Above The 40 – A (Brief?) Time To Get Bearish On The Stock Market

AT40 = 35.7% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 58.6% of stocks are trading above their respective 200DMAs
VIX = 12.5 (volatility index)
Short-term Trading Call: bearish

Commentary
The S&P 500 (SPY) finally flipped the switch on the bearish threshold I have described since the last bullish breakout to new all-time highs. At that time the stock market celebrated President Trump’s address to a joint session of Congress. This one-day plunge immediately put the index’s support at its 50-day moving average (DMA) into play. The move also planted a definitive bearish spin on the reaction to the Fed’s rate hike last week.

Just like that, the S&P 500 (SPY) dropped to a 5-week low and put 50DMA support into play.

The NASDAQ (QQQ?) lost 1.8% and 6-weeks of gains in one day. The intraday high was a fresh all-time high.

The selling felt worse than it really was because in recent months the S&P 500 has so rarely made one percent moves, much less one percent declines. March 21, 2017 delivered the worst one-day performance for the S&P 500 since Trump was elected President. The last decline worse than -1% was on October 11, 2016 of -1.2%, exactly the same decline as today. That 109 trading day stretch without a decline of 1% or more missed the all-time record by one trading day set in 1995. The last 1%+ gain was on March 1, 2017. The chart below shows the sparsity of one percent moves since May, 2016 relative to the preceding months.

One percent moves on the S&P 500 dried up significantly after May, 2016.

Source for price data: Yahoo Finance

AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, confirmed the day’s weakness. AT40 dropped from 46.5% to 35.7%. This close officially reversed ALL of AT40’s post-election gain. The move is yet one more reminder of why extended bearish divergences are important warnings. When AT40 swooned last week below 40%, the S&P 500 barely responded, stubbornly held onto support at its uptrending 20DMA, and failed to close below my bearish threshold. THIS time, the S&P 500 came tumbling down along with AT40 in a synchronous move that confirmed the market’s selling pressure.

AT40 (T2108) finally finished the reversal of all its post-election gains.

TraderMike provided a great description of the significance of bearish divergences in his latest review of the market’s technicals. In “READING TODAY’S TECHNICAL DAMAGE VIA THE SCANS PAGE AND GENERAL MARKET ANALYSIS PAGE” he covered the market’s technical weakness from many angles. Like TraderMike, I too have been nagged with the bearish implications of the year’s divergence. It never allowed me to flip the short-term trading call to bullish when I might otherwise have done so. This nagging was particularly important as I reviewed the mild one-day bullish divergence from last Friday. In that review, I pointed out that a sell-off into oversold conditions (AT40 below 20%) would not likely be a steep one. Sure enough, AT40 is at a level where I would start to consider “close enough” to oversold while the S&P 500 has yet to even test uptrending 50DMA support.