Oversold Conditions Test Critical Stock Market 200DMAs
AT40 = 13.2% of stocks are trading above their respective 40-day moving averages (DMAs) – a 4th oversold day (below 20%)
AT200 = 33.6% of stocks are trading above their respective 200DMAs
VIX = 21.3 (no change)
Short-term Trading Call: bullish
Commentary
All eyes are now trained on the stock market’s critical long-term moving averages as oversold conditions stretch into a fourth day. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), increased to 13.2%. This level is still very low, but it set up a mild bullish divergence with the S&P 500 (SPY). AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, increased to 33.6%.
The S&P 500 (SPY) lost 0.6%. More importantly, the index closed below its lower Bollinger Band (BB) for the fourth straight day and faded from resistance at its 200-day moving average (DMA). These technical dynamics are signs of sellers staying in control even as the slight increase in AT40 suggests a rebound is imminent.
{The S&P 500 (SPY) wilted 0.6% as it faded away from 200DMA resistance.}
The NASDAQ also faded from 200DMA resistance but closed above its lower-BB with a 0.9% loss. The Invesco QQQ Trust (QQQ) lost 1.2% but held 200DMA *support* in picture-perfect form.
{The NASDAQ is critically sandwiched between an abandoned baby bottom and a fade from 200DMA resistance.}
{The Invesco QQQ Trust (QQQ) lost 1.2% but held onto two critical supports at the abandoned baby bottom and 200DMA support.}
The ever-sinking small caps flipped the script with a day of relative out-performance. The iShares Russell 2000 ETF (IWM) gained ever so slightly at 0.4% as the index held recent lows.
{The iShares Russell 2000 ETF (IWM) is struggling to cling to critical support at the low point of the big May breakout.}
The volatility index, the VIX, was flat on the day. At 21.3 it is still in an “elevated” position above 20.
As a reminder, the average oversold period lasts about 5 days. As the oversold period stretches out, I start monitoring the performance of the S&P 500 during this period. After about the 6th or 7th oversold day, the projected performance of the S&P 500 while AT40 trades under 20% starts to decline. By the 9th day, the projected performance flips negative and steadily declines from there. Since going oversold the S&P 500 is down 1.3% (measured from the close of the first oversold day).
{The performance of the S&P 500 for a given oversold duration (T2108 below 20%).}
I set a low ball offer for SPY call options expiring next Friday that I thought would only execute a deep swoosh downward. The rush for the exits right at the close turned out to be enough. Per the oversold strategy I have laid out in earlier posts, I will accumulate more SPY call options on VIX spikes that send the market into even deeper oversold territory.
AT200 = 33.6% of stocks are trading above their respective 200DMAs
VIX = 21.3 (no change)
Short-term Trading Call: bullish
Commentary
All eyes are now trained on the stock market’s critical long-term moving averages as oversold conditions stretch into a fourth day. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), increased to 13.2%. This level is still very low, but it set up a mild bullish divergence with the S&P 500 (SPY). AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, increased to 33.6%.
The S&P 500 (SPY) lost 0.6%. More importantly, the index closed below its lower Bollinger Band (BB) for the fourth straight day and faded from resistance at its 200-day moving average (DMA). These technical dynamics are signs of sellers staying in control even as the slight increase in AT40 suggests a rebound is imminent.
{The S&P 500 (SPY) wilted 0.6% as it faded away from 200DMA resistance.}
The NASDAQ also faded from 200DMA resistance but closed above its lower-BB with a 0.9% loss. The Invesco QQQ Trust (QQQ) lost 1.2% but held 200DMA *support* in picture-perfect form.
{The NASDAQ is critically sandwiched between an abandoned baby bottom and a fade from 200DMA resistance.}
{The Invesco QQQ Trust (QQQ) lost 1.2% but held onto two critical supports at the abandoned baby bottom and 200DMA support.}
The ever-sinking small caps flipped the script with a day of relative out-performance. The iShares Russell 2000 ETF (IWM) gained ever so slightly at 0.4% as the index held recent lows.
{The iShares Russell 2000 ETF (IWM) is struggling to cling to critical support at the low point of the big May breakout.}
The volatility index, the VIX, was flat on the day. At 21.3 it is still in an “elevated” position above 20.
As a reminder, the average oversold period lasts about 5 days. As the oversold period stretches out, I start monitoring the performance of the S&P 500 during this period. After about the 6th or 7th oversold day, the projected performance of the S&P 500 while AT40 trades under 20% starts to decline. By the 9th day, the projected performance flips negative and steadily declines from there. Since going oversold the S&P 500 is down 1.3% (measured from the close of the first oversold day).
{The performance of the S&P 500 for a given oversold duration (T2108 below 20%).}
I set a low ball offer for SPY call options expiring next Friday that I thought would only execute a deep swoosh downward. The rush for the exits right at the close turned out to be enough. Per the oversold strategy I have laid out in earlier posts, I will accumulate more SPY call options on VIX spikes that send the market into even deeper oversold territory.
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