ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Sep
29

T2108 Update (September 29, 2014) – Oh So Close to Oversold and “Close Enough” To A Buy?

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 23.7%
T2107 Status: 45.1% (exactly matches 7 1/2 month closing low set on Friday)
VIX Status: 15.98
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #318 over 20% (includes day #280 at 20.03%, day #318 low at 20.25%), Day #5 under 30% (underperiod), Day #11 under 40%, Day #13 under 50%, Day #15 under 60%, Day #57 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
So today delivered the gap down I was looking for on Friday. Still, T2108 did not quite reach oversold territory. It got as low as a tantalizing 20.03%.


Close enough? Tantalizingly close to oversold before bouncing

Close enough? Tantalizingly close to oversold before bouncing


T2107 also dipped. Unlike T2108, its intraday recovery only took it back to last Thursday’s close.


T2107 bounces but remains at a major low for the year

T2107 bounces but remains at a major low for the year


The question now of course is whether this drop was “close enough” to triggering oversold conditions. The move off the bottom was too quick for me to react intraday. Moreover, I prefer a CLOSE in oversold conditions before lining up my trades on oversold conditions. To add to my hesitancy, the major indices, the S&P 500 (SPY) and the NASDAQ (QQQ), are struggling at their 50-day moving averages (DMAs).


The S&P 500 bounces right back to the 50DMA after gapping down

The S&P 500 bounces right back to the 50DMA after gapping down


Note that the S&P 500 does not show the proper open. SPY shows the gap down.

The NASDAQ struggles to hold onto 50DMA support

The NASDAQ struggles to hold onto 50DMA support


Finally, on the positive side, the VIX, the volatility index, gapped up and then failed to beat the high from August 1st that marked the peak of the last sell-off.


The VIX fades right at resistance but remains above 15.35 pivot

The VIX fades right at resistance but remains above 15.35 pivot


So, on balance, the trading call remains on HOLD yet again. IF the indices manage a solid close above the 50DMA -meaning a close above Thursday’s high as well – I will feel comfortable assuming that oversold conditions are behind us. Ironically, I will feel even MORE comfortable initiating buys if the S&P 500 generates some more palpable fear with a large spike in the VIX, a T2108 below 18% (the low from the last sell-off), and even an S&P 500 that cracks September’s low. Stay tuned!

Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short the Australian dollar

Sep
26

With Vultures Circling, Cliffs Natural Resources Breaks Important Support

written by Dr. Duru
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The vultures continue to circle around Cliffs Natural Resources Inc (CLF) looking to take advantage of a company desperate to raise enough cash to stay alive. From Bloomberg today (Sept 26, 2014):

“Cliffs Natural Resources Inc. (CLF), the U.S. iron-ore producer, has drawn interest for its Australian mines from producers including Mineral Resources Ltd. (MIN) and Mount Gibson Iron Ltd. (MGX), people with knowledge of the matter said.

The Australian companies are weighing bids for the iron-ore mines in Western Australia state that may be valued at as much as A$1 billion ($876 million), said the people, asking not to be identified as the details are private. No formal offers have been made yet and there is no certainty the U.S. company will agree to sell the assets, the people said.”

These rumors unfortunately were not enough to stave of a major break of support: the 2009 intraday lows.


Cliff Natural Resources (CLF) hits a ~10-year low

Cliff Natural Resources (CLF) hits a ~10-year low


Source: FreeStockCharts.com

This is the chart of a company that completely blew its opportunity to benefit from the commodities supercycle. At the current pace, I see every reason to expect that at some point in the next few years, CLF, a mere shadow of its former self, will return to its former state of non-glory in the early 2000s. I think it is quite telling that CLF bought its Australian assets in 2008 just as its stock was going parabolic into an all-time high and peak and just ahead of the financial crisis.

Be careful out there!

Full disclosure: no positions

Sep
25

T2108 Update (September 25, 2014) – Synchronized Sinking

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 21.5%
T2107 Status: 45.1% (7 1/2 month low)
VIX Status: 15.6 (17.9% increase!)
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #316 over 20% (includes day #280 at 20.01%), Day #3 under 30% (underperiod), Day #9 under 40%, Day #11 under 50%, Day #13 under 60%, Day #55 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
I was looking for today’s trading action on Wednesday when I wrote “A Market Over-stretched and Still Primed to Fall” in Tuesday’s T2108 Update. So give or take a day, the market is now poised perfectly for a (sharp) oversold bounce…or perched precariously on the edge of a major drawdown. It all depends on your perspective.

First, the S&P 500 (SPY) and the NASDAQ (QQQ) are perfectly synchronized in the latest breakdown. Both indices sliced right through their respective 50-day moving averages (DMAs). Moreover, they closed well below their lower-Bollinger Bands. By themselves, these closes are in over-stretched positions.


The S&P 500 breaks down below its 50DMA and well below the lower-BB

The S&P 500 breaks down below its 50DMA and well below the lower-BB

The NASDAQ breaks down below its 50DMA and well below the lower-BB

The NASDAQ breaks down below its 50DMA and well below the lower-BB


T2108 closed at 21.5%, its third lowest close since last summer.


Closing in on oversold conditions - can we get a true close below 20% this time?!

Closing in on oversold conditions – can we get a true close below 20% this time?!


T2107 is already well into territory that generated conditions for the first big bounce of the year.


T2107 tells us that many stocks are already over-stretched and eager buyers may take them back up at any time, for any reason

T2107 tells us that many stocks are already over-stretched and eager buyers may take them back up at any time, for any reason


You may be asking how could so many stocks trade below these important moving averages and yet the indices trade within spitting distance of major highs? The answer is that the market’s rally has created a lot of uptrends for a lot of stocks. As these moving averages go higher with the trend, the breaks of these averages occur at higher and higher levels on the indices. So now I am in the very uncomfortable position of preparing to buy oversold conditions without a truly major sell-off in the indices to create a necessary flush of selling or negativity. The S&P 500 and the NASDAQ are even comfortably above those August lows that felt so awful at the time (recall how I insisted traders stick with the oversold trade despite the discomfort?).

Fortunately, the volatility index, the VIX, is at least spiking to generate some of the necessary fear. Note that the VIX could easily retest its highs from the August lows.


The VIX makes another sharp reversal - this whiplash sends it above the 15.32 pivot point

The VIX makes another sharp reversal – this whiplash sends it above the 15.32 pivot point


Remember carefully – the overall bias for volatility is now to go higher, so buyers and bulls will not be able to stay comfortable for long on rallies.

The perfect scenario on the heels of all this synchronized sinking would be a large gap down on Friday morning on the indices to stretch even further below the lower-Bollinger Bands, the VIX retesting the August highs, AND T2108 dropping into (and even closing) in oversold territory. I recognize that I rarely get what I ask for on these trades, so I am just going to stay on alert and remain flexible. I am looking for an ideal first entry point for loading up on ProShares Ultra S&P500 (SSO) (call options OR shares) in anticipation of an oversold bounce. As usual, I will also be prepared to trade in multiple tranches. (When/if T2108 closes oversold, I will do a quick refresher on the rules for oversold trading).

Buyers should beware. The overall technical conditions are once again breaking down on the market. No one can credibly say a big bear market is around the corner, but these conditions DO suggest that you cannot expect trades on the long side to work for long periods of time until the topping signals get broken…unless you are in an invincible and oblivious stock like GoPro, Inc. (GPRO):


Sell-off?!?! What sell-off, GPRO asks...

Sell-off?!?! What sell-off, GPRO asks…


In the world outside of GPRO and a few others, synchronized sinking has appeared in other distressing signals of market detereoration. I conclude with just these three:

  • Caterpillar (CAT) could not hold 200DMA support
  • Emerging markets – represented by iShares MSCI Emerging Markets (EEM) – are facing a critical 200DMA test
  • The Australian dollar continues to sink with the pairing against the Japanese yen continuing to break down…despite what is otherwise general weakness in the Japanese yen as well. A weak Japanese yen is supposed to be good for markets and risk-seeking – it often gets credit for driving the Nikkei higher. I have used AUD/JPY as a more accurate gauge this year.


Caterpillar officially throws up the danger sign with a 200DMA breakdown

Caterpillar officially throws up the danger sign with a 200DMA breakdown

A critical test of the 200DMA for emerging markets as represented in EEM

A critical test of the 200DMA for emerging markets as represented in EEM

The Australian dollar - Japanese yen dance partners continue to confirm a weakening appetite for risk

The Australian dollar – Japanese yen dance partners continue to confirm a weakening appetite for risk


The trading call remains on hold because I do not want to recommend longs/bulls dump positions just ahead of oversold conditions. I cannot officially tell shorts/bears to take profits and get out the way until T2108 hits oversold. Both camps just better be ready for what promises to be a lot more whipping back and forth…

Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short the Australian dollar

Sep
25

Rio Tinto Quickly Gives Up Gains from Morgan Stanley Upgrade

written by Dr. Duru
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Two weeks ago, I noted Rio Tinto (RIO) as a prime short as a late responder to the on-going collapse in iron ore prices. On Monday (September 22), it broke down. Typically, I close out fortuitous short positions on such swift moves, but I am projecting RIO to go a lot lower over the next several weeks or months as the stock has been very slow to respond to deteriorating fundamentals and technicals.

So I was a bit surprised when Morgan Stanley (MS) upgraded RIO to overweight and hiked its price target. It seems they essentially made a financial engineering argument where RIO will be able to convince the markets in December at its Capital Markets Day that it has the financial wherewithal to maintain an increase in dividends. MS also claimed that there is upside in RIO’s aluminum business. It was enough to help RIO complete the close of Monday’s gap down. At the time of writing, the MS gains have been quickly reversed.


Selling resumes on Rio Tinto (RIO)

Selling resumes on Rio Tinto (RIO)


The gap up may have been the result of fortuitous timing. Emerging markets, miners, and commodities all enjoyed a reprieve from the selling yesterday. Today’s quick reversal tells me that it is very possible that the upgrade was indeed immaterial.

Regardless, I am a bit skeptical of Morgan’s thesis. Given I think iron ore could fall a lot more -along with a whole host of other commodities – it seems to me Morgan is ignoring significant downside risk on the way to its more rosy scenario. In particular, I do not think RIO will lift much until (or if?!?!) the Australian dollar (FXA) finally sells off significantly to generate a better balance in Australia’s economy. The Australian dollar has been quite stubborn in responding to deteriorating fundamentals given its attractiveness to capital markets for yield and/or some kind of “safety” bet relative to other major economies. These trades have only just begun to unwind in the past month or so. Despite very sharp rally in the U.S. dollar index for two months, the Australian dollar is only back to even for the year against the U.S. dollar.


The Australian dollar has finally begun breaking down

The Australian dollar has finally begun breaking down


Source for charts: FreeStockCharts.com

So, overall, I think rallies on RIO are opportunities to fade.

Be careful out there!

Full disclosure: long RIO put options, net short the Australian dollar

Sept 26 addendum: link to a WSJ article providing more details on the thesis of the Morgan Stanley upgrade: “Rio Tinto and The Tough Business of Pumping Iron Ore: Miner Faces Strategic Bind as Price of Commodity Tumbles

Sep
25

T2108 Update (September 24, 2014) – A Timely Bounce Starts Clock Ticking On Selling Pressure

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 29.9%
T2107 Status: 49.6% (% of stocks trading above their respective 200DMAs)
VIX Status: 11.1%
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #315 over 20% (includes day #280 at 20.01%), Day #2 under 30% (underperiod), Day #8 under 40%, Day #10 under 50%, Day #12 under 60%, Day #54 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
The S&P 500 (SPY) and the NASDAQ (QQQ) pulled off very timely bounces as both indices re-padded their spacing above their respective 50-day moving averages (DMAs).


The S&P 500 successfully retests 50DMA support

The S&P 500 successfully retests 50DMA support

The NASDAQ successfully retests 50DMA support

The NASDAQ successfully retests 50DMA support


Unfortunately, the T2108 Trading Model (TTM) did not predict the bounce despite the quasi-oversold (over-stretched) trading conditions. Moreover, a definitive catalyst failed to appeared before the bounce began to signal another 180 degree turn in thinking. Note that on an intraday basis, a daytrader could have easily justified buying a breakout to a new high on the day after the 50DMA held firm as support.

I am thinking a key lesson here is that T2107, the percentage of stocks trading above their respective 200DMAs, needs to feature more prominently in the trading model. I am now including it in the trading summary that starts each T2108 Update (see above). As I noted in the last T2108 Update, T2107 was at a low enough level to suggest that a bounce could happen at any time – I just do not have a formal model for T2107 extremes to make any definitive claims. What I CAN say now is that steep drop in the volatility index, the VIX, of 11% joined with the strong bounces off the 50DMA suggest that the clock is ticking against the latest round of selling pressure.

For example, the chart below shows that the market typically spends little time with T2108 below 30%. T2108 is on day #2 right now.


Mean and Median Duration Below Given T2108 Threshold

Mean and Median Duration Below Given T2108 Threshold


Another way to look at the short duration is to see the entire scatterplot of history (since 1986). In the chart below note the clustering below 10 days. Also note that the projection of the S&P 500 price change once T2108 jumps over 30% again is positive until the duration stretches toward 20 days – a rare feat for the market.


S&P 500 Price Change By Duration Below the T2108 30% Threshold

S&P 500 Price Change By Duration Below the T2108 30% Threshold


So with downward momentum abruptly coming to an end, time is now working against the bears.

I continue to play on both sides of the fence for this period of congestion and lack of overall clarity. Today’s trading gave some great examples of how this works (for more see the September 22nd T2108 Update) depending on what side of the fence (technical level) a stock is trading.

I missed today’s bounce in Baidu (BIDU) because I am being a bit cautious given the potential for a triple top in the stock. Otherwise, I would be all over this trade on 50DMA support.


Baidu (BIDU) sandwiched between bears sitting on a triple top and bulls holding up 50DMA support

Baidu (BIDU) sandwiched between bears sitting on a triple top and bulls holding up 50DMA support


I bought a fresh bunch of put options on Solar City (SCTY) as it bumrushed back to its 200DMA. I am assuming the breakdown on Monday confirms a triple top. So far so good on this latest bearish bet on SCTY. Note the almost perfect fade from resistance. All it needs now is confirmation…


Solar City fails resistance at the 200DMA

Solar City fails resistance at the 200DMA


I finally got back into LinkedIn (LNKD) with some call options. I like this retest of 50DMA support.


LinkedIn (LNKD) attempts a bounce off 50DMA support

LinkedIn (LNKD) attempts a bounce off 50DMA support


Finally, I am made another play on Intuitive Surgical (ISRG). I remain convinced that a big follow-up move is coming at some point, and I am trying to make sure I am positioned for it while lowering risk. I bought call options on Tuesday’s retest of 50DMA support. I sold today’s bounce and locked in the 65% return…too concerned that another sharp turn in the market will take the gain away as quickly as I received it.


Intuitive Surgical successfully retests its 50DMA in the middle of a post gap up holding pattern

Intuitive Surgical successfully retests its 50DMA in the middle of a post gap up holding pattern


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SCTY put options

Sep
23

T2108 Update (September 23, 2014) – A Market Over-stretched and Still Primed to Fall

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 26.1%
VIX Status: 14.9%
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #314 over 20% (includes day #280 at 20.01%), Day #1 over 30%, Day #7 under 40% (underperiod), Day #9 under 50%, Day #11 under 60%, Day #53 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
When T2108 closes below 30%, it is time to get on high alert.

I am torn, however, as I cannot issue a definitive buy or sell recommendation: 1) the S&P 500 (SPY) and the NASDAQ (QQQ) have printed ominous topping patterns this month (as described in previous posts), and 2) no major technical levels have broken to the downside. It is an odd state of limbo for the T2108 Update as conditions rapidly approach true oversold (below 20%)!

Let’s start with quasi-oversold conditions – what I will now sometimes colloquially call “over-stretched” to make my post titles sound less technical and hopefully more inviting. T2108 has dropped into quasi-oversold conditions for the second straight day. With a 34% 2-day loss and the VIX soaring by 15%, the T2108 Trading Model (TTM) is predicting another down day with 70% odds again. The associated decision (regression) tree is basing the entire prediction on the 1-day decline of T2108 of 18%. The guidance from the last T2108 Update holds again: operate as though the S&P 500 will close the day in the red, but be prepared to jump if the market responds to any positive catalyst. After all, 30% and lower has often been “low enough” to form a (trading) bottom.

The catalyst to cause a jump may not be an influential analyst or journalist this time. It may simply be 50-day moving average (DMA) support.


The S&P 500 has made a roundtrip from a 50DMA retest just over a week ago

The S&P 500 has made a roundtrip from a 50DMA retest just over a week ago

The NASDAQ is churning slowly but surely into a major retest of 50DMA support

The NASDAQ is churning slowly but surely into a major retest of 50DMA support


An odd aspect of the current rush to true oversold conditions is that the major indices are NOT experiencing anything close to a major, steep, uncomfortable, or even swift sell-off. There is little here that says sentiment has become overly negative. This explains why I am not comfortable getting ready to aggressively buy call options on ProShares Ultra S&P500 (SSO) for example.

I CAN say that many individual stocks are experiencing some swells in selling. T2108’s 26% is a near 6-week low. T2107, the percentage of stocks trading above their respective 200DMAs, has plunged further to 48%, a level last seen February 7th as the market began to recover from the early year sell-off. So, it is very possible that when (if?) the time to buy on oversold conditions comes, it will be best to pick over a list of choice individual stocks.

While these technical conditions are not conducive to an aggressive buy recommendation, they are also a possible trap for overly aggressive bears. For example, a very classic form of whiplash could feature a breakdown below 50DMAs on the major indices that bears chase downward. They will lick their chops assuming a top is confirmed with more selling to follow. If T2108 is oversold and T2107 is matching lows from earlier this year at the same time…well, you get the picture hopefully…the spring could pop at any time from there to catch sellers flat-footed. Ironically, more cautious bears may get the worst whiplash if they wait for a confirmation of the breakdown and find themselves opening fresh shorts just as T2108 sinks ever deeper into oversold territory.

Oh, and I did mention that the market is overdue for some kind of seasonal drawdown?

In other words, shorter-term traders have a VERY tricky playing field ahead. Neither bear nor bull will likely be allowed to get comfortable. (These are OK conditions for playing both sides of the fence as I have done. For an example, see my summary of trades from the last T2108 Update.)

I conclude with a look at two other key indicators that I follow when trying to sort through a confluence of trading signals: Caterpillar (CAT) – my favorite market hedge; and the Australian dollar (FXA), particularly versus the Japanese yen.

Caterpillar made a very bearish break below its 200DMA and failed to maintain a (meek) bounce off $100. Again, I sold my last round of CAT puts last week. I am ready to fade the next rally here. This is the lowest close since April 1st. Note in the chart below the very weak and unconvincing breakout above the 50DMA in August. The subsequent lower high and rounded dome is a CLASSIC setup for shorting.


Caterpillar (CAT) is definitively in the dangerzone

Caterpillar (CAT) is definitively in the dangerzone


The Australian dollar versus the Japanese yen (AUD/JPY) has been a relatively reliable indicator this year for bear/bull trading conditions. AUD/JPY is still in bullish breakout territory first established in early April and re-established with the breakout to new highs a month ago. The Australian dollar has been so weak this month that not even a strong bout of weakness in the Japanese yen has saved AUD/JPY from a sharp and abrupt fall from its previous uptrend. AUD/JPY has confirmed that upward momentum in risk attitudes has likely come to an end, but it has not yet given the green light to bears either. Such a confirmation will need to wait for a breakdown below the 200DMA…a key support which held very nicely in May and August.


The Australian dollar is quickly reversing fortunes - an ominous indicator that still awaits confirmation with a major breakdown

The Australian dollar is quickly reversing fortunes – an ominous indicator that still awaits confirmation with a major breakdown


Overall, bears and bulls alike – brace yourselves!

Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar

Sep
23

T2108 Update (September 22, 2014) – A Bearish Chill

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 31.7%
VIX Status: 13.7%
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #313 over 20% (includes day #280 at 20.01%), Day #29 over 30%, Day #6 under 40% (underperiod), Day #9 under 50%, Day #11 under 60%, Day #53 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
Another Fed-inspired pop is long forgotten again.

T2108 closed at 31.7%, a level last seen in mid-August. The 2-day loss of 24.9% qualifies for quasi-oversold conditions. The T2108 Trading Model (TTM) estimates 70% odds of further downside to follow Monday’s selling. The classification error is a very high 46% (10x cross-validation); the error rate when fit just to history is about 30%. The lesson from the last quasi-oversold episode is to operate as though the S&P 500 (SPY) will close down but to recognize that the market is stretched and a simple positive catalyst could send it lurching higher. For example, the TTM cannot anticipate the catalyst we saw last week: a journalist talking Happy Fed talk that the market uses as an excuse for buying. T2107, the percentage of stocks trading above their 200DMA further underlines the quasi-oversold condition. T2107 has quickly plunged to 51.3%, a level last seen in February!


T2108 plunges to oversold conditions

T2108 plunges to oversold conditions

T2107 is now at a level where a bounce could happen at any time

T2107 is now at a level where a bounce could happen at any time


I do not have a formal model for interpreting extremes in T2107. Since the August lows occurred at similar T2107 levels, traders should stay on alert that the market could bounce sharply at ANY time. For a mental model, think about the psychology of buyers and folks eager to participate in the market. They are looking at their favorite stocks falling very fast to or through key price and other technical levels. In many cases, they missed buying the last time their favorite trades reached this level. Punches through the 200DMA can look particularly over-extended to folks looking for a buying excuse. So, when an influential voice flips the right switch, the party gets started.

For the rest of us, we need to stay calm and remain VERY circumspect. A bearish chill is still descending upon the market in my opinion. I have a HOLD for the trading call only because no key technical level has broken to justify telling longs to stop out and/or lock profits. I also see a few pullbacks that indeed look worth the risk to justify a quick trade. Make no mistake though, but the S&P 500 (SPY) and the NASDAQ (QQQ) are still looking toppy.

The S&P 500 printed a fresh all-time high after the Federal Reserve announced its latest monetary policy decision. It was yet another no-news event that the main media insisted on turning into a moment of financial drama. This print may turn into a false breakout given it was followed by a moment of indecision: a candlestick doji called an evening star. Monday’s selling confirmed the bearish interpretation of this potential sign of the end of the uptrend and thus a topping pattern.


The S&P 500 descends sharply off an ominous topping doji called an "evening star"

The S&P 500 descends sharply off an ominous topping doji called an “evening star”


Regular readers should also notice that Friday created a kind of divergence given T2108 definitively declined even as the S&P 500 remained flat. It was another divergence that signaled a big move the next day.

The NASDAQ (QQQ) is still in worse shape than the S&P 500. The NASDAQ not only failed to make a new high last week, but also it is STILL struggling to invalidate the bearish engulfing topping pattern from September 3rd.


The NASDAQ is STILL struggling with the ominous bearish engulfing (topping) pattern

The NASDAQ is STILL struggling with the ominous bearish engulfing (topping) pattern


The volatility index, the VIX, naturally jumped on today’s selling. It just happened to gap up from a retest of August’s lows. This move once again verifies that the ever so slight bias of volatility is now to increase NOT decrease (are central banks across the planet starting to breathe sighs of relief?!?)

Finally, as you can imagine, the swift trading has created some very important and even enticing stock chart patterns. I do not have the time to post these charts, so I will trust interested readers to look these up on your own. Some of the stocks in this list are also follow-ups to trades I have proposed in previous posts.

  • iShares MSCI Emerging Markets (EEM): gap down of -1.5% confirmed 50DMA breakdown. Sold latest round of puts. I will continue to fade EEM rallies at key points of resistance.
  • iShares MSCI Turkey (TUR): Broke its 200DMA on Friday. With the Turkish lira (USD/TRY) losing out to the U.S. dollar, I moved quickly to buy puts on TUR. I may get more aggressive on USD/TRY longs.
  • SolarCity Corporation (SCTY): Confirmed breakdown of 200DMA and a topping pattern I pointed out on September 15. A complete reversal of the June 17 surge is now in play. I locked in profits and sold my put options. This one is good to fade on rallies to ressitance.
  • Zillow (Z): I screwed up last week trying to hold on for more profits from the decline and ended up empty-handed! I should have just shorted the stock instead of buying puts. Shares are hard to borrow though. I bought a small number of shares as a play on Z’s tendency to surge for no apparent reason immediately following active selling.
  • Rio Tinto plc (RIO): Gapped down and confirmed bearish developments I wrote about earlier. See “Warning Signs: A Sharp Rush Away From The Australian Dollar And Related Trades” for a follow-up. I am holding onto my January puts as I anticipate a LOT more selling in the coming weeks or months.
  • Monster Beverage Corporation (MNST): My timing was off and I had to sell my call options at a loss last week. I somehow neglected to make sure a fresh order on Friday executed. Sure enough, an upgrade on Monday sent the stock up 2.9% on a bout of impressive relative strength and a new 1-month high. As a good friend noted, the current plunge in commodity prices will help beverage companies like MNST.
  • Caterpillar Inc. (CAT): I sold my puts last week for a nice profit but wish I had bought longer-dated put options. On Monday, CAT fell another 1.6% to stop just short of hitting its 200DMA, my downside bearish target. A break of this level will sound the bearish alarm bells VERY loudly. I like continuing to fade CAT on bounces.
  • Rackspace Hosting, Inc. (RAX): I was VERY fortunate to have a stop in place for my previous tranche of call options. I was taken out when RAX punched below $38 briefly. I was not happy until last Wednesday’s fresh collapse on news that RAX had given up looking for a buyer. I moved into fresh, long-dated call options. This is pure speculation now because a catalyst to regain lost ground is much less clear now. A market sell-off will undoubtedly take RAX even lower.
  • Baidu (BIDU): This trade was my best one of last week. BIDU popped on cue after a 50DMA retest. I sold out a little early, but I was nonetheless happy. I was VERY tempted to dive right back in on Monday’s retest of the 50DMA on a 4.5% plunge. I decided to be a bit more patient this time since one could easily argue BIDU is starting to look like it is making a triple top. Gulp!
  • ProShares Ultra VIX Short-Term Futures (UVXY): Once again, the Fed successfully worked to depress volatility. Shortly after last week’s monetary policy announcement and press conference, I sold my UVXY puts. The main losses on UVXY occurred the day before when the market “celebrated” the notion that the phrase “considerable time” would remain in the Fed’s lexicon.

I think readers can tell from my trades which stock market beast currently has the strongest grip on my heart and mind even as I reserve some mettle for very select bullish plays…

Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, long TUR put options, long MNST call options, long RIO put options, long Z, long USD/TRY

Sep
21

Forex Setup Week (September 21, 2014) – A Time of Reckoning for the Australian Dollar

written by Dr. Duru
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This week’s forex setup is simply about the Australian dollar, especially against the U.S. dollar (FXA).

At the time of writing, the Australian dollar is testing the next round number on its stair-stepping down: 0.89. The last time AUD/USD hit this level, the Reserve Bank of Australia (RBA) talked up the Australian economy ahead of some strong economic reports. Those reports helped sustain the Australian dollar during its last rally: March and into April.


The Australian dollar looks ready for its next leg down

The Australian dollar looks ready for its next leg down


Source: FreeStockCharts.com

While AUD/USD may bounce meekly from 0.89, the most important aspect of this chart to note is the Bollinger Band (BB). The lower Bollinger Band is opening up far and wide with the 20-day moving average (DMA) declining sharply…all setting up what seems to be an imminent time of reckoning for the Australian dollar…much lower.

As has been my pattern learned from the days of the stubborn Australian dollar, I closed out my last short AUD/USD position to lock in profits at this important technical level. I am hoping to refade the pair on a bounce, and I am ready to reload on a fresh breakdown that comes instead.

Be careful out there!

Full disclosure: no position

Sep
21

Why the Pound Failed to Rally After the Scots Said No to Independence

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 21, 2014. Click here to read the entire piece.)

The people have spoken…and so apparently have the markets. The people of Scotland voted firmly in favor staying within the United Kingdom. In response, the British pound (FXB) sank sharply, defying some expectations that the currency would soar on a NO vote. Essentially, that rally may have already happened.


The British pound has returned to its level against the U.S. dollar right before poll results suggested the YES camp had greatly improved its odds to win the Scottish referendum on independence

The British pound has returned to its level against the U.S. dollar right before poll results suggested the YES camp had greatly improved its odds to win the Scottish referendum on independence


It is not possible to know for certain what explains the pullback in the British pound, but there are several clues available for investigation. It all starts with the gap down on September 8th in the wake of poll results which suddenly suggested that the Yes campaign had much improved odds of winning.

{snip}

This story is of course ex post (after the fact), and it fits what I can observe now with hindsight. {snip} However, the market’s relative comfort with the British pound was VERY evident and obvious against other major currencies I follow: the euro (FXE), the Japanese yen (FXY), and the Australian dollar (FXA). In each case, the British pound reversed its losses within days and achieved major milestones AHEAD of the referendum vote. {snip}


The British pound managed to a major six-year breakout against the yen ahead of the referendum vote

The British pound managed to a major six-year breakout against the yen ahead of the referendum vote

The British pound pushed EUR/GBP toward 2012 lows ahead of the vote. 2008 lows aren't much further down.

The British pound pushed EUR/GBP toward 2012 lows ahead of the vote. 2008 lows aren’t much further down.

A rare sight: from 11-month lows to 6-month highs in less than two weeks!

A rare sight: from 11-month lows to 6-month highs in less than two weeks!


Source for charts: FreeStockCharts.com

Sure each currency pitted against the British pound pair has its issues, but the market definitively stated with these observable moves that it was quite comfortable that the British pound was not in trouble from the results of the referendum. {snip}

I do not expect the British pound to immediately resume its pre-vote rally. {snip}

{snip}

So now back to the election results and some lessons learned when trying to tie real-world headline/event risk to currency trading. The market definitely had this one right in the days going into the vote: the final result was never even close or in question. {snip}

{snip}

Click for larger view…


A decisive victory for the NO campaign on Scottish independence

A decisive victory for the NO campaign on Scottish independence


Source: The Telegraph

Given these results, another question to ask is how did the YES camp get over-estimated in the final two weeks? {snip}


Whatever the reason, a big lesson and reminder I have taken from this episode is that it typically pays to follow the money. {snip}

Be careful out there!

Full disclosure: net short the British pound

(This is an excerpt from an article I originally published on Seeking Alpha on September 21, 2014. Click here to read the entire piece.)

Now you get it…

http://news.yahoo.com/katie-couric-scottish-independence-now-i-get-it-195951504.html;_ylt=AwrTHRoc8RtUyFwAD4RXNyoA;_ylu=X3oDMTEzMmcwdGpzBHNlYwNzcgRwb3MDMwRjb2xvA2dxMQR2dGlkA1NNRTY5OV8x



Sep
16

T2108 Update (September 17, 2014) – It Just Took One Man to Light Up the Market Tinder?!

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 39.2%
VIX Status: 12.7%
General (Short-term) Trading Call: Hold (TRADERS BE READY FOR WIDE SWINGS)
Active T2108 periods: Day #310 over 20% (includes day #280 at 20.01%), Day #26 over 30%, Day #3 under 40% (underperiod), Day #6 under 50%, Day #8 under 60%, Day #50 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary


This is what I tweeted after I blinked and noticed that buyers had already taken the market upward off the lows and to flatline. Little did I know at the time just how true these words would ring.

I came into the day with the T2108 Trading Model on my mind. It was predicting a down day so the sudden gap down seemed to confirm another day of selling. It was not until the market exploded higher that I realized I needed to switch to a different mental model: a quasi-oversold market just looking for an excuse to buy. That excuse came in the form of WSJ journalist Jon Hilsenrath – someone whose impact my poor little model simply cannot anticipate.

Hilsenrath is the WSJ’s “beat” reporter for the Federal Reserve. He is the one who typically gets to attend the press conferences and ask questions on behalf of the WSJ. Over time, he has apparently developed quite a trusted reputation as a Fed-watcher, but I do not think I have ever seen him (presumably) move markets like he did today – stocks and currencies combined!

Hilsenrath had a simple message, a message that I have essentially made over and over myself: “do not overthink the Fed.” He basically argued that the Fed is in no rush to get hawkish on monetary policy and will look to qualify its “considerable time” framework for raising rates such that the market does not pin the Fed down on a specific calendar date. That was enough to send the market higher in sweet relief. The first chart below shows the action on the S&P 500 (SPY) in 5 minute chunks so the changes in trading are more obvious.


In a blink sellers lost control of the open...and then Hilsenrath sealed the deal

In a blink sellers lost control of the open…and then Hilsenrath sealed the deal

Not quite 2000, but a bullish push for the S&P 500 above 50DMA support and after a "hammer" day on Monday

Not quite 2000, but a bullish push for the S&P 500 above 50DMA support and after a “hammer” day on Monday


The NASDAQ also benefited, but it is still underneath a bearish topping pattern.


The market rally also helped the NASDAQ but its bearish topping pattern remains intact for now

The market rally also helped the NASDAQ but its bearish topping pattern remains intact for now


I have adjusted the trading call slightly in the wake of this action. I am maintaining a hold for both bears and bulls, but noting that both sides of the fence need to be prepared for wide swings the rest of this week. I am not going to try to “out think” this one and just hope that I can react quickly and appropriately as the action reveals itself.

I forgot to mention in the last T2108 Update that I decided to go back to buying puts on ProShares Ultra VIX Short-Term Futures (UVXY) because of my perception (I still have not confirmed with the data!) that the Fed tends to dampen market volatility. Of course today’s rally on rate relief smashed volatility and sent UVXY plunging 9.7%. I am still holding a small amount of UVXY shares given September (and October) typically expose market weaknesses. I am definitely dumping the shares by November. In the meantime, trading puts on UVXY remains the big moneymaker.

The iShares MSCI Emerging Markets (EEM) was also a beneficiary of the rally. I was quick on THIS trade and rushed to load up on a fresh tranche of puts as EEM approached 50DMA resistance.


Dreams of a continuation of zero-interest-rate-policy (ZIRP) and a lower dollar even sent international markets higher with emerging leading the way

Dreams of a continuation of zero-interest-rate-policy (ZIRP) and a lower dollar even sent international markets higher with emerging leading the way


As I mentioned, Hilsenrath was even able to move currencies. While the overall dollar index looks like it just swung from one side of a small room to another…


The U.S. dollar in a holding pattern until the Fed bestows its next travelling papers

The U.S. dollar in a holding pattern until the Fed bestows its next travelling papers


…individual currency pairs, especially versus the Australian dollar had notable moves. Here is the 15-minute on the Australian dollar versus the U.S. dollar (FXA). I have stretched out the timeframe to show how, in typical fashion, the currency broke a significant technical level at 0.90 only to eventually shoot higher. There was one more tease for good measure.


The Australian dollar's major technical breakdown does not last long

The Australian dollar’s major technical breakdown does not last long


Given I remain firmly bearish on the Australian dollar, I promptly faded this move.


Through all of the excitement, I cannot forget what happened to Apple (APPL).

AAPL gapped down with the market, but its loss at the lows was much more significant, around 1.5%. Like the S&P 500, AAPL shot up immediately off the low. Unlike the general market, it could not manage to close with a gain. AAPL’s ominous behavior just got more ominous.

AAPL has now twice retested the all-time highs set before the September 9th product announcement and failed. This gap down essentially confirms some kind of topping action. As I have said in previous posts, I remain a fan of AAPL, but I think this poor trading action needs to be taken seriously. Only a fresh all-time high can invalidate the bearish reading. The Apple Trading Model (ATM) predicted an up day, but I was much too slow to get in at the great prices on call options at the lows (recall that the best trades on the ATM occur when the stock opens contrary to the prediction). Eventually I decided to match up calls and puts because it seems that AAPL is going to make at least one more big move this week in one direction or another.


It still looks like some kind of top in Apple (AAPL)

It still looks like some kind of top in Apple (AAPL)


Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, long AAPL calls and puts, long EEM puts, long UVXY shares and puts

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