AT40 = 64.0% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 52.5% of stocks are trading above their respective 200DMAs
VIX = 13.2
Short-term Trading Call: neutral
Commentary
The churn continues on the S&P 500 (SPDR S&P 500 (NYSE:SPY)) while AT40 (T2108) loiters around just under its overbought threshold of 70%. The lethargic trading action is still keeping me from flipping the short-term trading call to bearish as I normally would do when AT40 gets rejected from the overbought threshold. I am content to wait things out. If/when AT40 breaks the last low at 59.7%, I will flip bearish. My favorite technical indicator closed the week at 64.0%.
The S&P 500 (SPY) gapped up to start the week, filled the gap, and drifted to near flat for the week.
The NASDAQ had a VERY subtle upward bias for the week.
Like the NASDAQ, the PowerShares QQQ ETF (NASDAQ:QQQ) had a very subtle upward bias for the week.
The volatility index, the VIX, was itself volatile for the week. The jitters up and down gave me the opportunity to trade profitably in and out of ProShares Ultra VIX Short-Term Futures (NYSE:UVXY) call options twice. I loaded up for a third time ahead of Thursday’s close. The jig may be coming to an end though as on Friday the VIX gained 5.5% and UVXY only gained 1.9%. I held the calls because the expiration for this round is two Fridays out.
The volatility index, the VIX, continues to hold its ground just above 12.
The amount of time AT40 (T2108) has spent under the overbought threshold is starting to get long in the tooth. At 78 days below 70%, the chart below shows that the performance of the S&P 500 by the time it gets into overbought territory starts declining. The S&P 500 is currently down 4.1% since AT40 dropped out of overbought conditions on January 24, 2018. This performance is well below the projection of S&P 500 performance for an underperiod that ends at 78 days. In other words, IF the S&P 500 can muster enough strength to drive into overbought territory, the accompanying rally would likely be broad-based and very strong. That is, very strong given the market’s current performance, but it is one more reason to avoid flipping my short-term trading to bearish.
The duration of the current T2108 70% underperiod is getting long compared to the historical record
CHART REVIEWS
Amazon.com (NASDAQ:AMZN)
My last trade on AMZN was a bust. With the stock looking poised for an upside resolution to a Bollinger® Band (BB) squeeze, I dipped my toe in again. I dove in with another calendar call spread with expirations on June 8th and 15th.
Amazon.com (AMZN) finally woke up a bit this week. The stock looks ready to resolve a small Bollinger Band (BB) squeeze to the upside.
Best Buy (NYSE:BBY)
Earlier in the week I noted the increasing trading volume on down days for BBY. The selling culminated with a big dip two days ahead of earnings. This episode turned out to be one of those times where the trading action going into earnings telegraphed exactly what was coming. BBY has likely topped out for now and looks headed for an important test of support at its uptrending 200DMA.
Pre-earnings sellers in Best Buy (BBY) raised the alarm for a reason. BBY gapped down below its 50DMA and sellers confirmed the bearish breakdown with another 3.5% loss.
United States Oil (NYSE:USO)
Oil prices finally took a plunge. On Friday, rumors rattled markets that the Saudis and Russians would finally relieve some of their production cuts in response to production issues in Venezuela and the likely drop in oil from Iran. To me, this is yet one more episode that demonstrates how the oil market is fraught with manipulation. At the time of writing, it is still not clear whether Saudi Arabia and Russia will actually increase production. Regardless, oil prices as represented by USO remain in a strong uptrend from the 2017 lows.
The United States Oil (USO) gapped down and lost 4.3% in a move that looks toppy. Can the 50DMA uptrend keep guiding USO higher from here?
Energy Select Sector SPDR ETF (NYSE:XLE)
XLE weakened ahead of the plunge in oil prices. The top came in the form of a bearish engulfing pattern on Tuesday. If I had been paying attention, I would have loaded up on puts after seeing that. At one point on Friday, XLE traded exactly where it stood at the end of April.
The Energy Select Sector SPDR ETF (XLE) made a marginal new 3-year high before pulling back 5.5%.
BHP Billiton) (NYSE:BHP) and Rio Tinto) (NYSE:RIO)
The drop in oil had a direct impact on BHP. Ironically, the catalyst I was looking for my latest iron ore pairs trade featuring BHP puts and Rio Tinto longs was a potential catch-up in the price of iron ore. Iron ore is still fumbling along, so this time around my profits on BHP puts were exactly offset with losses on RIO calls. I find it ironic that my first time matching BHP puts with RIO calls resulted in the same kind of pullback that generated profits two out of three times. I decided to add to the now very cheap RIO calls instead of closing out the trade at even. If oil quickly rebounds, I will immediately lock in whatever profits remain on my BHP puts and look for the next entry.
BHP Billiton (BHP) followed through on a bearish engulfing top with a gap down and 3.7% loss to end the week.
The upward momentum in Rio (RIO) ended right at the previous high. Is a double-top in the works?
Chipotle Mexican Grill (NYSE:CMG)
I was hoping that a drop in oil prices would provide a fresh catalyst to stocks like CMG which should benefit from a decline in gas prices. Instead, CMG dropped 1.0% on the day. The stock was essentially flat as a pancake for the week and delivered another loss on my attempt to anticipate an upside resolution to the current BB squeeze. I must be a glutton for punishment as I reloaded yet again.
Chipotle Mexican Grill (CMG) went completely flatline this week despite a Bollinger Band (BB) squeeze. Friday delivered the first sign of life….to the downside.
Baidu (NASDAQ:BIDU)
I often watch BIDU but almost never trade it. The drama over the departure of the company’s COO finally pushed me to pull the trigger. I was far too early in buying call options last Friday. Over the weekend traders and investors decided they had not sold enough and on Monday BIDU plunged again. The stock has started to stabilize right at its converged 50 and 200DMAs, so I pulled the trigger one more time. This time I bought a small amount of shares alongside a call option. I plan to hold these shares in anticipation of, at minimum, a return to the top of the current widening trading range. I will add to the shares if BIDU drops all the way back to the bottom of its trading range.
Baidu (BIDU) looks like it is finally stabilizing after a massive downdraft. Can support at 50 and 200DMAs hold?
iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)
What a difference 10 days make. On May 15th, a return to 3%+ on the 10-year U.S. Treasury caused a flurry of negative trading activity. Now interest rates are in sharp retreat with Friday’s action pushing TLT above its 50DMA. TLT gained 2.1% for the week and notched a 1 month high. I find it instructive that the S&P 500 barely benefited from this sharp decline in rates. As planned, I took this opportunity to reload on TLT puts.
The iShares 20+ Year Treasury Bond ETF (TLT) rallied sharply as interest rates swiftly pulled back. How long can this latest 50DMA breakout last?
iShares US Home Construction ETF (NYSE:ITB)
While the S&P 500 barely benefited from the back-up in rates, home builders lapped it up. ITB gained a nice 1.5% and even challenged its 50DMA resistance. Since I think rates will eventually continue higher, I am unmoved by the price action. I will continue to wait for the catalysts I discussed earlier.
The iShares US Home Construction ETF (ITB) benefit from a pullback in interest rates. Right after confirming a 200DMA breakdown, ITB has rallied right back to 50DMA resistance.
Goldman Sachs (NYSE:GS)
Financials pulled back on the drop in interest rates. Yet the persistent weakness in GS continues to mystify me. GS is now barely off its low for the year which was set earlier this month. Something looks broken here. I am warily keeping an eye on these developments.
Goldman Sachs (GS) continues to struggle. GS already confirmed 200DMA resistance. A break below the May low would put GS in firm bear territory.
Qualcomm (NASDAQ:QCOM)
QCOM is in recovery mode. This past week, the stock broke out above its 200DMA and is back where it traded when President Trump’s administration blocked Broadcom's (NASDAQ:AVGO) attempt to buy the company. I consider this move to be a very bullish confirmation of the positive implications of the extra $10B QCOM might spend buying its stock back from the public.
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
Be careful out there!
Full disclosure: long AZO call spread, long QCOM calls and shares, long BHP puts, long RIO calls, long CMG call, long BIDU shares and call, long TLT puts