock market first gapped higher, sellers stepped in as has been their habit, and after grinding lower for almost 90 minutes, the buyers took over control for the rest of the day. The Post-Trump Reversal received a major and resounding reprieve. Individual stocks and whole indices recorded eye-popping gains.

The S&P 500 (SPY) gained a whopping 5.0%. It was a vertical move reminiscent of the wild one-day stock market comebacks during the 2008-2009 financial crisis. Suddenly, the S&P 500 December performance to-date is “only” down 10.6% and year-to-date the index is down 7.7%. Just three more trading days to get back to even for 2018 (2673.21 currently happens to neatly coincide with the rapidly declining 50DMA).

The S&P 500 (SPY) eliminated 2 days of losses with today's 5.0% gain. The upper bound of the lower Bollinger Band channel is directly in play. — The S&P 500 (SPY) eliminated 2 days of losses with today’s 5.0% gain. The upper bound of the lower Bollinger Band channel is directly in play.

The NASDAQ and the Invesco QQQ Trust (QQQ) jumped to 5.8% and 6.2% gains. Again, this kind of trading action is straight out of the financial crisis playbook.

The NASDAQ almost wiped out three straight days of losses with its 5.8% gain. The upper bound of the lower Bollinger Band channel is next up as critical resistance.

The Invesco QQQ Trust (QQQ) jumped an incredible 6.2% with a strong finish at the intraday high.

The volatility index, the VIX lost 15.7% as fear cooled off enough to let the market soar.

The volatility index, the VIX, was mostly downhill for the day. It closed with a 15.7% loss and ended a streak of six straight trading days closing at or near its upper Bollinger Band.

Even with all these dramatic moves, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), only moved from a rock-bottom 3.6% to 6.5%. The technical damage to the market runs deep indeed. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, managed to push into double digits. AT200 moved from 8.0% to 11.0%. The S&P 500 is now down 5.1% since closing in oversold territory on December 14th.

Per the chart below, if the oversold period ended today after its 7th day, the performance of the S&P 500 would be at the lower extremes of historical performance shown by the blue circles. There are three separate paths from here for ending the oversold period according to the projections shown by the red bubbles: 1) a rally in the next three trading days or so to get the S&P 500 close to a flat performance for the oversold period, 2) a lot of churn for as many as 10 more trading days where the downtrending 40DMAs fall low enough for a small rally to push stocks quickly over resistance, or 3) a very extended and historic oversold period that stretches beyond 17 total trading days. The first case sets up the market for a big January fade as the market’s remaining sellers seize the opportunity of higher prices. The second case keeps the market guessing and in suspense until the December jobs numbers are released and perhaps until companies begin releasing early earnings surprises. The third case is a bear market extreme that would be consistent with all the extremes of this month.

The performance of the S&P 500 for a given oversold duration (T2108 below 20%).

I started the morning poised to act. With the market gapping up, I automatically assumed a rally day had finally arrived to take the market out of its historic oversold depths. I mainly focused on making bullish moves. I doubled down on my put options on ProShares Ultra VIX Short-Term Futures (UVXY) which I closed at a profit at the end of the day. I flipped a call option in Nvidia (NVDA). I took profits on my latest round of call options in Splunk (SPLK). I sold the long side of a calendar call spread on AMZN that salvaged a good chunk of the position (if I had waited for AMZN to go from a 7% to a 9% gain, I would have closed out at even but who knew?!?). For good measure, I added puts on Netflix (NFLX) as a new hedge.

I did not make moves on the prime targets I discussed in the last Above the 40. I simply missed Okta (OKTA) and did not want to chase a stock up 11% on the day. I will buy its next dip. Cracker Barrel Old Country Store (CBRL) bounced off 200DMA support with a 1.2% gain. I decided to stay patient and wait for follow-through buying.

My most surprising moves were for longer-term positions (meaning I hope I can hold onto them for at least a year or two, a grade or two below retirement positions). I decided that if I was not going to buy shares in some known consumer names like Apple (AAPL) at this point of market panic, I might never buy them. I was of course pleasantly surprised to see most of these positions deeply profitable by the close. However, I am FAR from comfortable with these buys for all the reasons I discussed in previous posts, especially the last Above the 40.

CHART REVIEWS

Align Tech (ALGN)

I am still not at the point of buying interest in ALGN. I just like to watch for signs of life in former high-flyers as potential clues on the market’s risk attitudes. ALGN is definitely still a damaged stock. Incredibly, the stock lost 50% in less than three months.

Align Technology (ALGN) avoided breaking the November intraday low with an 8.9% gain. The stock still has a LONG way to go to repair its 200DMA breakdown. A rapidly downtrending 50DMA still looks ominous.

Advanced Micro Devices (AMD)

I am trading AMD again. I took profits on puts last Friday. I thought AMD would drop a LOT lower in the middle of a market sell-off this severe. So that hedge did not work out as well as I wanted. I think AMD is in the middle of a major topping pattern. I am only interested in fading its rallies rather than buying its dips. I expect the rapidly declining resistance from the 50DMA to hold firm, even as AMD held October support. AMD’s one-day pop almost challenged 200DMA resistance.

Amazon.com (AMZN)

The big percentage one-day moves in AMZN barely make sense. Only big money players can move such a large stock so far. AMZN rallied 9.5% but still only reversed two days of losses. The gap up and follow-through buying left behind a morning star bottoming pattern that plants AMZN solidly on my buy list for bullish trading periods.

CyberArk Software (CYBR)

I want to use the Post-Trump Reversal to buy back into cybersecurity plays. CYBR is at the top of the list given its impressive resilience in this period. The stock bounced off 200DMA support and left CYBR as one of the very rare stocks which have yet to even trade below its 200DMA during the sell-offs of the last 2 1/2 months.

CyberArk Software Ltd. (CYBR) continues to survive as one of the few stocks that never broke 200DMA support during this month's massive sell-off. The 5.7% gain puts the 50DMA pivot back into play. — CyberArk Software Ltd. (CYBR) continues to survive as one of the few stocks that never broke 200DMA support during this month’s massive sell-off. The 5.7% gain puts the 50DMA pivot back into play.

ETFMG Prime Cyber Security ETF (HACK)

HACK has not been as fortunate as CYBR, but it is still better off than the general market on a relative basis. HACK closed nearly flat for the year on Monday. So today’s rally represents almost all of HACK’s year-to-date gains. I am waiting to buy HACK until after I establish a position in CYBR. In a worsening sell-off, I will start accumulating HACK around $30 and below while holding CYBR.

SPDR Gold Trust (GLD)

I sold my GLD call options as the underlying confirmed its 200DMA breakout on Monday. Normally, I would have held on for a presumed extended rally. However, since I associate GLD’s current move with a market panic, I want to take profits at opportune times like this one. I will go back in buying call options on a retest of 200DMA support or even 50DMA support. I am of course still holding tight to my core GLD shares.

The SPDR Gold Shares (GLD) gapped and crapped and ended the day down 0.3%. Support at the 200DMA is in play and critical to determining whether GLD's rally is over. — The SPDR Gold Shares (GLD) gapped and crapped and ended the day down 0.3%. Support at the 200DMA is in play and critical to determining whether GLD’s rally is over.

Nvidia (NVDA)

NVDA is a VERY broken stock. Its 4.7% gain on the day barely shows up as a blip on the below 7-month chart. I was fortunate to successfully flip a call option, but NVDA is not yet a good play for an extended swing trade.

PPG Industries (PPG)

I keep checking in on PPG given its early October post-earnings collapse was an early warning signal for worries over economic growth and inflation. The stock soon recovered and stayed firm in November as if the bull market were still intact. The December sell-off slowed down as PPG approached the post-earnings low. PPG is too tricky to play for the short-term. The stock needs to clear $100 or $101 to confirm this bottom, and those price levels are too close to overhead resistance from the declining 50DMA.

ROKU (Roku)

ROKU received a major boost from Needham as its top pick for 2019. Yet in true bear market style, sellers stepped right into the gap and completely faded the stock. Somehow, buyers returned with enough force to deliver a whopping 11.7% gain. If ROKU can break free of its lower Bollinger Band channel, it could finally mount a serious challenge of overhead resistance.

iShares 20+ Year Treasury Bond ETF (TLT)

I bought TLT puts as a fade of post-Fed fear. I did not have much of a thesis except to be contrary at a key point of resistance for TLT. Today’s drop to $120 was sufficient for me to take good profits on the position. I decided not to wait for a test of 200DMA support. I think TLT will drop a lot further in an extended market rally as yields are too low in the context of a belief in a strong economy.

Twilio (TWLO)

With all the technical damage happening in the stock market, TWLO’s ability to stay far above its 200DMA support is almost as astounding as the wild gyrations of the Post-Trump Reversal. TWLO is firmly on my buy list for trades. The last one was a calendar call spread with the short side expiring last Friday. I am now back to even and expecting TWLO to end the week having touched or crossed $90 at some point (yes, a tight window!).

Twitter (TWTR)

TWTR is another stock which managed to hold October (or recent) lows in the December sell-off. I think TWTR demonstrates its value as a public forum over and over with the Treasury’s announcement of a “Plunge Protection Team” being yet one more example. I already own shares, and I am thinking of buying calls to play a bounce back to resistance.

Walgreens Boots Alliance (WBA)

WBA did not tumble off its recent highs based on my bearish thesis, but I will take it. I decided to take profits at the open after realizing it made little sense to hold on so deep in oversold territory. I will look to start accumulating a fresh short position starting at the 200DMA.

Walmart (WMT)

WMT’s 5.4% pop brought the stock right back to the 200DMA. The 200DMA breakdown makes the October run-up and November peak look like a climactic top. Still, I am holding calls in the expectation that WMT can make another run at 50DMA resistance.

Zillow Group (Z)

Zillow Group held onto its November low as support with today’s 8.8% rally. I used this sell-off to start scaling into the stock. As a reminder, insiders bought a massive amount of stock in November. The news pushed the stock as far as 50DMA resistance. The market-wide sell-off helped people forget about the floor that insiders may have placed in the stock. These are the kinds of opportunities I prefer in a bear market.

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #7 under 20% (7th oversold day), Day #10 under 30%, Day #12 under 40%, Day #62 under 50%, Day #78 under 60%, Day #131 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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long SSO, long CAT calendar put spread, long QQQ puts; long AAPL calls, calendar call spread, and shares; long AMZN put spread and calendar call spread, long GLD, long ROKU shares and puts, long TWLO calls, long TWTR, long WMT calls

AT40 = 83.8% of stocks are trading above their respective 40-day moving averages (DMAs) (6th overbought day)
AT200 = 34.4% of stocks are trading above their respective 200DMAs (near 2-month high)
VIX = 16.1
Short-term Trading Call: neutral

Commentary

Starting in November or so, I developed an expectation for a January sell-off based in anticipation of earnings warnings and poor earnings reports. I expected slowing global growth, trade tensions, and tightening monetary conditions to help weigh the market down. Looking back with hindsight, the market looks like it rushed to discount all the potential headwinds in December’s historic sell-off. Even the major earnings warning from Apple (AAPL) that seemed to confirm the fears for January turned out to be a climax rather than a fresh spark.

I skipped over November and December as potential sources of the expected selling because these are seasonally benign, even bullish, months. Average maximum drawdowns for these months are historically the lowest of the year. Fortunately, I have AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), to help me effectively respond to changing market conditions and sometimes even anticipate these changes.

Last week I updated my data and analysis of AT40 and was pleasantly surprised to find that the S&P 500 (SPY) still performed roughly as expected given the various lengths of the oversold periods. The affirmations provide important guideposts for future trading extremes.

The stock market is at another extreme. AT40 is above the 70% threshold that defines overbought trading conditions. AT40 has even traded above 80% for three days. On average, the 80% overperiod lasts 5.5 days; the median is 2 days. My short-term trading call is neutral thanks to the 1-day overbought period that preceded the current overbought period. That episode flipped me from bullish to neutral. Key (and obvious) support levels kept me from going all the way to bearish. I am staying at neutral to avoid churn in the trading call; flipping bullish going into overbought is also too contrary/counter-intuitive.

Overall, the average overbought period lasts for 8.1 days with the median at 4 trading days. After 23 days, the performance of the S&P 500 improves almost linearly. In other words, this is a good time to anticipate the end of the overbought period, but it is too early to get bearish. I will go bearish if/when AT40 next drops from overbought conditions.

The S&P 500 (SPY) found new energy from a friendly Federal Reserve. Its 200DMA looms overhead as stiff resistance. It looks like a perfectly timed collision could happen just as the historic data says an overbought period should be coming to an end.

The S&P 500 (SPY) held its post-Fed gains to close the week near a 2-month high.

The NASDAQ and the Invesco QQQ Trust (QQQ) experienced small setbacks on Friday as big-cap giants stumbled a bit after reporting earnings.

The NASDAQ lost 0.3% as it slipped from a 2-month high.

The Invesco QQQ Trust (QQQ) lost 0.4% as it fell back from a near 2-month high.

The iShares Russell 2000 ETF (IWM) slowed down relative to the recent fresh surges in the S&P 500 and the NASDAQ, but small-caps also have a lot more headroom to 200DMA resistance.

The iShares Russell 2000 ETF (IWM) closed the week at a near 2-month high.

Financials have slowed down even more than IWM. Upward momentum has all but disappeared. I strongly suspect a test of 50DMA support is around the corner if the Financial Select Sector SPDR ETF (XLF) cannot regain some upward momentum in the coming week.

The Financial Select Sector SPDR ETF (XLF) has stalled out after confirming a mid-January 50DMA breakout.

The volatility index, the VIX, is finally back to the floor that has provided support ever since the October breakout. If volatility makes a comeback, THIS is the perfect time for it to happen…and just in time to help bring an end to the overbought period. However, if the VIX continues downward through the 15.35 pivot, then I will interpret such a move to confirm the onset of an extended overbought trading period. I am long volatility as a hedge; otherwise, I would have been short in anticipation of the Fed’s official capitulation on its hawkishness.

The volatility index (VIX) closed at a near 2-month low and hovers just above the 15.35 pivot.

CHART REVIEWS

Apple (AAPL)

What earnings warning? AAPL reversed its post-warning gap ahead of earnings. The gap up and 50DMA breakout confirmed that the earnings warning is officially ancient history. Much ado about nothing perhaps? I did not buy my weekly dose of call options, but AAPL is clearly a buy on the dips from here until/unless it dives below 50DMA support.

Autozone (AZO)

AZO did not benefit from January’s big rally, but the stock also proved very resilient in the sell-offs. The Amazon Panic from last summer is a distant memory, and the stock is just off its all-time high.

O’reilly Automotive (ORLY)

ORLY also failed to benefit from January’s rally. The stock essentially slept through all the market turmoil of the past several months. I am looking to buy into the next breakout from this firming consolidation pattern.

BHP Billiton Limited (BHP)

A weakening U.S. dollar (DXY) and a capitulating Federal Reserve provided fresh boosts to commodity plays. I have another pairs trade long BHP and short Rio Tinto (RIO). I am holding off from taking profits on BHP to see whether THIS time, BHP can break above its extended trading range. I will have a quick trigger in the coming week if it looks like the trading range will hold once again.

Rio Tinto (RIO)

RIO has benefited just like BHP. The stock also has a lot more headroom than BHP. I will flip my next pairs trade to go long RIO and short BHP after I take profits from the long BHP trade.

Caterpillar (CAT)

CAT was a core stock in my January post-earnings sell-off thesis. Even after it was clear that an oversold rally was firmly in place, I stuck to my guns on CAT. I used the stock as a hedge and next played earnings from the bearish side. I chose a different structure with a calendar put spread at $130 and outright puts at $127. The calendar spread reflected my deference to the bullish mood of the market. The outright puts reflected my base case for a large post-earnings drawdown. Surprisingly, I was able to profit from BOTH positions. CAT gapped down hard and even closed below its 50DMA and allowed me to take substantial profits on my outright puts. CAT’s immediate rebound to and past $130 allowed me to take profits on the calendar put spread.

CAT has yet to fill its post-earnings gap down, but it seems the benign trading environment will help push it to a test of 200DMA resistance. I will go back to buying CAT puts at that point. If the overbought period ends before that test, CAT will be one of the first stocks on my list to short (with puts).

Caterpillar (CAT) quickly reversed most of its loss from a post-earnings gap down and breakdown.

Whirlpool (WHR)

After the success with CAT, I honed in on other industrial/manufacturing stocks with high dependencies on the health of the global economy. I bought a put spread on WHR and sold a put short below the put spread. For a brief moment at the post-earnings open, I celebrated. I realized far too late that buyers were chomping at the bit to load up on the dip. Even after the stock finished reversing the gap, I did not consider a scenario of a gain on the day much less a 9.7% post-earnings gain! The next day, an analyst downgrade knocked the stock back down, and I promptly bought shares at the 200DMA. I flipped those shares for a profit the next day.

I am currently reading through the transcript from the earnings call. I now realize that the earnings were not nearly as bad as headlines suggested; there is even reason for optimism. Now that I understand better the real backdrop, I am looking to buy shares whether that’s on a new post-earnings high and/or a test of 50DMA support. For now, I am holding a single call option. Needless to say, I brought a quick end to my pre-earnings plays on the “global weakness” theme. For now, it seems the market is in the mood to buy the bad news in anticipation of more accommodative central banks.

Whirlpool (WHR) pulled of a major post-earnings reversal and is now clinging to 200DMA support.

iShares MSCI Emerging Markets ETF (EEM)

EEM summarizes the market’s growing comfort buying into the global economic slowdown. EEM broke through 200DMA resistance for the first time since a brief spell last June. I loaded up on call options on Friday’s immediate test of 200DMA as support. I expect EEM to suffer mightily if the overbought period ends but to extend its run alongside the U.S. market if overbought trading conditions persist. If another steep sell-off unfolds, I will be watching for 50DMA support and then support from the October/December double-bottom.

GrubHub (GRUB)

GRUB bounced off the December lows like the rest of the market, but it remains well off its all-time high set in September. The stock spent much of January consolidating. I am very interested in the post-earnings reaction on February 7th. GRUB is a very expensive stock in an increasingly competitive food-delivery industry: trailing P/E 53.5, forward P/E 41.7, price/sales 7.9, price/book 5.1. The potential explosiveness comes from a year-over-year earnings growth rate of 75% in the previous quarter and short-interest 14.6% of float.

Intel (INTC)

So far, so good on my last between earnings trade on INTC call options. The company announced a new CEO and the stock market responded favorably (belatedly it seems). I decided to wait on taking profits to see whether INTC could make a run at breaking 200DMA resistance. There is tremendous upside from there and just one line of potentially stiff resistance around $52.50, the July pre-earnings peak. I will take profits at the first sign of softness and prepare for the next round.

MongoDB (MDB)

MDB is a case of right direction, wrong trade structure. As I expected, MDB left its moment of Amazon Panic behind. However, the speed of the move caught me by surprise and left me flat-footed with a calendar call spread anchored at the $75 strike. I let the short side execute and since then have rolled through call options against the shares short. I will presumably come out net positive after covering the short on the next pullback.

Microsoft (MSFT)

Post-earnings, MSFT gapped down and closed below converged support at its 50 and 200DMAs. The mild selling continued on Friday. Overall, MSFT looks like it is setting up for a deeper drawdown, perhaps as far as the January low.

Nvidia (NVDA)

While NVDA has already warned, its upcoming earnings after market February 14th should be highly anticipated given the turn-around in the likes of AAPL. The stock has taken a severe beating and traders will start wondering whether all the negativity is already “priced in.” NVDA made an early move with a jump back to 50DMA resistance to close the week.

Square (SQ)

I got the pullback I wanted to get back into SQ. An analyst downgrade shoved SQ off its perch and back to 200DMA support. So far that support is holding.

Sarepta (SRPT)

SRPT is a wild stock. It gyrates wildly and widely on headlines of drug trials and the like. Sometimes the stock sets up great options trades. The stock got my attention last week after an analyst upgrade and $200 price target sent the stock soaring through its 200DMA pivot and off 50DMA support. The buying continued the next day. I am looking to buy a small amount of shares to sit on for the long-term.

Sarepta Therapeutics (SRPT) broke out bullishly from a 50/200DMA pivot.

Twilio (TWLO)

TWLO broke out to new all-time highs. The path from $100 to here was so subtle and slow I neglected to put a fresh position in place ahead of this latest bullish move.

Valero (VLO)

VLO earnings delivered for me with a fresh breakout for the refiner. Support at the 50DMA looks well intact now. Sellers returned on Friday but hopefully the entire gap up will not reverse.

Valero Energy (VLO) broke out to a near 3-month high on the heels of earnings but sellers returned the very next day.

iShares 20+ Year Treasury Bond ETF (TLT)

TLT did not respond immediately to the Fed’s capitulation but gapped higher the next day. TLT almost filled the gap in the wake of the report on January jobs. I suspect TLT will just churn directionless for weeks on end as the forces of a dovish Fed and alternating headlines on slowing global growth and a strong/resilient U.S. economy unfold.

The iShares US Home Construction ETF (ITB)

The interest rate environment will likely be the main driver for the housing market in the near-term. With the Fed out of the way, traders and investors are now free to bet on a recovery in the shares of home builders and some stabilization in the housing data. Accordingly, the rally in ITB resumed last week. I am glad I did not shut down the seasonal trade altogether and even doubled down on ITB call options!

Meritage Homes (MTH)

MTH is one of several home builders benefiting from the quick change in sentiment for the housing market. The stock soared 10.1% on Thursday post-earnings. MTH is now a clear buy on the dips all the way to 200DMA support.

Pulte Homes (PHM)

PHM reported ahead of the Fed. Buyers still stepped in and immediately saved the stock from a post-earnings gap down below 50DMA support. Sellers returned on Wednesday for another try in the hours ahead of the Fed. This time I jumped at the chance to load up on call options. The rebound was so sharp after the Fed, I went ahead and took profits near the close of trading. PHM closed the week pivoting around 200DMA resistance.

Toll Brothers (TOL)

TOL did not need earnings to break out above 200DMA resistance. I am a bit surprised at this bullish move since higher-end homes have suffered the most in the current housing market slowdown according to the aggregate data. TOL is a buy here, but I am very cautiously anticipating earnings on February 26th.

— – —

FOLLOW Dr. Duru’s commentary on financial markets via email, StockTwits, Twitter, and even Instagram!

Active AT40 (T2108) periods: Day #20 over 20%, Day #18 over 30%, Day #17 over 40%, Day #16 over 50%, Day #12 over 60%, Day #6 over 70%, Day #3 over 80% (overperiod)

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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY calls, long ITB calls, long BHP calls, long RIO puts, long INTC calls, short MDB and long MDB call, long SQ calls, long WHR call

AT40 = 85.7% of stocks are trading above their respective 40-day moving averages (DMAs) (20th overbought day)
AT200 = 47.3% of stocks are trading above their respective 200DMAs (4-month high which reverses the October, 2018 breakdown)
VIX = 13.5
Short-term Trading Call: neutral

Stock Market Commentary

The waiting game continues within a bullish cloak. An extended overbought rally slowly rolls along toward major man-made March deadlines facing US-China trade relations and Brexit. March even features the next meeting of the Federal Reserve. The positive bias in the anticipation is reflected through a series of indicators. At the time of writing, President Trump announced he is willing to extend the tariff deadline because of good progress in negotiations. Stock futures are up, but I do not trust those highly manipulated markets. Instead, I look at currency markets which show traders quickly reversing the trigger-finger reaction to the headlines. For example, the Australian dollar (FXA) rolled back almost all its instant gains. In other words, stocks are as likely to fade a gap open on Monday as they are to maintain a rally into the close.

The hourly chart of AUD/USD shows how the Australian dollar benefited quickly but briefly from trade headlines.
**Source:** **TradingView.com**

AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), is on day #20 of this overbought period. AT40 is even holding its own well above 80% for 9 straight days. The average 80% overperiod is only 5 days long with a median around 3 days. The average 70% overperiod, an overbought period, lasts around 8 days with a median around 4 days. The S&P 500 (SPY) has gained 4.8% so far during this oversold period. If the overbought period ended today, the S&P 500 would be well ahead of historical performance.

AT40 is now at the edge of a key “lift-off” point where the S&P 500 gets a “second wind” of performance. For example, over the next 10 trading days, the S&P 500’s performance for the overbought period converges toward 5%. If the current overbought period matches historical tendencies, then the S&P 500 will have to max out above 5% performance in order to exit the overbought period with a gain of 5% overall. In other words, the S&P 500 has at least a little more upside in store before this overperiod ends. I will call it another 1% or so for trading purposes.

The 200-day moving average (DMA) still features prominently in this overbought period. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, is at a new 4-month high and has reversed its breakdown from the October sell-off. Meanwhile, the major indices are still lingering around their respective 200DMAs with slow motion action. The S&P 500 (SPY) is up for a critical test of the peak from November.

The S&P 500 (SPY) gained 0.6% and closed at a near 3-month high.

The NASDAQ went from the slightest of taps on 200DMA resistance to a tentative 200DMA breakout. The tech-laden index already slipped by its late November peak and now wrestles with the early November peak. A move higher from here faces minimal resistance until around 8000 which represents a complete reversal of the sell-off that started in early October.

The NASDAQ finally made a clean 200DMA breakout on a 0.9% gain.

The iShares Russell 2000 ETF (IWM) is making its own bid for a 200DMA breakout. IWM finished just 0.25 points above this critical trendline. With the last three peaks already surpassed, IWM faces minimal resistance from here until a test of the all-time high set last August.

The iShares Russell 2000 ETF (IWM) gained 0.9% and closed a hair above its 200DMA resistance.

The volatility index, the VIX, made a decisive move lower. The VIX broke down from the 15.35 pivot and is charging toward the extreme low levels that dominated trading for months ahead of the October breakdown.

The volatility index, the VIX, continued its orderly decline and closed at a near 5-month low.

I continue to watch Semiconductor Hldrs ETF (SMH) for additional clues. SMH closed the week near a 5-month high. The index of semiconductors is near a complete reversal of its loss since the October breakdown.

The Semiconductor Hldrs ETF (SMH) gained 1.4% to close near a 5-month high.

My short-term trading call remains stuck in neutral even with this tantalizing picture of a stock market fueling up for another sprint higher against weakening resistance. As a reminder, this neutral setting came from the 1-day overbought period that preceded this overbought period. If not for that brief fake-out, I would be at a cautiously bullish stance. In other words, I see no signs of a top in the market, but I am also not interested in betting on the major indices. This combination makes me both willing to consider individual stocks making fresh 200DMA breakouts or tests of 200DMA support while looking to short select stocks that are demonstrating weakness relative to the market. I am also trying to avoid big bets either way.

Stock Chart Reviews

Friday, February 22nd was a fascinating day of tremendous post-earnings stock moves. Some of the moves look exaggerated, perhaps from panicked shorts closing out positions. I include several of these charts for reference as some may large trading opportunities counter to the post-earnings direction and some may present buy-the-dip candidates.

Intel (INTC)

Morgan Stanley (MS) upgraded Intel from equal-weight to over-weight and increased its price target from $55 to $64/share. Nightly Business Report noted that MS last upgraded INTC over 7 years ago! The stock gained 2.1% in response and closed at a 7-month high. The October breakdown and sell-off is now receding in INTC’s rearview mirror. The move also caught me without any “between earnings” call options in hand. I now await the next pullback for another buying opportunity.

The Kraft Heinz Company (KHC)

Kraft Heinz Company (KHC) hit a major reset button that crashed the stock with a 27.5% loss. KHC included in its earnings report a massive write-down of $15.4B (at the time of close KHC had a $42.6B market cap after losing $17B in value), a dividend cut, slashed earnings guidance, AND an SEC investigation into accounting irregularities. The stock closed well below its lower Bollinger Band (BB) and thus tempts me to trade it for a bounce at least back to that technical marker. However, the downtrend in KHC has been persistent and panicked sellers may not quite be finished dumping the positions they have stubbornly held through that downtrend.

The folks at CNBC’s Options Action had an interesting idea for current stock holders to take advantage of the surge in implied volatility: buy an April $37.50 call and sell two April $40 calls for a net zero cost for every 100 shares long.

Clean-up on aisle 5. Kraft Heinz crashed more than 27% on Friday in its worst day ever. @Michael_Khouw krafts a recovery trade. $KHC pic.twitter.com/qbTZU4waeL
— Options Action (@OptionsAction) February 22, 2019

Big investors are the interesting twists to this story. KHC is roughly a whopping 7% of the holdings of Berkshire Hathway of Warren Buffet fame. Will Buffet bail or use this as an opportunity to add to his position? If investors even get a hint of Buffet dumping, I assume they will try to front-run as much as possible. Either way, I think the stock has a lot of room to move up or down, and I will be looking to put on a position marrying a put spread to call options.

The Kraft Heinz Company (KRFT) lost 27.4% post-earnings and closed at or near an all-time low.

Roku (ROKU)

ROKU sports a heavy short position, not surprising for a consumer hardware stock not named Apple (AAPL), with 34.8% of its float sold short. I was unfortunate enough to pile on with my own hedged short position in what I thought was an earnings play with a lot more downside than upside risk for the stock.

ROKU survived its earnings and the move looked mild enough at first. The day turned into a rout for shorts. The gain was enough to get me a close on the March $52.50/$60 call spread I put in place for a hedge. At the $62 I bought a March $65 call for good measure. The race is now on to challenge the all-time high set at the end of September before the market experiences its next pullback. I like ROKU for more big moves ahead, and I will be using the short position as the backstop for call options.

Roku (ROKU) gapped up just enough to erase the previous day's earnings and never looked back on its way to a post-earnings 25.2% gain. — Roku (ROKU) gapped up just enough to erase the previous day’s earnings and never looked back on its way to a post-earnings 25.2% gain.

KB Home (KBH)

KB Home (KBH) spent almost two weeks churning just below its 200DMA. The stock finally broke out and thus goes back on my list of buys for seasonal plays on home builders.

Universal Display (OLED)

Universal Display (OLED) is a huge miss on my part. The stock essentially printed and confirmed a double bottom in January. I did not pay much attention because the stock was greatly under-performing the market off the Christmas Eve low. Now I can only hope to get a buy-the-dip opportunity after OLED rocketed to a post-earnings 23.0% gain.

iQIYI (IQ)

The downtrend in iQIYI (IQ), the “Netflix of China”, was extensive before ending in December alongside the stock market’s major low. After a very positive post-earnings breakout and response, the stock looks ready to return to the rapid run-up days immediately following the stock’s IPO. I have accumulated a position that I intend to hold for the “long-term.”

Caterpillar (CAT)

Caterpillar (CAT) answered the call and broke out above its 200DMA. No follow-through buying yet, but such a move would be very bullish for the stock. Investors are clearly eagerly trying to get ahead of an announcement of a China-US trade deal but not move too fast. There is no longer a need for me to refresh CAT puts for a hedge in the short-term until the stock trades below its 200DMA again.

Dexcom (DXCM)

My +3% price alert on DXCM triggered first thing in the morning. Before I had a chance to check on the chart and the news, my -3% price alert triggered. Assuming a major reversal was underway, I immediately set out to short the stock. My limit order was filled and the stock kept pushing higher before settling back down into selling mode. I covered before the test of 50DMA support. This post-earnings move is topping action since the sharp reversal pushed off an all-time high. The test of 50DMA support is very critical.

Zillow Group (Z) (ZG)

I made a case for buying Zillow Group (Z) (ZG) in late November following news of insider buying. A buyable dip followed the stock’s failure at 50DMA resistance. From an abundance of caution, I almost took profits on the stock ahead of earnings. However, I kept in mind competitor Redfin’s post-earnings 200DMA breakout as a model of upside potential. The results far surpassed my even most hopeful expectations; of course, the surge had good company on the day. Now I am trying to hold through a very important test of 200DMA resistance for Zillow Group.

Zillow Group (Z) surged to a 26.4% post-earnings gain that stopped just short of 200DMA resistance.

The Trade Desk (TTD)

The pre-earnings chart of The Trade Desk (TTD) looked like a coiled spring. I wish I saw that pattern BEFORE earnings!

Wayfair (W)

Wayfair (W) enjoyed a 27.9% post-earnings leap. I missed the 200DMA breakout on this one (I REALLY need to get more disciplined about using SwingTradeBot!). That move alone was a signal for speculating long on W even through earnings. The stock stopped just short of closing at a new all-time high. This stock is likely a buy-on-the-dip, but it is too hot to handle for me until it consolidates its gains for at least a week or so.

BHP Billiton (BHP)

BHP Billiton (BHP) broke out this month to multi-year highs and still looks like it has plenty of gas left. My current pairs trade on BHP vs Rio Tinto (RIO) is a switch from the usual with BHP puts and RIO calls. Looks like I would have done well to just stick with the original script after I took profits on the last trade!

Rio Tinto (RIO)

Rio Tinto (RIO) slowed down to start the month but is ending on a strong note. The stock is facing down strong resistance around the $60 level. This point has failed several times over several years. Above that level awaits a SEVEN-year high.

Sherwin-Williams (SHW)

Sherwin-Williams (SHW) is back in bullish form with a higher low and higher high as part of a confirmed 200DMA breakout. SHW’s fortunes are part of the turn in sentiment toward the housing market, and it helps solidify my (re)confidence in the home builder trade.

Lowe’s Companies (LOW)

Lowe’s delivered the previous week as I had hoped. Now I see a stock that could easily make a run for its all-time high. I will wait until after earnings the morning of the 27th to decide on any new moves (buys).

Home Depot (HD)

Home Depot (HD) finally joined LOW in breakout territory. If not for earnings on the morning of February 26th, I would have loaded up on call options. Instead, I will wait for the next signal…

XPO Logistics (XPO)

XPO Logisitics (XPO) is a classic example of the risk of overstaying a welcome on a bottom-fishing expedition. I made the case for the stock in December after the climactic sell-off. I took profits on call options ahead of expiration. The market called my stock away which was covered by a short call. After that, I just watched as XPO first failed to punch through 50DMA resistance next started following the trendline downward. I did not buy into last week’s post-earnings selling because of the news of a loss in business from a major customer (likely Amazon.com (AMZN)). If not for the company announcing another $1.1B buyback, I would now wonder whether the short-seller got it right after all. Instead, XPO is on my buy list for the coming week assuming the stock does not zip past its latest post-earnings low. From Seeking Alpha transcripts (emphasis mine):

Also in December, our board authorized a $1 billion stock buyback, which we completed earlier this month. As we announced yesterday, the board has authorized an additional buyback of up to $1.5 billion.

While we love M&A, the acquisition that will create the most shareholder value right now is acquiring our stock. As you saw in the release, we brought down the numbers for 2019. We can’t ignore the fact that our largest customer is curtailing about two thirds of its business with us.
We had substantial capacity dedicated to this customer in brokerage, last mile and logistics. But we believe the great bulk of these resources should be redeployed over the next couple of quarters.

I am following the company’s example in buying back into the stock.

The struggles continue for XPO Logistics (XPO) . An earnings bombshell confirmed declining 50DMA resistance.

United States Oil Fund (USO)

Oil is on the rebound along with other commodities and stocks. I have not bothered buying back in because USO is chugging along so slowly. I assume USO is headed for a 200DMA rendezvous.

Best Buy (BBY)

Best Buy (BBY) is defying gravity with a slow motion roll that includes a 50DMA breakout. My original bearish expectations simply failed to materialize. The stock is effectively in limbo until earnings the morning of February 27th. I am looking to that event to be a major catalyst. For example, the market is pricing in about an 8.8% up or down post-earnings move given the March 1 $60 straddle (call and put at the $60 strike) costs $5.30. Compare that to the implied 9.8% move priced in for the March 15 expiration. In this situation, I like playing stock on one side and a spread on the other. Given the fireworks from Friday, I will buy shares and a Mar 1 $60/56 put spread for about $1.30. Note the 50DMA is around $56.

Stamps.com (STMP)

Stamps.com (STMP) lost an astounding 57.8% after cutting its guidance in half and announcing the loss of its partnership with the United States Postal Service (USPS). I honestly did not know there was anything else to STMP’s business. I thought STMP would bounce back for “only” a 40% loss, but sellers were relentless. I am still going to keep a close eye on this one for a trade: buy on a post-earnings high, short only after the lower Bollinger Band (BB) “catches up” to the stock. Notice in the chart below how volume surged ahead of earnings – “someone” had a whiff of bad news!

The weekly chart of Stamps.com (STMP) is a reminder of the stock's long ramp up...and the amount of space underneath to fill on further selling pressure. — The weekly chart of Stamps.com (STMP) is a reminder of the stock’s long ramp up…and the amount of space underneath to fill on further selling pressure.

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Active AT40 (T2108) periods: Day #34 over 20%, Day #32 over 30%, Day #31 over 40%, Day #30 over 50%, Day #26 over 60%, Day #20 over 70%, Day #9 over 80%

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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY calls, long CAT puts, long BHP puts, long RIO calls, short ROKU shares and long call, long Z, long IQ, short AUD/USD, long AUD/JPY, short EUR/AUD

AT40 = 76.8% of stocks are trading above their respective 40-day moving averages (DMAs) (25th overbought day)
AT200 = 45.8% of stocks are trading above their respective 200DMAs
VIX = 13.6
Short-term Trading Call: neutral

Stock Market Commentary

The trading action on the major indices is practically a broken record. An extended overbought rally just grows older and the major indices churn and churn with an ever so slight upward bias. The slog of the US-China trade negotiations adds to the tantalizing nature of the trading as extreme optimism about the wheeling and dealing helps motivate the market’s patient levitation.

Last week, I looked at the burst of optimism Sunday night over the latest trade headlines and found skepticism from the behavior of the currency markets. Sure enough, the S&P 500 (SPY) gapped higher on Monday only to fade its way to a near flat close. The index spent the next three days drifting ever so slightly downward. Friday delivered a 0.7% gain that left the week in positive territory and maintained that ever so slight upward bias.

The S&P 500 (SPY) is sneaking its way higher again. The 0.7% gain on the day took the index to a 4-month closing high.

The NASDAQ followed the same script as the S&P 500 except the tech-laden index managed to leap off the bottom of its upper Bollinger Band (BB) and reach for the top of the channel.

The NASDAQ gained 0.8% for a new 5-month closing high.

The volatility index, the VIX, put another exclamation point on the benign trading environment with a resounding drop that closed even with a 5-month low. The 15.35 pivot is now starting to look more like resistance than a pivot.

The volatility index, the VIX, ended the week even with a 5-month low.

The trading action on bonds took me by surprise; bond yields took a leap higher. The iShares 20+ Year Treasury Bond ETF (TLT) lost 1.1% and even closed below its 200DMA. I missed a trade on this move because I blithely assumed that the Federal Reserve’s recent capitulation would keep a downward bias on rates. The 50DMA breakdown was a clear signal to go short and/or buy put options. I am also surprised the stock market rallied alongside this rate surge.

The iShares 20+ Year Treasury Bond ETF (TLT) lost 1.1% and confirmed its 50DMA breakdown with a 200DMA breakdown.

The rate surge put further pressure on the stocks of home builders and my remaining seasonal trades. This past week took down my April call options on the iShares US Home Construction ETF (ITB) from a nice gain to a loss. I am sticking by the trade with an expectation that the one-day surge in February will provide support for the next 200DMA breakout. Given time is running out, I will have to take profits on the next (presumed) upswing.

The iShares US Home Construction ETF (ITB) confirmed its latest 200DMA breakdown with a 0.3% loss.

AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), no longer underlines the benign trading environment. While AT40 is on day #25 of an overbought period, it finally fell out of the 80% overperiod. That lofty level lasted an incredible 12 days. AT40 has not closed this low since January 30th when my favorite technical indicator first punched above 80% during this overbought period. This drop is a small nick in the overbought period that borders on a bearish divergence. The next week of trading should provide more clarity.

The S&P 500 is up 5.2% during this extended overbought rally. The chart below shows that the index should have a strong upward bias from here if the overbought period continues. The index’s performance is also about 1 percentage point above where it would be if the overbought period ended on this 25th day. In other words, the overbought period could easily end in the next few days without a dramatic pullback and stay well within expectations. This observation is yet one more reason why it makes sense to wait for the overbought period to end before flipping bearish on the stock market.

Stock Chart Reviews

Box (BOX)

Box (BOX) suffered a post-earnings plunge on Thursday. Sellers returned Friday to keep 50DMA resistance intact. The industry for cloud storage solutions is crowded and competitive. I am still waiting for some kind of shakeout. In the meantime, BOX is a short with a tight stop on a close above 50DMA resistance.

Caterpillar (CAT)

Caterpillar (CAT) is tightly pivoting around its 200DMA. I am surprised the stock did go down for a loss given the surge in interest rates. CAT is still the perfect hedge on a negative reaction to the US-China trade negotiations. However, as I mentioned in an earlier post, the sluggish and benign nature of trading means that there is little point in buying puts until a clean 200DMA breakdown. Even then, the rising 50DMA will likely provide an extended rest stop for the next pullback in CAT. I realize this approach leaves me vulnerable to a sudden drawdown in the stock market, so I am looking to extend some short positions in stocks.

SPDR Gold Trust (GLD)

The surge in interest rates knocked precious metals for a loop. SPDR Gold Trust (GLD) suffered a 50DMA breakdown on high volume. The move looks very bearish for gold. I was very optimistic when GLD gapped up and broke out to a 10-month high. That moment turned out to be peak optimism as sellers have pressured GLD ever since. The stop I mentioned in that post triggered two days later and preserved some profit in my call options. I will buy call options again on a test of 200DMA support or a fresh move above the 50DMA.

iShares Silver Trust ETF (SLV)

The iShares Silver Trust ETF (SLV) suffered an even worse breakdown than GLD in the face of the surge in rates. Unlike my GLD call options, I did not put in a stop for the SLV calls. Now, I will just ride them out to the March expiration. SLV also looks more toppy than GLD, so I am NOT looking to refresh a short-term trade in SLV anytime soon.

Alphabet (GOOG)

If Alphabet (GGOG) is any indication, big cap tech stocks are finally ready to power the next move higher in the major indices. GOOG made its second 200DMA breakout in a month. The odds favor the second time being a charm, so I have GOOG on my list of “buy the dip” stocks. If Monday opens higher, I will start with a call spread expiring in two weeks and/or a calendar call spread with the short side expiring this week.

Goldman Sachs (GS)

Goldman Sachs (GS) delivered a profit shortly after I shorted the stock. I decided to hold for at least a test of 50DMA support, yet the stock rebounded quickly. Now I am back to flat in the position and waiting for the next move out of this elongating period of consolidation. I will add to the position on a test of 200DMA resistance if the test comes before the next pullback.

Nvidia (NVDA)

Nvidia (NVDA) has fallen into its own post-earnings consolidation period. While the stock quickly reversed its post-earnings gains, this is still a stock to watch. It is a buy on a breakout and even better buy on a test of 50DMA support. The January and December lows are obvious spots for stop-losses.

Splunk (SPLK)

Splunk (SPLK) had a wild post-earnings ride. After gapping up right from the open, traders quickly faded the stock for a small loss. This is toppy action. I am looking to buy puts on follow-through selling.

Stamps.com (STMP)

I laid out post-earnings trading rules for Stamps.com (STMP) last week. After seeing the stock perfectly rally off the post-earnings low, I pulled the trigger on a long a little early with a March 1/8 $95 calendar call spread. The stock kept soaring higher right to $100. I ended up wishing I had gone with straight calls AND waited for the close to look for a short opportunity. The stock pulled back from $100 and drifted lower. A small rally to close the week took me out the calendar call position at my targeted profit level. My new trading rule for STMP rule is to go long over $100 and short under last week’s low ($91.96).

Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance (WBA) took a 6.4% plunge after providing disappointing guidance to investors. I read through the transcript of the company’s comments at the Leerink Partners Global Healthcare Conference for some signs that my bearish thesis is playing out. There are still no clear signs, but I have seen GoodRX commercials and some more brand awareness.

WGA described two key headwinds: 1) reimbursement pressures that the company has not been able to mitigate as expected through negotiated contracts, and 2) price deflation from generic drugs. Current cost reductions are a small tailwind to the business. The company is also dealing with dynamic competitive pressures from CVS Health Corporation (CVS) which merged with Aetna last year. Aetna’s business has naturally migrated toward CVS, but WBA says that negative comps are going away soon. There are several challenges with international retailing as well.

The company is under-going a major cost restructuring program and digitizing its business with data to make it smarter and more efficient. These are tailwinds I cannot ignore. So, if the stock does not soon break through the December lows, I will take profits on my latest short position and rethink my strategy.

Walgreens Boots Alliance (WBA) dropped 6.4% from a consolidation range that converged on its 50 and 200DMAs

An industry in decline: CVS Health Corporation (CVS) closed the week at a 5 1/2 year low.

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Active AT40 (T2108) periods: Day #39 over 20%, Day #37 over 30%, Day #36 over 40%, Day #35 over 50%, Day #31 over 60%, Day #25 over 70% (80% overperiod lasted 12 days and ended Wednesday)

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

The T2108 charts above are my LATEST updates independent of the date of this given AT40 post. For my latest AT40 post click here.

Be careful out there!

Full disclosure: long UVXY calls, long ITB calls, short WBA, long GLD, long SLV shares and calls