Breadth Responds Poorly to Latest 1-Day Oversold Rally

26. Okt. 2018

Above the 40 (October 25, 2018) – Breadth Responds Poorly to Latest 1-Day Oversold Rally
October 26, 2018 by Dr. Duru

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.}

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.