ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Sep
1

Forex Setup Week (August 31, 2014) – Critical Test of QE2 Resistance for the U.S. Dollar

written by Dr. Duru
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Ten days ago, I thought the U.S. dollar (UUP) was over-extended and due for a correction. A cooling never happened. Instead, the dollar index continued climbing the upward trending channel between the first and second Bollinger Bands (BBs). Now, the dollar index faces an even more critical test: the presumed ceiling of a trading range that has held firm since last summer. This cap is somehwat stylized as I created by the dollar index’s level when QE2 was pre-announced by Federal Reserve chairman Ben Bernanke on August 26, 2010 at Jackson Hole, Wyoming.


The QE2 and QE3 reference prices have held up relatively well as a trading range since last summer

The QE2 and QE3 reference prices have held up relatively well as a trading range since last summer

The QE2 reference price has served as a cap that the U.S. dollar index has failed to exceed for long

The QE2 reference price has served as a cap that the U.S. dollar index has failed to exceed for long


Source: FreeStockCharts.com

Even though the dollar index managed to break above the QE2 reference price several times, the rallies never lasted long. So, I still like to think of this level as a cap.

This critical test is all the more critical with the European Central Bank (ECB) on-deck for a monetary policy decision featuring pressure from France in the form of Prime Minister Manuel Valls demanding that the ECB do even MORE to get the euro lower. France is fighting against renewed recessionary pressures. Valls made a similar demand back in May ahead of the ECB taking additional extraordinary measures. Given the euro is slightly more than 50% of the dollar index, moves in the euro will most directly influence the dollar’s critical test.

I am most interested in the possibility for the British pound to make a comeback against the U.S. dollar. It has been on a massive slide against the U.S. dollar for almost six weeks. This slide seems well over-done given the strong economic fundamentals in the UK that should not be impacted by the upcoming referendum in Scotland on independence. Note well though that GBP/USD faces major looming overhead resistance from a now declining 50-day moving average (DMA) and a 200DMA which is now flattening…


The British pound's downward momentum against the U.S. dollar finally seems to be over - just in time for the dollar index's test of its QE2 reference price

The British pound’s downward momentum against the U.S. dollar finally seems to be over – just in time for the dollar index’s test of its QE2 reference price


Source for charts: FreeStockCharts.com

I am sure sometime in September I will be assessing whether or not GBP/USD can resume its previous uptrend.

Be careful out there!

Full disclosure: long and short the U.S. dollar versus various currencies, long GBP/USD

Aug
30

T2108 Update (August 29, 2014) – A Surprisingly Strong August, Mixed Prospects for September, and A Critical Test for Twitter

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: 63.3%
VIX Status: 12.0%
General (Short-term) Trading Call: Hold (Bullish)
Active T2108 periods: Day #299 over 20% (includes day #280 at 20.01%), Day #13 over 40%, Day #11 over 50% (overperiod), Day #38 under 60%, Day #39 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 day, another all-time high…and a fresh run-up is in sight. In the chart below, notice all the “white space” sitting between the current close at 2003 and the upper-Bollinger Band.


The S&P 500 could be in the early part of a developing uptrending channel

The S&P 500 could be in the early part of a developing uptrending channel


The seasonal weakness never materialized for August in the form of an out-sized drawdown despite the big drop that preceded the month. Instead of a large drawdown, August’s 3.8% gain was its best performance since the year 2000. In 2000, the S&P 500 gained 6.1% in August; the S&P 500 gained 3.4% in August, 2009. Before 2014, August was DOWN three of the last four years. On the flip side, four out of the last five years have delivered UP performances for September. Here is a chart relating August to September performances since 1950.


August vs September Price Changes for the S&P 500: 1950 to 2013

August vs September Price Changes for the S&P 500: 1950 to 2013


Source for prices: Yahoo! Finance

Notice that there is no apparent pattern or relationship between the performances of the two months. There are some related raw stats of interest from 1950 to 2013 for August and September:

  • 35, or 55%, of years August closed with a gain.
  • 14, or 40%, of the years with an up August delivered an up September.
  • 29, or 45%, of years September closed with a gain.

Given the odds seem to favor a down month for September, I will be very inclined to switch bearish if T2108 hits overbought levels (70% or above). At the current pace, T2108 should hit overbought by the middle of September.

Click image for a larger view…


T2108 is closing in on overbought territory after another sharp rebound from (quasi)oversold conditions

T2108 is closing in on overbought territory after another sharp rebound from (quasi)oversold conditions


The NASDAQ (QQQ) looks even more bullish than the S&P 500. The tech-laden index bounced liked a springboard off the first Bollinger Band at the lows of the day and closed for a marginal new 14-year high. Unlike the S&P 500, the NASDAQ is already clearly driving higher in an upward channel between the first and second Bollinger Bands. The Bands are wide open for a continuation of the rally.


The NASDAQ jumps like a springboard to continue a push in an uptrending channel

The NASDAQ jumps like a springboard to continue a push in an uptrending channel


Interestingly, the volatility index, the VIX, avoided making fresh lows. There is no bearish divergence here, just something to watch for now. The VIX could easily plunge if it becomes clear to market participants that the market is going to soar a lot higher.


Volatility has managed to avoid fresh lows despite the stock market's upward push

Volatility has managed to avoid fresh lows despite the stock market’s upward push


I end with a fascinating chart a la Twitter (TWTR). The stock is right back at the critical $50 level. Twitter is one of those special cases where analysts stepped up to upgrade the stock right in the middle of what looked like the beginning of the end. Given the general negative sentiment on Twitter, I identified these upgrades as potential markers for a bottom. They were.

Click image for a larger view…


Twitter faces a critical test at $50

Twitter faces a critical test at $50


The chart above shows some of the key fundamental and technical milestones for Twitter. If you look very closely, you will see TWTR is trading above a newly formed 200-day moving average (DMA) – a very bullish event. So, I daresay, TWTR will cleave through, likely gap up, over the $50 hurdle. Shorts have already been scrambling to get out of the way of this run-up. Only 4.2% of the float is now short TWTR…


Shorts are tweeting a stampede to get out of the way of rising momentum

Shorts are tweeting a stampede to get out of the way of rising momentum


Source: Schaeffer’s Investment Research

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:

Aug
27

Don’t Call It A Comeback: King Digital Scratches for A Bottom, Amazon.com Rises Yet Again

written by Dr. Duru
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Do not count out King Digital (KING) just yet? Almost two weeks after a post-earnings implosion, KING is showing some signs of life. The stock may even be scratching its way to a (short-term?) sustainable bottom.


King Digital struggles t carve out a bottom

King Digital struggles t carve out a bottom


The chart above shows that buyers finally showed up in KING as it punched through the $13 level. The resulting positive close on the day formed a bullish engulfing pattern that can often signal a bottom under these conditions. The bullish turn was confirmed the next day with more buying on volume. On the third day, the stock even temporarily broke through to new post-earnings highs – a sign that buyers are slowly but surely taking over control. For aggressive traders that dare to play this bottom there should be plenty of churn going forward to buy the stock at slightly lower prices. This setup benefits from a very clear stop at fresh all-time lows. I estimate upside potential first to the previous all-time low around $15.20 and then the 50DMA around $17.75.

Amazon.com (AMZN) continues to live up to its AMaZiNg stock symbol. Just as I was counting out the stock based on bearish post-earnings performance, the stock made a 180 degree turn and returned to my initial bullish read (frustrating whiplash!). It took less than two weeks for a fresh 50-day moving average (DMA) breakout. A 3.1% surge off the 50DMA as support in the wake of news that AMZN paid about $975M for Twitch seems to all but confirm the buyers are back and firmly supporting the stock once again.


Amazon.com turns up sharply on a post-earnings recovery

Amazon.com turns up sharply on a post-earnings recovery


Source for charts: FreeStockCharts.com

I now have to assume that as long as the stock market is on a bullish march, AMZN will follow.

Full disclosure: no positions

Aug
25

T2108 Update (August 25, 2014) – S&P 500 2K Edition

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: 56.1%
VIX Status: 11.7%
General (Short-term) Trading Call: Hold (Bullish)
Active T2108 periods: Day #295 over 20% (includes day #280 at 20.01%), Day #9 over 40%, Day #7 over 50% (overperiod), Day #34 under 60%, Day #35 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
T2108 has not made much progress since the last T2108 Update on August 19th. However, the S&P 500 (SPY) has. The bounce from oversold conditions continues in nearly a straight line. Today, it made new all-time highs and crossed 2000 for a brief moment (of course, it could not stay above that line on the first visit).


The S&P 500 continues a sharp recovery from oversold trading conditions

The S&P 500 continues a sharp recovery from oversold trading conditions


While this move has been sharper than expected, the path toward the top of the Bollinger Band is as expected. Now note how the Bollinger Bands (BB) are opening up. Much to the chagrin of the bears piling on against this move, the S&P 500 could be warming up for even more upside before the next corrective phase. As planned, I sold out my aggressively collected call options on ProShares Ultra S&P500 (SSO). It was a very nice double. Although they did not expire until this Friday, I have no regrets since I believe I made an overall good risk/reward play.

Based on the headlines and tweets I see, I am amazed at how some bears act a lot like the Fed: nothing ever seems to disprove their theories. The Fed insisted that if accommodative policies were not working, it was because they were not accommodative enough. For bears, if the stock market charges to ever higher and higher prices, then the odds of a massive correction/crash/collapse just becomes even more likely. Will it be vindiciation to watch the S&P 500 race up to 2500 in a few years only to finally collapse to 2000 in the next bear market?

Anyway, I understand the pain of the bears since the 5% gain in just three weeks certainly seems like a lot given all the headlines swirling around. I am amazed because August was supposed to be the start of the two-month “danger zone” for the stock market. But price action must be respected nonetheless…and T2108 even more.

With Jackson Hole behind us and Labor Day weekend ahead of us, I am guessing the rest of this week will be a lot of churn and teasing with the 2K level. I will just end things here with a few chart reviews and trade updates.

First, note the VIX, the volatility index, could not hold the presumed upward trading channel. So all bets are off for a phase of steadily rising volatility (all Central Banks groan on cue here). Now the VIX could just as easily drop back to multi-year lows.


So much for the VIX taking on an upward bias - channel no more as it gets broken to the downside

So much for the VIX taking on an upward bias – channel no more as it gets broken to the downside


GrubHub (GRUB)
“Ugh” is the best way to describe this one. The technical setup delivered for me for a brief moment on Friday, August 22, but I chose not to sell. I wanted to try to hold on for follow-through since the stock market is in such a bullish mood. Instead, I got a nasty surprise today with a stock halt, news of a secondary offering, and a takedown that ended in a 8.4% loss on the day. The only slight saving grace is that the uptrend remains intact with the 20 and 50-day moving averages (DMAs). This episode just confirms for me that you can hardly trust hot IPOs for more than a hot minute. I am not hating on the insiders dumping shares here. They SHOULD be. My timing and/or execution was just lacking.


Grub UGH - nuff said

Grub UGH – nuff said


Monster Worldwide Beverage (MNST)
This stock broke out big time on August 15th when a deal with Coca-Cola (KO) was announced. KO also gapped up. KO has kept its gains, MNST has been sliding ever since. I have checked in on the stock every day and finally decided to pounce with some speculative call options. I am guessing the extreme initial move was driven by shorts screaming bloody murder. As regular readers know, extreme moves above the upper-Bollinger Band rarely last and that was the case with MNST. My setup here is a slight slowing in downward momentum at the first Bollinger Band.


Can Monster finally find a post-euphoria resting point for support?

Can Monster finally find a post-euphoria resting point for support?


Intercept Pharmaceuticals, Inc. (ICPT) is an example of this kind of first BB setup. I earlier anticipated more of a pullback, but buyers readily stepped into the setup. ICPT got a small gap up today above the small consolidation period. I am still NOT a buyer on this one though!


Buyers have stepped in at support for ICPT - much to my surprise

Buyers have stepped in at support for ICPT – much to my surprise


Apple (AAPL)
I would be remiss to post without a celebration of new all-time highs on Apple (AAPL). I think of this chart as the culmination of a somewhat brash prediction I made in early May: “A Turnaround In Apple Sentiment Should Push The Stock Back To All-Time Highs.” It is also validation of a call I made a year before that for a bottom in Apple in “An Apple Bottom As Sentiment Finally Turns Southward (Put Buying Soars).” It is definitely time to do another sentiment check and update my expectations if I can.


Apple continues on a near-perfect uptrend with well-defined supports

Apple continues on a near-perfect uptrend with well-defined supports

Fresh all-time highs in perspective with this weekly chart

Fresh all-time highs in perspective with this weekly chart


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 GRUB, long AAPL call options, long MNST call options

Aug
24

Forex Setup Week (August 24, 2014): That Stubborn Australian Dollar

written by Dr. Duru
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In last week’s edition of Forex Setup Week, I pointed to the “quiet” strength of the Swiss franc (FXF) with a particular focus on its trade against the euro (FXE) in EUR/CHF. Although the euro continued to weaken through the week, the franc did so as well. So now, EUR/CHF is essentially where it was a week ago. Overall, I think the strengthening trend will continue, even at the current snail’s pace.

This week, the stubborn resilience of the Australian dollar (FXA) has my attention. The “Aussie” has continued to make gains against every major currency I follow…except for the U.S. dollar. GBP/AUD is at levels last seen in early April. EUR/AUD is challenging the low from last month which in turn was a level last seen in November of last year. AUD/JPY is breaking out and sits now at a level last seen in early June…of 2013. Only the U.S. dollar is holding its own against this currency which, according to the Reserve Bank of Australia (RBA), should be much, much weaker at this point in the economic cycle.


Only the U.S. dollar is holding its own against the Australian dollar in what actually looks like a topping pattern in slow motion

Only the U.S. dollar is holding its own against the Australian dollar in what actually looks like a topping pattern in slow motion


Source: FreeStockCharts.com

As I have stated in earlier posts, I like to follow AUD/JPY as a gauge of sentiment, the classic risk-on/risk-off dichotomy. The AUD/JPY breakout is then very consistent with the freshly bullish run in the (U.S.) stock market. The stubborn resilience of the Australian dollar suggests there is yet more upside to come in the stock market.

However, I remain just as stubbornly bearish on the Australian dollar – I guess I listen to and read the RBA too much. I have been net short for a while but trading in and out of hedges, mainly against the euro. I was even more bearish on the euro than the Australian dollar for quite some time. Now I think the euro is likely over-extended in its weakness (in the short-term). I prefer to bet against the Aussie with the U.S. dollar and the British pound. The pound has failed to deliver the strength I was counting on, but I think it now has the greatest upside potential against the Australian dollar whenever it goes on its next cycle of weakness (and it WILL happen at “some point”).

I hope to soon give a trader’s perspective on the RBA’s recent appearance at Australia’s House of Representatives Standing Committee on Economics. The opening statement by Governor Glenn Stevens and the transcript from the proceedings were fascinating and illuminating reads. In the meantime, be careful out there!

Full disclosure: net short the Australian dollar

Aug
21

An Over-Extended U.S. Dollar and A Complete Reversal for Gold

written by Dr. Duru
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The U.S. dollar (UUP) is at 11-month highs. The dollar index is finally showing the strength many expected from the beginning of 2014 in anticipation of strong economic numbers and subsequent rate hikes.


The U.S. dollar surges....but is still well within its QE2/QE3 trading range

The U.S. dollar surges….but is still well within its QE2/QE3 trading range


The chart above shows that the U.S. dollar index has been on a relative tear since bouncing off its QE3 reference price (the QE reference prices are where the dollar traded at the time the Fed announced QE). This move really accelerated on Tuesday and Wednesday of this week (August 18th and 19th) in the face of strong U.S. housing data. However, this recent history of such rapid moves in the U.S. dollar is not pretty. Especially with the dollar extending above its upper-Bollinger Band (BB), traders should expect a notable pullback.

In particular, Jackson Hole 2014 edition is coming up. This symposium is hosted by the Federal Reserve Bank of Kansas City. It will provide a forum for Federal Reserve Chair Janet Yellen to pedal softly and disappoint folks who are bidding the dollar up in anticipation of some kind of rate hawkish talk.

Now if I am wrong, and Janet Yellen delivers for the U.S. dollar, all bets are off. In such a case, I will be particularly interested in ramping up my bets against the Australian dollar with an emphasis on AUD/USD. Reserve Bank of Australia governor Glenn Stevens will likely be the happiest man in the crowd to see the Federal Reserve finally definitively steer toward a normalization of monetary policy.


The Australian dollar is undergoing a very extended topping process against the U.S. dollar

The Australian dollar is undergoing a very extended topping process against the U.S. dollar


In any case, the dollar still looks good to trade between the rails of the QE2 and QE3 reference prices. Only a breakout (upside or downside) is a truly significant move at this point.

Finally, gold has finally buckled under the pressure of the rising U.S. dollar. As expected, SPDR Gold Shares (GLD) has now completely reversed the premature pop that was presumably in response to a media-driven fear that the Fed was somehow getting behind the curve on inflation.


GLD gaps down to complete a reversal of June's premature "inflation scare"

GLD gaps down to complete a reversal of June’s premature “inflation scare”


Source for charts: FreeStockCharts.com

Mind you, I remain bullish gold, but I remain sober in observing that there are simply no near-term catalysts to drive it higher on a sustainable rally. The best I am willing to believe is that 2013′s sell-off has ended in a sustainable bottom.

For your “edutainment”, I have included this short clip from CNBC’s Rick Santelli. I think he is a bit nuts, and the nuttiness seems to grow as the markets refuse year-after-year to bow down to his desires, wishes, and ideologies. But I LOVE this defense of technical analysis relative to trading the “fundamentals” of monetary policy. Quite relevant as Jackson Hole kicks off with the U.S. dollar over-extended in the near-term…



Be careful out there!

Full disclosure: net short the U.S. dollar, long GLD

Aug
20

T2108 Update (August 19, 2014) – A Gut-Check on Sentiment As the S&P 500 Rolls On

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: 53.8%
VIX Status: 12.2%
General (Short-term) Trading Call: Hold
Active T2108 periods: Day #291 over 20% (includes day #280 at 20.01%), Day #5 over 40%, Day #3 over 50% (overperiod), Day #30 under 60%, Day #31 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 leaders of the European Union, Ukraine and Russia will meet in Minsk on August 26 to discuss energy security and the conflict in east Ukraine, Ukraine’s President Petro Poroshenko said on Tuesday.” – from Reuters, August 19, 2014.

This quote pretty much ended most headline risks from the crisis in Ukraine. Sure there will be setbacks and bad headlines to come, but this quote seems to establish that the process of resolution is truly underway. The market will now tend to look over the horizon for the prospects of that resolution. This headline then is probably a lot more powerful than the one last Friday (August 15) that sent the market hurtling downward for a brief spell, giving bears one more hope that a substantial correction was finally on the way.

I do not say this to bask in complacency. After all, I was bracing for much more volatility in the next two months and a high potential for a notable drawdown in the market. I make the above point because it is important for understanding sentiment and thus the technicals going forward. To get lower prices in the near-term, something has to happen even worse than the prospect of a Russian invasion of Ukraine. This is no different than all the other crises and particularly geo-political jolts the market has weathered since the financial crisis.

It was another strong day for the S&P 500 (SPY). For the fourth trading day out of the last five, the index closed at or near its high of the day. Since the resolution of a bullish divergence, the index has printed healthy gains on six of the last eight trading days. The chart below shows that the S&P 500 is within inches of setting fresh all-time highs…and this time there is plenty of upside room with the Bollinger Bands (BBs) wide open.


The S&P 500 continues its surge out of oversold conditions

The S&P 500 continues its surge out of oversold conditions


T2108 followed along with the program by closing on its high at 53.8%. T2108 was last at this level July 23rd, right where the S&P 500 peaked before the last bout of selling. Closing above this level will accomplish another bullish confirmation of the upward move.

Since I am always good for caveats and caution, here is one I found from my old mentor Trader Mike.


I am assuming that I should expect momentum to slow here, perhaps the S&P 500 even moves to retest the 50DMA as support. This is probably a good time to close out my call options on ProShares Ultra S&P500 (SSO). I was quite aggressive when the S&P 500 first broke above its 50DMA, and there is no need to get greedy considering my full spectrum of positions. If I am fortunate, the market will deliver a gap up Wednesday morning…

While I have been much more confident on the S&P 500, I remain conflicted on ProShares Ultra VIX Short-Term Futures (UVXY). UVXY closed at a new (marginal) all-time low, and I find myself wishing I just owned put options as I used to do before the July consolidation and then breakout got me playing shares on the long side again. But I have also found the shares to serve a good psychological purpose as a hedge to bolster the forward-looking confidence. Stay tuned on this one.

Finally, the NASDAQ (QQQ) continues to streak higher in a straight line to fresh 14-year highs. And remember all that against about small-caps? iShares Russell 2000 (IWM) is finally breaking out its shell with a move above its 50DMA.


A tentative breakout for small-caps...just ahead of small-cap killer Janet Yellen's appearance at Jackson Hole, Wyoming....

A tentative breakout for small-caps…just ahead of small-cap killer Janet Yellen’s appearance at Jackson Hole, Wyoming….


The bullish signals are piling one on top of each other now, caveats aside of course. It made me check in on my favorite bear/stubborn contrarian Doug Kass. As Kass likes to say when he is clowning the chatter-class when it says nothing to acknowledge it has called a trade seriously wrong: “crickets.” While there is nothing indicating what Kass has done, is doing, or plans to do with his accumulation of trades fighting against the S&P 500 and the NASDAQ in the wake of the bounce from oversold conditions (complete with on-going jawboning of course!), he has grasped for one potential contrarian/bearish indicator:

However, with the signals piling on as they are, I think these CNBC folks are right to be unabashedly bullish. There is little point in being outright bearish here until the market at least throws a bone like a fresh 50DMA breakdown or a true buying blow-off into, for example, overbought conditions.

Let’s also consider whether we can truly get any signal from counting the number of bulls versus bears in a CNBC production studio. First of all, I am not sure how much CNBC sentiment counts for anything anymore. After all, global ownership of equities is supposedly at a 50-year low, and it truly seems that only the die-hard market geeks care much about the stock market these days. Sometimes it even (anecdotally) seems like this bull market is hated quite thoroughly.

For the sake of this discussion, let’s say CNBC is indeed representative. We still need to know whether these are folks who are 1) always bullish or 2) bears converted to bulls. On #2, we need to know when the bears converted. A recent conversion from a die-hard bear to a bull is much more bearish than a bear who finally hopped aboard the uptrend in 2011, 2012, or even 2013. Late converters represent the classic last money chasing the last fumes of an over-extended run-up. Yet, it will be difficult to even make such a call when so little attention is focused on the market despite its historic run.

Doug Kass will be guest-hosting Bloomberg TV’s “Market Surveillance” on Thursday morning. I wish I had the opportunity to watch it. I am betting if the market happens to be weak the day before or that morning, Kass will use it as evidence of a top, confirmation of the contrarian view, a reminder that risk happens fast, etc… If not, the market’s rally will serve as a platform to berate market participants for blind complacency (smile – Kass, you know I love you…).

Finally, here are some more charts of interest.

Wix.com (WIX) has disappointed. The strong breakout on June 24th had absolutely no follow-through. WIX is even trading just below its 50DMA, is under-performing, and is still hovering just above its all-time low. I am stubbornly hanging on for the follow-through…or fresh lows.


No follow-through for Wix.com as post-IPO lows still hold sway over trading

No follow-through for Wix.com as post-IPO lows still hold sway over trading


Last week, Kate Spade & Company (KATE) had one of the ugliest post-earnings fades you will ever see. The stock started off with a nice gap up and gained as much as 10% or so before absolutely collapsing. It cleaved through its 50DMA and then 200DMA like nobody’s business. It was so fast, I did not even have a chance to think about hopping aboard the downward express. Instead, seeing the stock over-extended below the lower-Bollinger Band (BB)…well, long-time readers should know what I did: I purchased some speculative call options. So far, so good…although I wish I had just purchased stock since the call options still came with an expensive implied volatility premium that has since fizzled a bit. I am also skeptical KATE can muster enough buying power to conquer looming, overhead resistance at its 200DMA.


KATE is attempting a valiant recovery from a dramatic post-earnings collapse. Resistance should be tough...

KATE is attempting a valiant recovery from a dramatic post-earnings collapse. Resistance should be tough…

Overall, it seems earnings could have signaled the end of KATE's run-up and longer-term recovery

Overall, it seems earnings could have signaled the end of KATE’s run-up and longer-term recovery


GrubHub Inc. (GRUB) had a remarkable first day of trading when it went IPO on April 4, 2014 in the middle of a big swoon for high-multiple and momentum stocks. The stock priced at $26 after revising its range from $20-22 to $23-25. The stock promptly sold off and closed at $34. That seemed to be the end of the story and the beginning of the end for another over-hyped, over-valued internet/mobile play. The stock churned lower to $30 right as the sell-off in momentum and high-multiple stocks ended around May 20th. The stock has “quietly” fought its way back up. It made a failed retest of highs in early June, finally broke out on July 29th only to get faded. The sell-off ended early and formed a classically bullish cup and handle pattern that resolved into a very strong surge last week to fresh all-time highs. I treated the subsequent pullback as a rare “second chance” opportunity to hop aboard this bullish pattern.


GrubHub is looking ready to surge much higher...

GrubHub is looking ready to surge much higher…


Finally, the one that got away: LinkedIn (LNKD). My rationale for locking in profits pre-earnings made perfect sense at the time. However, I feel a huge sense of irony that the post-earnings hurdle over the 200DMA did not renew my bullishness enough to hop back on. LNKD has gained another 10% or so since its post-earnings open, providing ample upside opportunity along the way. Until the last two days of weaker trading, LNKD has traded upward nearly non-stop (granted in baby steps along the way). A retest of converging 50 and 200DMA lines of support would be absolutely fascinating to behold (and hopefully trade).


A dramatic turn in sentiment for LinkedIn

A dramatic turn in sentiment for LinkedIn


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 UVXY shares and puts, long SSO call options, long WIX, long KATE call options, long GRUB

Aug
19

T2108 Update (August 18, 2014) – Distractions Removed, the S&P 500 Passes the Test

written by Dr. Duru
Bookmark and Share

(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: 50.3%
VIX Status: 12.3%
General (Short-term) Trading Call: Can add to existing buys now that the S&P 500 has broken out above its 50DMA. Stop on a close below the 50DMA. Cannot consider shorting until such a breakdown or T1208 overbought conditions.
Active T2108 periods: Day #289 over 20% (includes day #280 at 20.01%), Day #3 over 40%, Day #1 over 50% (overperiod), Day #28 under 60%, Day #29 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
Monday’s surge for the S&P 500 (SPY) above its 50-day moving average (DMA) provided great validation of my rule to avoid trading on headlines. The 0.85% gain also took the index above the previous bear/bull line. With oversold conditions fading in the mirror and likely leaving behind overly aggressive bears who yet again failed to chase the market down, today’s move on the S&P 500 is fully bullish.


The S&P 500 breaks out, closes at its high of the day, and punctuates the bounce from oversold conditions

The S&P 500 breaks out, closes at its high of the day, and punctuates the bounce from oversold conditions


Of course, only new highs (all-time and 52-week) will validate this bullish push. As I assess the odds I just remind myself what has happened after each bounce back from sell-offs inspired by negative headlines…

Incredibly, the NASDAQ (QQQ) punched to fresh FOURTEEN-year highs. I think this is a great occasion for showing a monthly chart…


The picture is enough said: the NASDAQ is an awesome recovery to behold.

The picture is enough said: the NASDAQ is an awesome recovery to behold.


I am truly embarrassed to have to look back on this chart with hindsight to report that buying a simple breakout above the highs of the last bull market could have been just one of two trades over the last three years. The other trade would have been either to buy the subsequent dip in 2011 for truly committed bulls or to buy again on the next breakout in 2012. This is classic “trend is your friend” kind of action. Heck, it is even “buy the dip” kind of action.

In the wake of the dot-com crash in 2000, two friends and I placed bets on the number of years the NASDAQ would need to establish a full recovery. I was the most bearish at 25 years. My friends bet 10 and 15 years. At least that bet was made in 2001 dollars…

T2108 closed at 50.3%, climbing another five percentage points. It continues to confirm the bullish bounce from oversold conditions earlier this month.

The volatility index, the VIX, has of course continued to plunge. Last week’s surge toward the 15.35 pivot is almost ancient history as the VIX now tests the lower edge of the presumed upward channel.


Can the VIX's upward trending channel hold?

Can the VIX’s upward trending channel hold?


ProShares Ultra VIX Short-Term Futures (UVXY) is of course getting freshly crushed and ground. Its breakout above the 50DMA is definitely ancient history now.


UVXY playing a familiar tune: a close at all-time lows

UVXY playing a familiar tune: a close at all-time lows


Now for some interesting stock charts fitting for the current trading setup…

Facebook (FB) and Intuitive Surgical (ISRG) are experiencing Bollinger Band (BB) squeezes. In both cases, post-earnings moves took the stocks well above their respective upper-Bollinger Bands and essentially exhausted buyers. Both stocks are struggling to regain post-earnings momentum. A breakout (or breakdown) from here should be quite decisive. In particular, if FB manages to breakout higher, it could/should be part of a fresh rally in tech and the stock market in general: I cannot imagine a major sell-off in the middle of a fresh FB run-up.


Facebook is still struggling to regain its post-earnings momentum so this BB squeeze should be decisive

Facebook is still struggling to regain its post-earnings momentum so this BB squeeze should be decisive

Intuitive Surgical has yet to make a fresh post-earnings high so its BB squeeze should be decisive

Intuitive Surgical has yet to make a fresh post-earnings high so its BB squeeze should be decisive


Another sign buyers are on the move…U.S. Steel (X) continues its strong post-earnings rally as it punches a fresh 3-year high. I am guessing buyers are hunting out relatively “cheap” stocks that can help them play catch up with the stock market. At the beginning of this year, I said I would pay more attention to steel stocks again and start writing about them. I never got around to it, and I certainly regret it now! (AKS Steel (AKS) is still in my portfolio). I can only watch now. A person on twitter reminded me about Nucor (NUE). The stock is around post-recession highs but is essentially flat on the year. Perhaps there is still good catch-up potential there…


U.S. Steel surges to fresh 3-year highs: buyers looking for "cheap" stocks for playing catch-up with the stock market?

U.S. Steel surges to fresh 3-year highs: buyers looking for “cheap” stocks for playing catch-up with the stock market?


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 UVXY shares and puts, long SSO call options, short FB and long call options, long ISRG call options

Aug
17

Forex Setup Week (August 17, 2014): Return of the Franc

written by Dr. Duru
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Last week’s edition of Forex Setup Week featured three major trends: a looming breakdown in the British pound (FXB), a fresh 200-day moving average (DMA) breakout for the U.S. dollar over the Canadian dollar (FXC), and a resilient Australian dollar.

The British pound did indeed fail its critical test against the U.S. dollar and broke down below the 200-day moving average (DMA). It has weakened against major currencies across the board. The U.S. dollar could not hold its breakout against the Canadian dollar. The Australian dollar continued to strengthen against all the major currencies I follow, adding yet more confirmation of last week’s bullish continuation of the bounce from oversold conditions. In other words, it was one of my tougher weeks in a long while for the ol’ forex account. (Fortunately, it followed a pretty good week: the market giveth and the market taketh away…)

This week, I am increasing my monitoring of the Swiss franc (FXF). The Swiss franc has steadily and very slowly gained strength for several months. That strength accelerated in the past two weeks as seen here against the euro (FXE):


The franc's strength has suddenly accelerated in the past two weeks

The franc’s strength has suddenly accelerated in the past two weeks

The Swiss franc has yet to mount a credible run of weakness against the euro since the immediate aftermath of the SNB's floor

The Swiss franc has yet to mount a credible run of weakness against the euro since the immediate aftermath of the SNB’s floor


Source: FreeStockCharts.com

The Swiss franc has been a relatively “boring” currency for quite some time, so last week’s move to early 2013 levels caught my attention. I am now more actively watching how this trade resolves. Even more importantly, I am looking out for any larger implications of this move.

Be careful out there!

Full disclosure: net long the Swiss franc, long British pound, long USD/CAD, net short the Australian dollar

Aug
15

T2108 Update (August 15, 2014) – The S&P 500 Almost Passes the Test

written by Dr. Duru
Bookmark and Share

(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: 41.9%
VIX Status: 13.1%
General (Short-term) Trading Call: Hold on further buys until/unless S&P 500 confirms a 50DMA breakout. Otherwise, aggressive traders can attempt a fade at 50DMA resistance. See below for more.
Active T2108 periods: Day #288 over 20% (includes day #280 at 20.01%), Day #2 over 40% (overperiod), Day #16 under 50%, Day #27 under 60%, Day #28 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
It looked like the perfect confirmation of the bullish bounce from T2108 oversold conditions. The S&P 500 (SPY) gapped up over its 50DMA, sellers could only barely push the index back to the 50DMA for a minutes, and then the buyers began applying fresh upward pressure. But news headlines from Ukraine caused a quick change in the game. And yet, sellers could only take advantage for less than two hours. By the close, the S&P 500 was exactly even with the prior close.


A stalemate at the 50DMA

A stalemate at the 50DMA

News headlines ended a perfect  confirmation of bullish tidings. Yet, sellers could not hold the advantage.

News headlines ended a perfect confirmation of bullish tidings. Yet, sellers could not hold the advantage.


While the S&P 500 closed flat (slightly in the red), T2108 held onto a small gain. A positive sign for buyers heading into Monday.

I think Doug Kass summed up the buyer advantage pretty well here… (even though I believe he is holding onto his accumulation of shorts on the S&P 500 and the NASDAQ – he seems to be a staunch contrarian).


On the other side of the ledger, the VIX first bounced perfectly off the lower edge of its channel and rallied right to the 15.35 pivot line. The VIX faded in the wake of the S&P 500′s comeback, but it managed to close firmly in the green – likely a reflection of a small increase in nervousness with the Ukrainian headlines not completely resolved by market close.


The VIX bounces off the lower edge of its channel but falls short of the 15.35 pivot

The VIX bounces off the lower edge of its channel but falls short of the 15.35 pivot


My reaction to the opening action was to get aggressively bullish as planned; I did not want to wait for a Monday confirmation. Even as the S&P 500 was retesting the previous bear/bull line, I jumped into a fresh tranche of ProShares Ultra S&P500 (SSO) call options. Admittedly, I was not paying attention to that important line of resistance. When the news headlines hit, I put an immediate stop to trading. This twitter exchange explains my approach to these scenarios:


In the wake of geo-political headlines, watch, not react

In the wake of geo-political headlines, watch, not react


Mind you, I did have other trades execute. Right before the SSO trade, I pulled the trigger on a fresh tranche of iShares MSCI Spain Capped (EWP) put options as EWP seemed to struggle with its 200DMA. Not to mention I remain skeptical of European shares in light of their severe under–performance relative to the S&P 500 recently. No matter what unfolds with T2108, I plan to double down if EWP manages to reach its declining 50DMA…


Is EWP failing a test of its 200DMA?

Is EWP failing a test of its 200DMA?


As I watched my shares in ProShares Ultra VIX Short-Term Futures (UVXY) pop post-headlines, it suddenly occurred to me to grab a put option. I am now trading UVXY on its own “merits.” I am not complicating things by trying to pay for the SSO call options. What I like about UVXY is that its ultimate destiny is clear (somewhere just north of zero before the next reverse split), yet it has explosive upside potential at any time. UVXY is a perfect hedge against sudden negative surprises while the put options can limit the penalty for waiting around for those surprises.

I placed an aggressive limit order on Apple (AAPL) call options in preparation for another strong Monday. That order filled later in the day. I was very tempted to grab the profits near the close (given recent experiences of letting profits slip through my fingers). However, I grit my teeth and stayed focus on the potential for further upside. AAPL’s chart remains very bullish, and it closed strongly all things considered with a 0.5% gain.


Apple is ever so quietly creeping upward and onward

Apple is ever so quietly creeping upward and onward


Finally, Zillow (Z) remains an intriguing trade. It barely sneezed as the Ukraine headlines hit as a 50DMA retest looks ready to resolve to the upside. See “Zillow Tells The Market Not To Go Crazy Thinking About Valuations On Trulia Deal” for more on recent catalysts and why I went short Z right after the deal was announced. I quickly sold a small amount of shares I bought on the 50DMA retest and swapped into a fresh put spread. I plan to buy the dips going forward until/unless the 50DMA finally fails.


Zillow continues to ride its 50DMA ever upward this year

Zillow continues to ride its 50DMA ever upward this year


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 UVXY shares and puts, long SSO call options, long EWP puts

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