ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Jan
28

T2108 Update (January 28, 2015) – No Central Bank Salve This Time

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 43.5%
T2107 Status: 44.0%
VIX Status: 20.4 (an 18.7% increase)
General (Short-term) Trading Call: Bearish (S&P 500 under 50DMA)
Active T2108 periods: Day #69 over 20%, Day #28 above 30%, Day #8 over 40% (overperiod), day #1 under 50% (underperiod), Day #38 under 60% (underperiod), Day #139 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
Apple (AAPL) could not save the day. The Federal Reserve could not provide a salve. So much for the “almost” bullish divergence between T2108 and the S&P 500 (SPY) yesterday.

T2108 dropped to 43.5%. The S&P 500 extended its losses from yesterday to close right at the “Santa Claus” pivot in the current chopfest.


The S&P 500 tumbles 1.4% and closes right at the point where the Santa Claus rally began last month (nope - I can't make this stuff up!)

The S&P 500 tumbles 1.4% and closes right at the point where the Santa Claus rally began last month (nope – I can’t make this stuff up!)


The trading bias stays at bearish thanks to this latest confirmation of the 50DMA pivot. A retest of 200DMA support is once again back in play. The chart does not make it clear but the market fell apart around 2pm Eastern. Since the Fed statement was released at that point, I can conveniently blame the Fed for the loss.


The Fed statement greases the skids for the S&P 500 into the close

The Fed statement greases the skids for the S&P 500 into the close


Whatever spooked the market, spooked it REAL good. (I think the mainstream media headlines I have seen completely missed the point about a statement that was almost a carbon copy of the December one – the Fed is NOT worried about low inflation. It is MORE convinced that low inflation is transitory.) The volatility index, the VIX, soared 18.7%. I am of course VERY relieved I did not try my typical pre-Fed fade of volatility. As I discussed in the last T2108 Update, the jump in volatility ahead of the meeting was simply not large enough.


The volatility index, the VIX, soars off its 50DMA support

The volatility index, the VIX, soars off its 50DMA support


The VIX’s gain was of course a huge loss for the shares I would have have purchased ahead of the Fed meeting: ProShares Short VIX Short-Term Futures (SVXY). SVXY’s 8.6% loss has me prepared to get back into shares on the next plunge. Given the current downtrend channel, a tag of 48 or so would mark an excellent entry. It also happens to match the October low.


ProShares Short VIX Short-Term Futures (SVXY) plunges and confirms downtrend defined by 20DMA

ProShares Short VIX Short-Term Futures (SVXY) plunges and confirms downtrend defined by 20DMA


The selling caught me by surprise because I thought Apple’s strong open would set a positive tone for the entire day, even with the Fed. Instead, even Apple (AAPL) succumbed gravitational forces and closed at its upper-Bollinger Band (BB). This forms a “gap and crap” pattern. The fade does not surprise me, but I was not willing to make a fresh bearish bet on such expectations: 1) Bollinger Bands tend to act like short-term magnets when stocks move “too far” above or below them, 2) optimism is extremely high in AAPL, and 3) AAPL rallied right into the teeth of resistance formed by the “flash dip.” The Apple Trading Model (ATM) projects 78% odds for a positive close tomorrow, but 70 to 86% odds that AAPL will fade from its open. This setup means I will fade AAPL if it gaps up and I will buy it if it gaps lower (the projection for the close gets priority). Similarly, I might make contrary trades if I feel AAPL is reaching a high/low for the day.


Apple (AAPL) soars as much as 8%+ in response to earnings but resistance from the "flash dip" sends the stock fading into a close right on top of the upper-Bollinger Band (BB)

Apple (AAPL) soars as much as 8%+ in response to earnings but resistance from the “flash dip” sends the stock fading into a close right on top of the upper-Bollinger Band (BB)


Netflix (NFLX) is a stock which defied the “magnetic rule” for its Bollinger Bands as long as it could. Today, the momentum finally hit the pause bottom. NFLX has closed the gap down from October, so it is very possible it churns from this point for some time. I have played the post-earnings momentum by going short shares as a hedge against buying call options. I bought a fresh one on today’s pullback.


The momentum for Netflix (NFLX) finally takes a pause.

The momentum for Netflix (NFLX) finally takes a pause.


Speaking of tech, I am now officially wary and essentially bearish on the NASDAQ (QQQ). Today’s pullback looks a lot worse for the tech-laden index than for the S&P 500. Like the S&P 500, the 50DMA is acting as a pivot in the current chopfest. Unlike the S&P 500, the NASDAQ printed a clear and present danger in the form of an ominous double-top across late November to December. Today’s drop seemingly confirmed that top. A new low, below the current chop, would be the final lock on the bearish case.


The NASDAQ ignores the good news from Apple as it tumbles 0.9% - adding confirmation to the ominous double-top from December

The NASDAQ ignores the good news from Apple as it tumbles 0.9% – adding confirmation to the ominous double-top from December


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 AAPL put, put spread, and call; short NFLX and long NFLX call

Jan
27

T2108 Update (January 27, 2015) – An Official Chopfest

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 51.5%
T2107 Status: 46.5%
VIX Status: 17.2
General (Short-term) Trading Call: Bearish (only because S&P 500 is now below its 50DMA. Overall, market remains in a “chopfest” trading range and bear/bull calls are NOT stable)
Active T2108 periods: Day #68 over 20%, Day #27 above 30%, Day #7 over 40%, day #2 over 50% (overperiod), Day #37 under 60% (underperiod), Day #138 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
Having multiple components of the Dow Jones Industrial Average (DIA) report disappointing earnings was just too much for the market to handle. Sympathy selling helped send the S&P 500 (SPY) below its 50DMA for the fourth time in just 6 weeks. The index lost 1.3% on the day. The chart below shows a trading range that has lasted at least 3 months, creating an official chopfest. The 50DMA AND the line marking the start of last month’s “Santa Claus” rally are serving as pivots. This pattern makes bear/bull calls very unstable and rewards flexibility and mobility.


The S&P 500 is in a bearish position again but remains locked in a trading range

The S&P 500 is in a bearish position again but remains locked in a trading range


Today’s loss finished the reversal of all the S&P 500’s gains post ECB QE (European Central Bank quantitative easing). T1208 fared much better as it bounced of its lows and managed to lose a mere two percentage points. This is not quite a bullish divergence, but it does set up a potentially strong day as the market gets revved up for another Federal Reserve decision. I ALMOST put on another fade volatility trade in anticipation of more soothing words from the Fed, but the jump in volatility was not nearly extreme enough to setup a good risk/reward trade.


Volatility gaps up on a bad earnings day but cannot hold its high of the day

Volatility gaps up on a bad earnings day but cannot hold its high of the day

ProShares Short VIX Short-Term Futures (SVXY)  is still hugging its 20DMA which remains an important feature of a downtrend

ProShares Short VIX Short-Term Futures (SVXY) is still hugging its 20DMA which remains an important feature of a downtrend


At this point, I need to wait for another extreme move in volatility – a steep drop in ProShares Short VIX Short-Term Futures (SVXY) – before even thinking about fading volatility. I am increasingly wary of the on-going downtrend in SVXY marked by its declining 20DMA.

One of the Dow components causing trouble today was Caterpillar, Inc. (CAT). Apparently, plunging oil prices have caused serious challenges for CAT’s oil-based business. I think the following bullets points from Seeking Alpha speak volumes, especially the last point!

  • The oil price decline is the most significant reason Caterpillar (NYSE:CAT) expects a 20% cut in its earnings this year, particularly for its energy and transportation unit which makes compressors, pumps and turbines for oil and natural-gas companies, and is a negative for CAT’s construction business in oil-producing regions, CEO Doug Oberhelman said in today’s earnings call.
  • A stronger dollar also is hurting sales and will hurt U.S. manufacturers, although CAT’s global production footprint would help offset the impact, the CEO said.
  • “We are hopeful the guidance is conservative enough to provide a base level expectation for 2015, but it was a surprise even against lower expectations,” says William Blair analyst Larry De Maria.
  • If 2015 sales fall the company expects, it would be the first time since the Great Depression that CAT has experienced three consecutive years of falling revenues.

While I have been bearish on CAT since its breakdown in early December, I did not have my favorite hedge in place before earnings (a basket full of CAT puts). The small bounce ahead of earnings actually qualified for a fade, but I was being conservative in looking for a larger bounce. I have also been distracted by the market’s resilience in the face of CAT’s decline. I think of CAT as one of several indicators of market health, so the extended duration of the widening divergence between CAT and the S&P 500 is throwing my mental model for a bit of a loop. In other words, is the S&P 500 due for a major fall or will CAT instead soon launch a healthy relief rally?


Caterpillar (CAT) confirms the overall bearish tone of the commodities space

Caterpillar (CAT) confirms the overall bearish tone of the commodities space


Apple (AAPL) experienced sympathy selling that created less than ideal conditions for the quarterly pre-earnings trade (click the link for more details on the setup). My analysis concluded a bearish response to earnings was the most likely outcome. I bought a weekly put and a put spread expiring next week. My idea was to provide the opportunity to profit greatly from a big decline and also to be ready for a slow drip downward.

At the time of my positioning, AAPL was “only” down 1.6% or so. By the close, AAPL was down 3.5%. This was definitely enough to qualify for profit-taking on the put option, but my limit sell order was set just a little too high. I will pay the price for relying on that setting to take advantage of a plunge into the close as AAPL produced gangbuster numbers for earnings. HOWEVER, the stock “only” managed in after hours to close today’s gap down. AAPL needs to close ABOVE $114.50 to invalidate the topping pattern from the abandoned baby top (see chart below). More importantly, AAPL needs to gain some immediate follow-through to finally break through the bearish build-up I discussed in the pre-earnings analysis. I am also VERY wary of the extremes in optimism I now see in the stock.


Apple (AAPL) plunges into earnings as optimism wavers for a brief moment

Apple (AAPL) plunges into earnings as optimism wavers for a brief moment


The sympathy selling in tech was also enough to bring Google’s (GOOG) spirited rally off recent lows to an abrupt halt. GOOG reports earnings on Thursday, Jan 29th. I do not have a GOOG-specific model for playing earnings ahead of time, but I will be primed to trade GOOG AFTER earnings.


Google's sprited rally off a double-bottom comes to an abrupt end with a fresh 50DMA breakdown

Google’s sprited rally off a double-bottom comes to an abrupt end with a fresh 50DMA breakdown


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 AAPL put and put spread

Jan
27

The Apple Pre-Earnings Trade: January, 2015 Edition – Soaring Optimism

written by Dr. Duru
Bookmark and Share

At the time of writing Apple (AAPL) is down 1.6% in sympathy with a poor reaction to Microsoft’s (MSFT) that included warnings about the impact of the strong U.S. dollar (UUP). The drop has formed a bearish “abandoned baby top” kind of technical pattern just as the stock has dropped below the 50-day moving average (DMA) for the fourth time in less than 6 weeks. The current pattern makes the 50DMA look more and more like firm resistance. Moreover, the “flash dip” from December 1, 2014 has yet to get invalidated as a bearish warning.


Apple (AAPL) continues a long struggle with its 50DMA

Apple (AAPL) continues a long struggle with its 50DMA


Source: FreeStockCharts.com

Despite the growing bearish technical signs, optimism in Apple (AAPL) is riding VERY high. Since I am also an AAPL bull, I am sympathetic to the sentiment. But as a technician, I am VERY wary at this point.

This optimism is important perspective as we all prepare to hear what AAPL has to say in earnings tonight (January 27, 2015). Before every earnings, I assess the prospects for AAPL’s trading the day after the report based on a read of sentiment and technicals. I do not have time to replicate all the charts, but interested readers can refer to the pre-earnings trade analysis from October, 2014. You can also get more background on my approach there.

Let’s start with the analysts. According to Schaeffer’s Investment Research, 21 analysts rate AAPL a strong buy versus 4 buys and 6 holds. There are NO sell or strong sell recommendations. This is about as optimistic a bunch as you can find on a stock that is widely held and followed.

In recent days, the open interest put/call ratio has tumbled toward a 52-week low, a level set last summer. I believe the magnitude of the drop is the most important. Because there is nothing like it over at least the last two years, I interpret the plunge as an extreme in optimism.


A surge of optimism ahead of Apple's January, 2015 earnings as the open interest put/call ratio plunges

A surge of optimism ahead of Apple’s January, 2015 earnings as the open interest put/call ratio plunges


Source: Schaeffer’s Investment Research

Add to this extreme in optimism, the on-going decline in shares sold short against AAPL. Short interest is now a mere 1.0%. (I believe this chart is split-adjusted).


Short interest continues its on-going drop

Short interest continues its on-going drop


Source: Schaeffer’s Investment Research

The post-earnings record for Apple in January is poor (starting in 2007). January is Apple’s worst month as far as % of times the post-earnings reaction is negative (again, refer to my October pre-earnings post for more details). January is the near anti-thesis of the great performance AAPL typically displays in April. So, I am particularly wary of the high optimism going into January earnings.

There also tends to be a strong inverse (or negative) correlation between the 7 and 14-day average price change and the post-earnings price change (I still have these averages based on calendar days, not trading days – something I hope to change this year!). Going into today, these numbers are 1.0% and 0.3% respectively. This positive bias, especially for the last week, is another sign of the optimism going into earnings. Note however that the correlations are not strong for January earnings (but the sample size is much smaller as well).

Today’s big drop in price confounds my bearish outlook. There is an inverse correlation for the one-day price change ahead of earnings, but there is also a small positive correlation for January earnings. Certainly, today’s drop takes some of the oomph out of whatever negative reaction would have occurred post-earnings.

So, overall, I would at least NOT make a bullish bet going into earnings. The data above suggest that all the buying power interested in AAPL has positioned itself ahead of earnings. If AAPL pulls of a win, then there are clear hurdles above which AAPL becomes a strong buy again (like clearing $114.50, the top of the abandoned baby top). The data, technicals, and sentiment all point me to speculate on a bearish response to earnings. Note this is VERY different from saying that AAPL will report awful numbers, I am betting on the market’s immediate response. Implied volatility is very high on AAPL right now, returning to pre-earnings levels more typical before 2014. So, the market seems to be trying to brace for a relatively big move.

Be careful out there!

Full disclosure: long MSFT put options

Jan
25

A Squeeze for the British Pound

written by Dr. Duru
Bookmark and Share

I have not written about the British pound (FXB) in a long time. I hope to get back in the groove soon because I think in the coming weeks and months, the British pound may be the only good option for fading the U.S. dollar (UUP) whenever the moment arises (GBP/USD). I am currently using it as a hedge on all my long U.S. dollar plays. The next big caveat for the British pound is fresh election drama in May.

This week could be a pivotal week with both a monetary decision coming from the Federal Reserve and GDP coming from the UK. A looming Bollinger Band (BB) squeeze is appropriately raising the stakes on the fundamentals. If it does not resolve into a big move (up or down) this week, I expect it to do so next week. As a reminder, the Bollinger Band defines the ranges of expected volatility. I now draw my charts showing two BBs relative to the 20-day moving average (DMA). The first, marked by the darkly shaded area, is roughly 1 standard deviation from the 20DMA. The second, extending beyond the first with the lightly shaded area, is roughly 2 standard deviations from the 20DMA.


A Bollinger Band squeeze is building on the British pound versus the U.S. dollar

A Bollinger Band squeeze is building on the British pound versus the U.S. dollar


Source: FreeStockCharts.com

As a reminder, here is a long-term chart of the U.S. dollar index showing how much upside exists if the current rally does indeed turn out to be the mere beginnings of a secular bull run for the greenback. In that case, the pound will do a lot better against currencies that look to extend weakness for some time to come (like the euro and the Australian dollar). Note that the St. Louis Fed has only updated the chart below through November, 2014. At that time, the real trade weighted U.S. dollar index against a broad range of currencies hit 89.


Is the rally for the U.S. dollar just getting started?

Is the rally for the U.S. dollar just getting started?


Source: St. Louis Federal Reserve

Be careful out there!

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

Jan
23

Array BioPharma and Pandora Deliver Big for Options Buyers

written by Dr. Duru
Bookmark and Share

I wish I could find a report that looks back on big stock moves and looks for any tell-tale options activity. It is always difficult to translate options action into predictions on stocks, but having a “hindsight” report could prove educational. In the meantime, we will have to settle for sporadic reports like this piece (or let me know where I should look).

On Friday, January 23, Array BioPharma, Inc. (ARRY) soared 41% on 36M shares traded (about 18x the average rolling 3-month volume).


Array Biopharma soars on Novartis deal

Array Biopharma soars on Novartis deal


The chart shows a very nice technical setup that could have been bought without knowing anything about ARRY’s fundamental story. The gap up on December 4, 2014 sent the stock soaring above its 200DMA and the subsequent dribble downward finally ended with a brief breakdown below 50DMA support. A buy on the 50DMA recovery would have made a lot of sense from a technical standpoint, especially given the earlier 200DMA breakout.

Here is a snippet of the news that caused all the excitement:

“Array BioPharma Inc. (NASDAQ: ARRY) today announced that it has reached a definitive agreement with Novartis Pharma AG to acquire worldwide rights to encorafenib (LGX818), a BRAF inhibitor currently in Phase 3 development. This agreement is conditional on the closing of transactions announced by Novartis and GlaxoSmithKline PLC (GSK) on April 22, 2014, which are expected to close in the first half of 2015, and the agreement remains subject to the receipt of regulatory approvals.”

Here is a snapshot of at least one trader who made a LOT of money off today’s action: according to briefing.com, on January 20, 2015 ARRY Jun $5 calls traded 1,570 contracts versus open interest of 4,890 with almost all the volume attributable to one trade near the ask. The trades drove implied volatility from 83% to 94%. According to data from Etrade.com, those calls sold for around $0.95 each and are now worth about $2.70, a nifty 184% gain. Given volume of 2,093 contracts today, I can imagine this lucky trader cashed out.

In other options news, Pandora (P) soared 10% apparently in response to the results of a survey from OTR Global. According to TheStreet.com:

“The 17 ad agencies included in the OTR Global survey said they are generally pleased with the performance of ads on Pandora, and plan on “significantly” boosting their ad spend on the streaming music service this year.

The OTR Global survey also said that Pandora local ad spend increased 90% year over year in the fourth quarter.”


Pandora pops on favorable OTR Global survey results

Pandora pops on favorable OTR Global survey results


Source: FreeStockCharts.com

The options trade that made big money on Pandora was VERY fortuitous. According to briefing.com, M&A rumors drove the purchase of about 10,000 call options versus under 1,000 put options. Briefing.com specifically called out the Jan $16 weekly calls expiring TODAY given volume of 4,440 options versus an open interest of 1,100. This action helped drive implied volatility from a mere 3% to 58%. As the chart above shows, the low implied volatility made sense given Pandora came into the week trading around lows (levels last seen in mid-2013).

The VERY interesting trade here is a potential fade of Pandora ahead of earnings. It seems the trade was all about anticipating good results from the OTR Global survey and NOT earnings or M&A action. The on-going downtrend from the all-time peak in March, 2014 seems to support a negative bias toward earnings. I would of course NEVER short a stock like this, only options (for example, short interest is a relatively large 14.6% of the float). I will write more if I decide to make a trade ahead of earnings.

Be careful out there!

Full disclosure: no positions unfortunately

Jan
22

T2108 Update (January 22, 2015) – Return of the Stock Market’s Soothing Salve

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 51.2%
T2107 Status: 47.1%
VIX Status: 16.4 (down 13%)
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #65 over 20%, Day #24 above 30%, Day #4 over 40%, day #1 over 50% (overperiod), Day #34 under 60% (underperiod), Day #135 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 I last wrote a T2108 Update a week ago, the market felt heavy enough to switch my trading bias to bearish. I stuck by the anti-volatility bets but was on the hunt for set-ups to go short on individual stocks. I chose not to chase the S&P 500 (SPY) lower because I tend only to short the index when it is overbought or it experiences a major technical breakdown (well above oversold conditions). As it turned out, the S&P 500 never even retested 200DMA support as sellers completely lacked follow-through. It left me over the last week with very few bearish trades to even try.


The S&P 500 surges above its 50DMA....again

The S&P 500 surges above its 50DMA….again


So, the market continues to chop with every move higher and then lower and higher again causing a whoosh of excitement. This time around the excitement came from the soothing salve of the European Central Bank (ECB). Its announcement of a quantitative easing (QE) program was apparently met with great market approval. The apparent impact on volatility was most dramatic and allowed me to close out all my anti-volatility positions with respectable gains: shares in ProShares Short VIX Short-Term Futures (SVXY) and put options on ProShares Ultra VIX Short-Term Futures (UVXY).


The market's salve comes in the form of a central bank just one week after a different central bank helped send volatility to its closing peak for the cycle

The market’s salve comes in the form of a central bank just one week after a different central bank helped send volatility to its closing peak for the cycle

The strong surge for ProShares Short VIX Short-Term Futures (SVXY) still leaves it stuck in a downtrend so far marked well by a declining 20DMA

The strong surge for ProShares Short VIX Short-Term Futures (SVXY) still leaves it stuck in a downtrend so far marked well by a declining 20DMA


Note how volatility reached a closing cyclical peak after the Swiss National Bank (SNB) threw markets for a loop by dropping its currency cap on the Swiss franc (FXF) against the euro (FXE). A week later, the ECB helped plunge the VIX by 13% in a day, 27% off the last cyclical peak. This latest volatility cycle covered a nice range, but notice how SVXY still appears locked in a downtrend. I am a little more wary of the fade volatility trade and will look for a greater extreme next time I try it.

T2108 closed at 51.2% after an impressive surge of 9 percentage points. T2108 has not managed to move much higher than these levels since the bounce from the December lows. I have no reason to drop my long-standing assumption that the stock market is caught in a choppy range. I have changed the trading bias to bullish only because the S&P 500 broke above its 50DMA. I can only assume that all-time highs will represent a cap. A break to new all-time highs will be bullish with special caveats in place if T2108 tests overbought conditions around the same time.

Google (GOOG) is one stock I thought I could fade when the trading bias was bearish. Today, it blew right through 50DMA resistance AND the high from the previous bounce. I set up a trade on put options to trigger only if the stock broke through its low of the day after today’s open; unfortunately the condition triggered and within minutes GOOG was off and running. The stock now looks quite manic. However, since the last low now looks like a hammer bottoming pattern, I must change my trading bias on GOOG to bullish. If I had been prepared to change bias earlier, today’s incredible surge would have made a very profitable trade on call options! Resistance looms overhead from the declining 200DMA.


Google turns manic and confirms a double bottom

Google turns manic and confirms a double bottom


The trade on Conn’s Inc. (CONN) came to an abrupt end as the stock declined 11% to start the week. I was hoping the stock would rebound after January options expiration. The stock position was even at that time and the call option I sold against the stock expired worthless (paying for half of the higher strike call options I purchased). So, I cut the stock loose and bought a few call options just in case the stock revives again.


With the supportive options action expired and behind it, Conn's resumes its sickly ways

With the supportive options action expired and behind it, Conn’s resumes its sickly ways


In some good news, I closed out all my gold-related short-term trades with nice profits yesterday. I sold a bit early as gold took a brief dip. I had a sensitive sell trigger in effect because SPDR Gold Shares (GLD) has been ripping higher well above its upper-Bollinger Band – such moves are rarely sustainable and usually lead to substantial pullbacks at some point. I am looking to buy aggressively into that next dip.


The ever stronger US dollar is not preventing gold from continuing to soar year-to-date

The ever stronger US dollar is not preventing gold from continuing to soar year-to-date


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 GLD, long GOOG put options, long CONN call options, net LONG the euro (short term!), short the Swiss franc

Jan
15

T2108 Update (January 15, 2015) – Like So Much Paper Flailing in the Ill Winds

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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 36.5%
T2107 Status: 41.9%
VIX Status: 22.4 (up 4.2% but failed to close above previous day’s high)
General (Short-term) Trading Call: Bearish
Active T2108 periods: Day #61 over 20%, Day #20 above 30%, Day #2 under 40% (underperiod), Day #11 under 50%, Day #29 under 60%, Day #131 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 just about to write a quick T2108 Update for January 14, 2015 when a bomb dropped in currency markets. The Swiss National Bank capitulated on its 1.20 floor against the euro, sending EUR/CHF quick-fast and in a hurry toward parity. Just like that my assessment of the market’s health took a dramatic southward turn. Needless to say, I failed to write that T2108 Update.


A rapid plunge back to parity for the Swiss franc against the euro

A rapid plunge back to parity for the Swiss franc against the euro

Even the mighty U.S. dollar gave up 2 1/2 years of gains against the franc in one fell swoop

Even the mighty U.S. dollar gave up 2 1/2 years of gains against the franc in one fell swoop


This abrupt change in the forex landscape wreaked havoc for quite some time as traders scrambled to adjust. The Japanese yen (FXY) looked to gain for a while as a new safety currency. The Australian dollar (FXA) fared a LOT better than I would have expected given the sudden expression of risk aversion: the surge in strength in the Swiss franc is a massive display of pent-up demand and market angst. In the end, AUD/JPY completed an ominous fade and failure from what now looks like 200DMA resistance.


The Australian dollar versus the Japanese yen  continues to flash a warning sign

The Australian dollar versus the Japanese yen continues to flash a warning sign


The currency action in total tells me to bias my interpretation of trading on the S&P 500 (SPY) with a bearish tint. Indeed, the index violated a potential hammer from the previous day, broke below 2000, and to add insult to injury, it finally closed below the starting point for December’s Santa Claus rally. A retest of 200DMA support is a mere one or two days of losses away.


The S&P 500 continues to wobble

The S&P 500 continues to wobble


T2108 closed at 36.5%. If the S&P 500 makes a 200DMA retest soon, T2108 will be under 30%. Such a break and retest will be “close enough” to consider aggressive buys on the index. However, under these bearish conditions, I will greatly prefer to make a move only when/if T2108 hits oversold conditions (below 20%). Note that December’s low came up short relative to oversold AND the S&P 500’s 200DMA. I was MUCH more bullish then given my expectations for the Santa Claus rally. Note well that the S&P 500 can break 200DMA support and still stay well within the range of chop that I continue to expect for the time being. It iwll take a break of the October lows to significantly change my trading perspective.

The one small bullish hint came from the behavior of the volatility index, the VIX. Even though the S&P 500 made a convincing breakdown AND currency markets were going crazy, the VIX “only” managed a 4.2% gain. The VIX could not even close above the previous day’s high when the markets made a spirited comeback into the close. The highs from December and October are still “miles” away.


The volatility index has yet to surge, making only reluctant progress toward previous highs

The volatility index has yet to surge, making only reluctant progress toward previous highs


I interpret this reluctant move by the VIX as a sign that the market just needs one positive catalyst (QE for the eurozone anyone?) for volatility to get smashed once again. Accordingly, I nibbled again on shares of ProShares Short VIX Short-Term Futures (SVXY). I am still ready to load up on put options on ProShares Ultra VIX Short-Term Futures (UVXY) if volatility finally does surge well above its upper-Bollinger Band. I will not buy call options on ProShares Ultra S&P500 (SSO) until T2108 hits oversold. In the meantime, most of my trades on individual stocks are focused on shorting opportunities (home builders are a HUGE exception).

Gold has increasingly caught my attention here. Seeing currencies act like the paper-thin playthings of powerful central banks has made me appreciate all over the relatively “realness” of gold (GLD). I think I have good company here. I pointed out in an earlier T2108 Update how gold had remained remarkably resilient in the past few months even as the U.S. dollar continued to power higher. No surprise given the machinations in the currency market that SPDR Gold Shares (GLD) gapped higher today. Even though GLD slammed right into 200DMA resistance, I went ahead and added to my long-term holdings with short-term trades in VelocityShares 3x Long Gold ETN (UGLD) and Direxion Daily Jr Gld Mnrs Bull 3X ETF (JNUG). I am ready to add to my short-term holdings on dips going into the next monetary policy announcement from the European Central Bank.


SPDR Gold Shares (GLD) is likely heading for a major breakout

SPDR Gold Shares (GLD) is likely heading for a major breakout


I think the prospects of so much euro paper flailing in the (ill) winds should make gold look better than ever.

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 and the Swiss franc, net long U.S. dollar, long SVXY, long UVXY put options

Jan
15

The Swiss National Bank Capitulates On the Swiss Franc

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on January 15, 2015. Click here to read the entire piece.)

The Swiss national Bank (SNB) curtly reminded me that paper currencies are just the playthings of central banks.

Just over a week after I had start enjoying more actively shorting the Swiss franc (FXF), the Swiss National Bank dropped a bomb on financial markets by announcing it will pull the rug from under the EUR/CHF by removing the 1.20 artificial floor. The impact was immediate and dramatic.


The euro plunges back toward parity with the Swiss franc as the SNB capitulates on its floor

The euro plunges back toward parity with the Swiss franc as the SNB capitulates on its floor

There goes the entire length of the U.S. dollar's rally since the breakout from the summer of 2014

There goes the entire length of the U.S. dollar’s rally since the breakout from the summer of 2014


Source for charts: FreeStockCharts.com

The SNB’s capitulation comes with a few vain attempts to smooth over this dramatic change in monetary policy. First, the SNB moved its range on three-month Libor further to –1.25% to −0.25% from −0.75% to 0.25%. {snip}

{snip}

Next up, the SNB suggested that it is really its exchange rate against the U.S. dollar that provided the final trigger on this decision:

{snip}

This is a euphemistic way to refer to capitulation. {snip}

Finally, the SNB makes a hopeful stab at guessing that more deeply negative rates will prevent an over-tightening of monetary conditions. {snip}

This surprise move exposed a severe weakness in my trading strategy. {snip}

As it stands, my exposure was thankfully relatively small as I was just in the beginning process of rebuilding positions short the franc. {snip}

This whole episode reminds me of my own warning about the potential for more wild currency moves when I wrote “Parabolic Moves In The Ruble And Turkish Lira May Foreshadow The Same For The Australian Dollar.” Anyone got gold…?

Be careful out there!

Full disclosure: short franc

(This is an excerpt from an article I originally published on Seeking Alpha on January 15, 2015. Click here to read the entire piece.)

Jan
15

Short the Franc Even As Negative Rates Are Proving Insufficient to End Strength Versus the Euro

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on January 5, 2015. Click here to read the entire piece.)

Don’t look now, but the Swiss franc (FXF) is seemingly back for another test of the 1.20 currency floor against the euro (FXE).


The Swiss franc has almost reversed all its losses against the euro from the announcement of negative rates

The Swiss franc has almost reversed all its losses against the euro from the announcement of negative rates


When the market forced the hand of the Swiss National Bank (SNB) to take additional measures to weaken the franc, the SNB rolled out negative interest rates. As the chart above shows, the impact was immediate, yet the market’s preference to fade the weakness was also immediate. {snip}

In the meantime, the Swiss franc IS continuing to weaken against the U.S. dollar (UUP) – so much so that the USD/CHF currency pair returned to parity to start off 2015.


The U.S. dollar re-achives parity against the Swiss franc

The U.S. dollar re-achives parity against the Swiss franc


This weekly chart suggests that the U.S. dollar is breaking out against the Swiss franc and can very easily rally to highs last seen in 2010. {snip}

These dynamics now make me prefer shorting the Swiss franc over shorting the euro. For example, it is very possible that the next monetary policies out of the ECB instill enough confidence in the market that traders start bidding the euro UP in anticipation of better days ahead. In such a case, EUR/USD becomes an amazing, contrarian play. But this will still leave the SNB unsatisfied if EUR/CHF stays just as low as ever with the franc bid up in sympathy. In other words, the onus of weakness seems to lie now much more heavily on the franc than the euro. Time should soon tell.


Oh the ironies! When the euro was last THIS week, the running fear was a collapse of the entire monetary union.

Oh the ironies! When the euro was last THIS week, the running fear was a collapse of the entire monetary union.


Source for charts: FreeStockCharts.com

Be careful out there!

Short the euro, franc; long the U.S. dollar

(This is an excerpt from an article I originally published on Seeking Alpha on January 5, 2015. Click here to read the entire piece.)

Jan
15

Currency Markets Once Again Force the Hand of the Swiss National Bank

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on December 18, 2014. Click here to read the entire piece.)

The Swiss National Bank (SNB) reacted swiftly.

It could have just been a “fat finger” trade an hour before U.S. trading began. In an instant, the euro (FXE) vs Swiss Franc (FXF) currency pair (EUR/CHF) traded right down to the 1.20 floor before bouncing right back up in a flash.


A quick test of resolve - traders hit and get instantly rejected from the 1.20 floor on EUR/CHF

A quick test of resolve – traders hit and get instantly rejected from the 1.20 floor on EUR/CHF


Whatever it was, it was seemingly enough to kick the SNB into action. Early morning in Switzerland on December 18th, the SNB released the following news titled “Swiss National Bank introduces negative interest rates: Minimum exchange rate reaffirmed, and target range for three-month Libor lowered into negative territory“:

{snip}


The Swiss National Bank announces negative rates with the expected instant reaction weakening EUR/CHF

The Swiss National Bank announces negative rates with the expected instant reaction weakening EUR/CHF


This announcement firmly reminds traders and investors that the currency markets are an important sphere of influence to monitor. {snip}


The Australian dollar gains against the euro....

The Australian dollar gains against the euro….

The Australian dollar also gains on the British pound but has yet to break through Fed-related lows

The Australian dollar also gains on the British pound but has yet to break through Fed-related lows


Source for charts: FreeStockCharts.com

Given my strategy to fade rallies in the euro, I have avoided buying EUR/CHF directly to play anticipated action from the SNB. {snip} Overall, I strongly expect the currency market to resist the SNB’s push to weaken the currency. That is, the journey from here to a weaker Swiss franc will not be a straight line. The market may even deign to force the SNB’s hand yet again.

Be careful out there!

Full disclosure: short the Swiss franc, net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on December 18, 2014. Click here to read the entire piece.)

 Subscribe Subscribe Subscribe by Email Follow DrDuru on Twitter
Follow DrDuru
20-50% off entire stock NCAA apparel at Kohl's OLD ARCHIVES

Recent Archives

Great Links

Tag Cloud

Join In

Disclaimer