The Market Mosaic 4.24.22
Bear or Bounce?
Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at trends, market’s internals, and the mood of the crowd. I also look for information contained in sector movements and other areas of the capital markets. Finally, I’ll highlight one or two trade ideas I’m tracking using this information.
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Last week, I highlighted the warning lights flashing red in speculative corners of the market. Many stocks were beginning to break down from bearish chart patterns, such as bear flags. And that action caught up to the rest of the market late in the week.
So, where do we go from here?
In this week’s issue, I’ll show why we may be in store for a bit more downside follow through. But I’ll also highlight the indicators I’m following to tell me that a bottom has been reached.
Let’s dive right in!
Two types of groups have recently flagged warning signs for the rest of the market. That includes speculative growth stocks and former leaders. On speculative names, the Ark Innovation Fund (ARKK) is a poster child for that type of company. You can see in the chart below how ARKK hasn’t been able to shake the downtrend, and is breaking down again after testing the 50-day moving average and resetting the MACD at zero.
On the leaders, stocks like Advance Micro Devices (AMD) and Nvidia (NVDA) started downtrends late last year, and have seen the downside pick up with key support levels breaking down. That includes $100 that I highlighted last week for AMD, and here’s the chart for NVDA. The $210 and $200 levels were important support, and both gave way last week.
Other stocks I flagged last week in these spaces are showing renewed breakdown as well, including TTD, APPS, SNOW, and MARA.
How to Spot a Bottom…
Now this all begs the question of when will the selling stop? Here are 3 signs I’m watching to indicate a bottom is near.
The laggards start to lead. Honestly, we saw a bit of this on Friday. I called out ARKK above, but guess what? ARKK fell less than the overall market on Friday…down 1.65% versus 2.77% for the S&P 500. I know that doesn’t sound like much, and one day doesn’t mark the start of a trend. But that’s the type of action you want to see around a bottom. Better yet, what if next week ARKK sees a plunge at the open then close the day near flat, or even green. That would mark a key reversal signal for the stock market.
Breadth becomes oversold. This is where I go back to one of my favorites: the percent of stocks trading above their 20-day moving average. Given the damage done in the stock market late last week, I think this measure needs to get buried to signal an oversold condition. That means a level below 20%...even closer to the 10% threshold hit on more recent bounces.
Volatility hits backwardation. Wait, what in the hell does that mean!? One way of tracking volatility is through the VIX Index, and there are futures contracts tied to the VIX looking ahead. I look for peak fear in the stock market when the VIX futures curve starts to invert. That means the level of the VIX on the current month contract is rising above the price of VIX contracts expiring further out. Or put another way, volatility now is expected to eclipse volatility down the road. That type of fear tends to mark a turning point in stocks. We’re not quite there yet, but getting close per the chart below.
So Now What?
I want to come back to the chart of the S&P 500. First, there is a triangle pattern that developed, and we are close to breaking through the bottom support line. It also seems clear that the market wants to at least test the 4,200 level that held several times in February and March, marking a bottom back then. We’re firmly below key moving averages, so I look to price for the next levels. I think around the 4,000 is the one to watch, which is the breakout from April last year.
This is where you sit back and watch, and remember that cash is a position. There are not many high quality setups passing my screens, and even those that showed relative strength in the past couple weeks have reversed lower. That includes the gold-related stocks and TAP that I discussed last week.
Personally, I also play downside moves in the stock market and wanted to highlight a breakdown we are seeing with Oracle (ORCL). There are a few things I like about this setup: 1) the trendline break, 2) the cross below the 50-day moving average 3) MACD cross below zero. I like to keep trailing stops tight on this type of position, and typically use a 10-period moving average.
That’s all for this week. I hope you’ve enjoyed this edition of The Market Mosaic, and please share this newsletter with anyone you feel could benefit from an objective look at the stock market.
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Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence!