AT40 = 37.1% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 46.7% of stocks are trading above their respective 200DMAs
VIX = 11.7 (was as high as 14.3)
Short-term Trading Call: neutral

Commentary
North Korea launched a ballistic missile over northern Japan, bot no fire and fury ensued. What happened instead was more like volatility and fizzle.

The volatility index (the VIX) gapped higher by 26.7% but ended the day with a mere 3.4% gain.

The key tell going into U.S. trading was in the currency market. The Japanese yen (FXY) surged on the North Korea news but weakened throughout Asian and then European trading. For example, AUD/JPY plunged for about 75 minutes and then reversed from there. Indeed, the subsequent reversal and rally was so strong, AUD/JPY tested resistance at its 50-day moving average (DMA) by the close of U.S. trading and burst through after that. This breakout is bullish, but I decided to use AUD/JPY as a hedge by starting a fresh short position.

Initially, the Japanese yen (FXY) surged and pushed AUD/JPY as North Korea’s missile launch fired up risk aversion. The fear fizzled quickly into a AUD/JPY rally…

The Australian dollar (FXA) punched through 50DMA resistance against the Japanese yen (FXY) and placed AUD/JPY in a newly bullish position.

The yen’s weakness was so pronounced by the time the U.S. opened for trading, I was surprised volatility gapped so high and the stock market gapped as low as it did. The sharp move distracted me from making the “right” trade which was to fade volatility. Instead, I let my long volatility positions that I hold as on-going every-two-weeks hedges fade on the vine.

The S&P 500 rallied back to a flat close. The NASDAQ was able to close above its 50DMA and a 10-day high. The PowerShares QQQ Trust (QQQ) rebounded well above its 50DMA yet stopped cold at its declining 20DMA.

The S&P 500 (SPY) bounced back sharply from its gap down but stopped short of 50DMA resistance.

The NASDAQ bounced back over its 50DMA but still could not quite break through its downward trending 20DMA.

Like the NASDAQ, the PowerShares QQQ Trust (QQQ) had a sharp recovery that could not quite break through downward trending 20DMA resistance.

With motivated sellers freshly shaken out of the market, the major indices could post one of those robust reactionary rallies. Yet, AT40 (T2108), the percentage of stocks trading above their respective 40DMAs, is not quite ready to provide a pass. AT40 closed a full point behind Monday’s close which itself represented an end to the preceding 5 days of upward momentum. It is very possible the market will spend the rest of the week in a stalemate as it awaits the storied return of traders after the Labor Day weekend.

While little changed with the major indices, a change MAY have finally occurred with the U.S. dollar index (DXY0). The dollar sold off at the open as EUR/USD almost (incredibly!) reached the 1.21 level. This plunge was enough to finally bring the dollar buyers back into play as they rallied the index into a hammer close. Given the dollar index traded further below its lower-Bollinger Band (BB) than it has done throughout this entire downtrend, I strongly suspect that the dollar can finally pull off a sustained relief rally.

The U.S. dollar index (DXY0) may have finally printed a sustainable bottom in the form of a classic hammer that traded far too deeply below the lower Bollinger Band (BB).

The true calamity of the day was Best Buy (BBY). BBY gapped down to its 50DMA and proceeded to continue selling into a 11.9% loss on the day. I covered my short position and took the profit. Ironically, this position was a market hedge and not a play on earnings. The trade could have gone the other way. As it stands, this is a very bearish move for BBY given it broke down on such large volume from its all-time high. The trading volume of 34.8M shares was the highest down volume since a 14.1% loss on January 15, 2015 when 40.6M shares traded (data from Yahoo Finance).

Best Buy (BBY) got a post-earnings smackdown from an all-time high. This could be a significant top; at best the healing should be very protracted.

My trade on Ulta Beauty (ULTA) may have been one trading day premature, but the trade just might work out anyway. ULTA gapped down with the market today, but its bounce back turned into what looks like a bullish engulfing bottom. I even like buying shares here with a stop below today’s low.

Ulta Beauty (ULTA) rallied back from a gap down for a bullish engulfing close. It looks like enough for a (short-term?) sustainable bottom.

And then there is Chipotle Mexican Grill (CMG). I earlier went back to playing the downtrend. At the time I declared I would not even consider a bottoming in CMG until it managed two closes above the lower-BB band. CMG ALMOST pulled it off today. The stock showed relative strength right from the open by moving from a gap down and into the green in the first 15 minutes. It was mostly downhill from there as CMG quickly reverted to relative under-performance. I have a hedged position on with calls and puts, but I think the trade momentum in either direction is dying down for the week.

The Chipotle Mexican Grill (CMG) is trying to make another bid for a bottom.

In one other trade, I decided to pull the trigger on my between earnings Intel (INTC) trade. I was trying to hold out until September and/or a big market swoon, but I decided to take the plunge here just in case the latest market volatility did indeed fizzle the enthusiasm of the latest round of motivated sellers.

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“Above the 40” uses the percentage of stocks trading above their respective 40-day moving averages (DMAs) to assess the technical health of the stock market and to identify extremes in market sentiment that are likely to reverse. Abbreviated as AT40, Above the 40 is an alternative label for “T2108” which was created by Worden. Learn more about T2108 on my T2108 Resource Page. AT200, or T2107, measures the percentage of stocks trading above their respective 200DMAs.

Active AT40 (T2108) periods: Day #385 over 20%, Day #199 over 30%, Day #7 under 40% (underperiod), Day #16 under 50%, Day #22 under 60%, Day #145 under 70%

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!