Last week the market’s pullback came with a bit more “technical damage” based on breadth and volume than what the price action suggests, explains John Person.
As for sector ETFs, only Transportations (IYT), materials sector (XLB), Gold (GLD), and Bonds (TLT), were positive for the week. Most of the heavy declines were in the large-cap tech names. These are the ones that carried the market higher in August. Names such as Apple, Microsoft, Amazon, Wayfair, Shopify, and the like. My take is we are undergoing the beginning of a rotational correction rather than a full-blown market crash. However, if the market moves lower and people are long, who cares about what the difference is between calling it a “correction” or a “crash,” especially when they are losing money. This was the second weekly loss in a row for all the major averages, moreover the Russell 2K is officially in a weekly PPS sell signal on extremely negative technical conditions.
Here are the Year–to-Date (YTD) & Week to Date (WTD) performance figures.
S&P 500 ($SPY%) up 4.69% / weekly: -2.64%
NASDAQ 100 ($QQQ): up 27.46% / weekly -4.81%.
Dow Jones Industrial Average (DIA): down 1.52% / weekly: -1.75%
Russell 2000 Small Cap Sector (IWM): down -9.55% / weekly: -2.63%
For several weeks I had been stating I am “cautiously pessimistic” based on my technical indicators. Under normal circumstances, based on my technical indicators, I would be saying to get aggressively short this market. However, in a very heated (more like extreme polarization) Presidential election, in a global pandemic economy with foreign central bankers and the Federal Reserve adding liquidity to the economy, its hard to do. There are two market data points that are also holding me from getting aggressively short. One, the CFTC shows the small speculators are short with Commercials and Hedge Funds now net long.
The second is the volatility index (VIX) and using the ETF (VXX) as a guide, it fell each and every day last week. Typically, this moves higher when equities move lower. Next week dips may not be supported as we did see decent volume on the intraday sell-offs last week, and we closed below weekly pivot. This suggests distribution and not accumulation. In other words, traders are selling rallies not buying dips. I tend to believe this pattern will continue into next week. We do have an FOMC meeting, and there's still some hope of a possible stimulus bill.
If we do see a rally, I believe its best to price in and place option orders for a new bear put spread in SPY. If the market rallies we will get filled and if by the end of the week the market looks positive we will simply exit the trade. However, if the rally fails and the market falls apart then we have at least a good idea we could see more losses in the weeks ahead. We need, to see weaker breadth readings with increased volume and an uptick in the VXX to confirm a more sustainable down turn. A solid technical sell signal would be to watch if the $SPY closes below its repective weekly Pivot ($336.60) next Friday. This action would raise the probability we could see the SPY trade as low as its quarterly Pivot ($291).
I am looking at any upside rally this week as an opportunity to buy the October 16th expiration 335/325 (10 wide) bear put spread. Initially work limit orders at $3.30.
