Not Yet Oversold But Stock Market Makes An Important LowAT40 = 23.4% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 24.7% of stocks are trading above their respective 200DMAs (new 32-month low)
VIX = 22.5
Short-term Trading Call: neutral
Commentary
The technical damage continues in the stock market. Amid all the carnage and massive gap downs, I am surprised AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs) is still above the threshold for oversold trading conditions (20%). My favorite technical indicator closed at 23.4%. In the last oversold period, T2108 closed as low as 9.7%.
{AT40 (T2108) lost 6 percentage points and closed just above oversold territory.}
While the stock market is not technically oversold, AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, closed below its lows from October. AT200 hit a new 32-month low and a new extreme (note that AT200 dropped to the single digits during the early 2016 sell-off). This important low means that money managers are once again looking at broad damage in their portfolios. A large share of those stocks are trading in bearish territory and look like sells into the next rally. AT200’s return to these levels confirms the lasting technical damage slamming the stock market.
{AT200 (T2107) sliced right through the closing lows of October as technical damage spreads again in the stock market.}
The charts of the major indices say plenty. The S&P 500 (SPY) lost 1.8% and closed exactly at the October low and the low of the last oversold cycle. The index is down 1.2% year-to-date. The NASDAQ lost 1.7% to close at a 7-month low and is now flat year-to-date. The Invesco QQQ Trust (QQQ) lost 1.8% to close at its own 7-month low. QQQ is still UP 2.2% year-to-date.
{The S&P 500 (SPY) lost 1.8% on the worst gap down of the past 6 weeks of weakness. An attempted gap fill was beaten back down by sellers.}
{The NASDAQ lost 1.7% on a gap down that established a worse level of weakness for the tech-laden index.}
{The Invesco QQQ Trust (QQQ) lost 1.8% on a bearish gap down and a successful fade of an attempted gap fill.}
The volatility index, the VIX gained 11.8% to close at 22.5. The VIX surprisingly is not already back to its highs from the previous oversold periods. If someone told me about the large gap downs the market experienced on the day, I would have assumed the VIX was soaring right past the previous highs.
{The volatility index, the VIX, is on the rise again and is right back to elevated levels (above 20).}
The Australian dollar (FXA) versus the Japanese yen (FXY) is, surprisingly, nowhere near its recent low. Combined with AT40 versus AT200 and the VIX, this positioning tempts me to think that the stock market is near a low for this latest selling cycle. Note that part of the lift is coming from recent bullish economic news.
{AUD/JPY is clinging to its 200DMA and is still well off its recent lows.}
The stock market is in desperate need of positive catalysts to break out of this cycle of selling. While the relative gulf between AT200 on one side and AT40 and the VIX on the other side looks like a potential kind of bullish divergence, I am keeping the short-term trading call at neutral. I downgraded all the way from bullish to neutral because of the 200DMA breakdown for the S&P 500. Today’s selling just confirmed that trading call. I am assuming the healing process for this technical damage needs to happen in oversold territory. By trading rule, I will flip back to bullish if AT40 drops below 20%.
