ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Mar
2

The Reserve Bank of Australia Slows the Momentum for Rate Cuts

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

This time around, the currency market seemed well-prepared for a rate cut from the Reserve Bank of Australia (RBA). As luck would have it, the RBA did not cooperate. {snip}

This statement will keep the market guessing for the next month or so trying to read the economic data for clues as to whether the RBA will proceed with rate cuts at the April meeting. While the RBA’s conclusion suggests that the Bank freely consider further rate cuts in the future, the body of the statement included conflicting clues on these prospects:

{snip}

One unsaid factor potentially driving the decision is the muted reaction of the Australian dollar to the last rate cut. {snip} With no reliable reaction function, the RBA is naturally less inclined to cut rates and should be more measured in its deliberations.

{snip} On balance, market conditions appear ripe for range-bound trading. I expect only a particularly strong catalyst can send the Australian dollar materially below recent lows ahead of the next RBA meeting.


The Australian dollar is likely to remain in its current holding pattern in the coming weeks, perhaps with the overhead 50-day moving average (DMA) serving as on-going resistance (or a pivot)

The Australian dollar is likely to remain in its current holding pattern in the coming weeks, perhaps with the overhead 50-day moving average (DMA) serving as on-going resistance (or a pivot)


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

Mar
2

A Weekend Rate Cut In China Fails to Stir the Australian Dollar; RBA Now On Tap

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

On Saturday, the People’s Bank of China cut its benchmark interest rates by 0.25 percentage points (25 basis points). Yet, as of the open of Asian trading, the Australian dollar (FXA) failed to respond as usual with a trigger rally. When China cut rates on November 21, 2014, the Australian dollar received a quick boost higher. Of course, the pop did not last long, and the Australian dollar preceded to descend along its the next big leg lower. The market may have taken a lesson from that experience – this time there is no such pop in the Australian dollar (so far).


The Australian dollar responds to the last rate cut in China by sliding toward the bottom of the recent range

The Australian dollar responds to the last rate cut in China by sliding toward the bottom of the recent range


Source: FreeStockCharts.com

{snip}


Market expectations for another RBA rate cut have crept back toward highs

Market expectations for another RBA rate cut have crept back toward highs


Source: ASX RBA Rate Indicator

After February’s rate cut, the Australian dollar plunged as the move appeared to catch enough traders by surprise. However, the Australian dollar has yet to trade lower. In fact, the currency soared the very next day to produce a four (trading) day high. Given this inability to trade lower ever since, I am not nearly as confident as last time around that an RBA cut will send the Australian dollar to new lows. {snip}


Current markets are expecting ever lower rate from the RBA this year

Current markets are expecting ever lower rate from the RBA this year


Source: ASX RBA Rate Indicator

Be careful out there!

Full disclosure: net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

Mar
2

The January Barometer Appears Set to Fail Again This Year

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

In many ways, February is the new January” so says Katie Nixon of Northern Trust.

And this seems like a rational reaction to the continued failure of the January barometer to predict anything meaningful. Last year, I wrote “The Problem With The January Barometer” to demonstrate the poor record of the famed barometer for predicting down years. Sure enough, January, 2014 delivered a 3.6% loss, but it turned out to be one of only four months in 2014 with a down performance. The S&P 500 (SPY) delivered a tidy 11.4% gain for 2014.

{snip}

Yet, pointing to a strong February as indicative of a strong year is just about as meaningless as using a strong January. Predictions of down years present a much more interesting challenge than the prediction of up years: the S&P 500 closes the year in the green the vast majority of the time. {snip}


In very select scenarios, February can add some clarity to the likely direction of the year

In very select scenarios, February can add some clarity to the likely direction of the year


{snip}

Ultimately, I prefer to think of the potential for drawdowns rather than try to pinpoint an annual gain on the S&P 500. Drawdowns help define risk and the scope of buying opportunities on the dip. {snip}


Despite 2000's peak and 2009's historic lows, March is one of the LEAST dangerous month of the year. Last year's October drawdown made up for below average drawdowns in the S&P 500's two other

Despite 2000’s peak and 2009’s historic lows, March is one of the LEAST dangerous month of the year. Last year’s October drawdown made up for below average drawdowns in the S&P 500’s two other “most dangerous” months.


As the NASDAQ (QQQ) approaches the 15th anniversary of its all-time peak (closing high of 5050 and intraday high of 5133), I find it ironic that the tech-laden index is within “rally distance” of that peak in that same month of March…one of the least dangerous months of the year on average.

Be careful out there!

Full disclosure: no positions

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

Mar
1

Still Room for Upside After the S&P 500 Survives Its Most Dangerous Months of the Year

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 2, 2014. Click here to read the entire piece.)

“A reason pretty much always exists to be bearish on the market. It just seems that from August to October, market participants are most willing and ready to listen to and act upon the siren calls.”

I concluded my last piece on S&P 500 correlations piece with this quote. This quote rings particularly true for the latest corrective phase of the market as sentiment swung wildly from worrying about nothing, to worrying about everything, to being completely relieved. {snip}


This year's October drawdown made up for below average drawdowns in the S&P 500's two other "most dangerous" months

This year’s October drawdown made up for below average drawdowns in the S&P 500’s two other “most dangerous” months


Source for price data: Yahoo! Finance

This year’s above-average October drawdown was characterized by a particularly extreme oversold period (as defined by the percentage of stocks trading below their 40-day moving averages (DMAs)). Even the percentage of stocks trading above their 200DMAs fell at one point to a 3-year low. Adding to the extremes were a volatility index that surged at one point past 2012’s high (but could not hold it for two days in a row) and an S&P 500 which quickly lost all its gains for the year.


Volatility in volatility: the VIX swings from 7 1/2 year lows to three-year highs in just over three months

Volatility in volatility: the VIX swings from 7 1/2 year lows to three-year highs in just over three months

A year's worth of trading action compressed into a little more than one month of time

A year’s worth of trading action compressed into a little more than one month of time


Source: FreeStockCharts.com

The collection of extremes had me focused on the buying opportunities and formed the basis for my claim on October 17th that the stock market had finally carved out a bottom. Since then, I have been surprised at how nostalgic some bears seem for the sell-off, failing to credit the rapid healing in market sentiment that has enabled the S&P 500 to hit a fresh closing all-time high.

{snip}


Plenty of upside remains before a broader uptrend re-stablishes itself in the stock market

Plenty of upside remains before a broader uptrend re-stablishes itself in the stock market


Source: FreeStockCharts.com

{snip} From this perspective, the market’s reaction to and ability to absorb an ever-stronger U.S. dollar (UUP) may be the key wildcard to track in coming weeks and months.


The dollar has resumed its upward momentum and still has more apparent upside before the next levels of potential resistance

The dollar has resumed its upward momentum and still has more apparent upside before the next levels of potential resistance


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: long SSO

(This is an excerpt from an article I originally published on Seeking Alpha on November 2, 2014. Click here to read the entire piece.)

Feb
27

T2108 Update (February 27, 2015) – A Wimpy End to Yet Another Strong Month

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

T2108 Status: 63.9%
T2107 Status: 52.8%
VIX Status: 13.3
General (Short-term) Trading Call: Mildly bearish – STILL waiting to see what happens when/if T2108 becomes overbought. Solidly bearish on a S&P 500 close below 2085.
Active T2108 periods: Day #90 over 20%, Day #49 above 30%, Day #29 over 40%, Day #11 (corrected) over 60% (overperiod), Day #160 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 was another day of very marginal moves, except this time the S&P 500 (SPY) declined while T2108 gained.


The S&P 500 ends its primary uptrend on yet antoher very marginal move

The S&P 500 ends its primary uptrend on yet antoher very marginal move


The volatility index surprisingly closed lower, now at a fresh 2 1/2 month low. Earlier, I thought the volatility index, the VIX, was getting ready to hop back over the 15.35 pivot.


Volatility surprisingly closes on a down note

Volatility surprisingly closes on a down note


Although February ended with a whimper for the S&P 500, the month was overall very strong. The index gained a very respectable 5.5% gain. This strong gain motivated me to zoom out and take a look at the market from a longer-term view. This monthly chart of SPY shows the sheer persistence of this run-up. Note the uptrend distinctly defined by the two upper-Bollinger Bands (BB).


The very definition of persistence and TREND

The very definition of persistence and TREND


This chart is VERY humbling. It tells me that buy and hold is far from dead. It reminds me how the market “wants” to go up. Most importantly, it demonstrates that today’s uptrend is little different from the uptrend that defined the last long-term run-up. If THIS run-up is anything like the last, then we have at least another year or more to go for this rally (eerily enough, that would position us for another major sell-off to mark a change in U.S. presidential regimes). In 2003, SPY first re-entered the space between the monthly upper-BBs. The ETF pretty much stayed there until the end of 2007. Today’s post-plunge market took a few attempts before it latched onto its uptrend. Since mid-2012, SPY has pretty much stayed on-trend. This view gives me some insight on how to better time shorts (at the top of the channel) and longs (at or near the bottom of the channel). Here is a close-up to make clear the channel behavior:


Persistence in motion

Persistence in motion


That deep plunge to the 20-month moving average was the sell-off in October. This view makes plain how that selling was a stark outlier in the middle of the overall trend.

OK. Enough of the long-term stuff. Back to what we have immediately in front of us. Here are some telling charts.

Facebook (FB)
This chart says a thousand words. Did Facebook just triple top? This week, FB looked like it was finally regaining momentum to make another breakout attempt. The high volume selling on Friday was quite surprising to me. Even though the stock remains within an uptrend channel, the selling seems to confirm the third point of a triple top.


A sudden burst of selling interrupts Facebook's (FB) latest attempt to print fresh all-time highs

A sudden burst of selling interrupts Facebook’s (FB) latest attempt to print fresh all-time highs


Herbalife (HLF)
HLF is back on my radar. It has been a while since I last wrote about this controversial stock. My late November piece was timely as HLF triggered a short that culminated in a massive 2-day sell-off in early January. At the time, there was no news to explain the move. On January 7th, it all made sense as Bill Ackman appeared on CNBC to once again tout his short thesis on HLF. True to form, the selling stopped on a dime, and buyers/bulls successfully thumbed their collective noses at Ackman. It was a classic “buy/sell the rumor, sell/buy the news” flip-flop.

HLF returned to my radar as recent headline earnings seemed to convey bad news. Surprisingly, the stock traded up briefly. With the highs sitting at the top of a recent consolidation range and with the 50DMA holding well as resistance since last summer, I used the pop to take a contrary position in put options. Sure enough, the stock faded and closed with a 11% loss. Note that the latest Ackman low is still intact…


A definitive downtrend for Herbalife (HLF)

A definitive downtrend for Herbalife (HLF)


In case you were wondering, shorts have actually backed off a bit recently from HLF. They are now “only” 33.9% of float.


Shorts have persistently pressured Herbalife (HLF). Are they finally ready to back off?

Shorts have persistently pressured Herbalife (HLF). Are they finally ready to back off?


American Express (AXP)
As promised, I sold out of my AXP call options. And apparently just in time. Today’s 1.99% drop formed a classic bearish candle indicating the end of an upward move. I decided to flip allegiances here and bought put options. I will likely double down if I can get the puts for a cheaper price in the next two weeks or so. I gave myself runway again with an April expiration.


The American Express relief rally may have just come to its final stop

The American Express relief rally may have just come to its final stop


Google (GOOG)
GOOG had an outstanding week, and I completely missed it (ugh!). GOOG broke out above its 200DMA on Thursday; the stock has officially confirmed its double-bottom across December and January. It is now in a “full bull” position. The fade from the highs on Friday is just an opportunity to buy at a better price. Of course, a close below the 200DMA will end the call, but I am willing to give GOOG enough leash to its 50DMA given the enormous potential of a fresh run-up. $600/share anyone?


Google (GOOG) looks ready for launch

Google (GOOG) looks ready for launch


Splunk (SPLK)
Missing GOOG was bad enough, but I had little excuse for missing this classic and picture-perfect post-earnings fade on Splunk. I remain bearish as ever on SPLK, and I was ready to fade from the post-earnings open. Sellers moved in right from the open. Yet, I was still overly cautious with a low-ball offer on some put options. Needless to say, they never executed (in retrospect, I should have shorted shares but I was simply too wary). SPLK fell almost 10% from highs to lows. This is once again a stock to fade on rallies. Friday’s move was about as bearish as they come: high-volume selling, a bearish engulfing pattern, and a close on the low of the day.


Sellers were ready to dump shares into post-earnings liquidity. In the selling's wake is a VERY bearish technical pattern from every angle.

Sellers were ready to dump shares into post-earnings liquidity. In the selling’s wake is a VERY bearish technical pattern from every angle.


Now, let’s bring on the Spring…!


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: short FB and long FB call options, long HLF puts, long AXP puts

Feb
26

T2108 Update (February 26, 2015) – An Apple Reprieve for the Market

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

T2108 Status: 63.8%
T2107 Status: 52.6%
VIX Status: 13.9
General (Short-term) Trading Call: Mildly bearish – STILL waiting to see what happens when/if T2108 becomes overbought. Solidly bearish on a S&P 500 close below 2085.
Active T2108 periods: Day #89 over 20%, Day #48 above 30%, Day #28 over 40%, Day #17 over 60% (overperiod), Day #159 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
And just like that, the market got a reprieve from at least one of the “tentatively ominous” signals I cited in the last T2108 Update: Apple (AAPL).


Apple (AAPL) surges off the bottom after news circulates about March 9th product event

Apple (AAPL) surges off the bottom after news circulates about March 9th product event


AAPL followed-through on recent selling right at the open. Within 30 minutes it was down as much as 1.7%. That trading action seemed to validate my concern about topping action in AAPL. However, the stock drifted upward from there. Next, news of a product event scheduled for March 9th sealed the deal for a positive day. Interestingly, there was no surge in intraday volume on the news. Surprisingly, looking at the 15-minute chart below, you might never guess anything particularly noteworthy happened after the selling ended.


When did the rumors start? When did the rumor become news? Volume is largely mum...

When did the rumors start? When did the rumor become news? Volume is largely mum…


Regardless of the intraday action, the end result was a very bullish recovery by Apple that sets up the typical “buy the rumor, sell the news cycle” that seems to accompany most Apple product events. This cycle provides the market a reprieve from the warning signs I cited earlier: the anticipation alone for this event should provide plenty of positive and bullish spin for the market.

Another positive…the NASDAQ (QQQ) managed a fresh 14+ year high today…this achievement follows 2 days where the NASDAQ seemed unphased by Apple’s brief change of fortune.


NASDAQ 5000 almost seems like a lock now

NASDAQ 5000 almost seems like a lock now


On the other side of town, T2108 and the S&P 500 basically are singing the same ol’ refrain. T2108 closed down as I would have expected today. It now sits at 63.8% after a very marginal close lower. The S&P 500 (SPY) also closed marginally lower and still sits comfortably within an uptrend albeit one that now looks like it is waning relative to the NASDAQ.


The S&P 500 is dribbling along the lower part of its uptrend channel

The S&P 500 is dribbling along the lower part of its uptrend channel


In other words, it seems no dramatic visit into overbought territory or a fast drop away from the boundary is in the cards in the very short-term. I will now retreat from anticipating to mere watching again! Let’s see what March and the beginning of Spring bring.

We know what my favorite permabear is looking forward to… :)



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 call and put options

Feb
25

T2108 Update (February 25, 2015) – Finally A Convergence Of (Tentative) Warning Signs

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

T2108 Status: 64.9%
T2107 Status: 52.9%
VIX Status: 13.8
General (Short-term) Trading Call: Mildly bearish – STILL waiting to see what happens when/if T2108 becomes overbought. Solidly bearish on a S&P 500 close below 2085.
Active T2108 periods: Day #88 over 20%, Day #47 above 30%, Day #27 over 40%, Day #16 over 60% (overperiod), Day #158 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 nudged up a fraction to close at 64.9%. It is playing the same ol’ coy role relative to overbought status looming directly overhead. The S&P 500 barely budged with essentially a flat close. The index remains comfortably placed within an uptrend channel.


The S&P 500 remains perched within an uptrend channel defined by the two Bollinger Bands (BB)

The S&P 500 remains perched within an uptrend channel defined by the two Bollinger Bands (BB)


The source of my change in the trading call to “mildly bearish” comes from the volatility index and Apple (AAPL).

The volatility index, the VIX, made a strong move upward from its low of the day. The candlestick looks like a hammer bottom in the making.


The volatility index, the VIX, looks ready to flip over its pivot again

The volatility index, the VIX, looks ready to flip over its pivot again


I did not understand why volatility was able to make such a strong comeback given the relatively placid trading on the S&P 500. And then I saw what Apple (AAPL) did.


Apple (AAPL) experiences its first 2-day decline since mid-January. It  has marginally broken its primary uptrend defined by the two Bollinger Bands (BB)

Apple (AAPL) experiences its first 2-day decline since mid-January. It has marginally broken its primary uptrend defined by the two Bollinger Bands (BB)


Technically, this drop in Apple appears at first blush relatively benign given the uptrend and its ability to invalidate the last topping signal. However, a closer look shows two days straight of high-volume selling – rarely a benign sign coming off all-time highs (or 52-week highs for that matter). With a market cap twice that of the next largest stock, Apple’s run-up since January earnings feels nearly epic. It seems to make sense to watch Apple for market signals. The market is now guilty until proven innocent, like a fresh all-time high from Apple and/or a continuation of the S&P 500’s run-up.

Beyond what happened today, I have two other signals from this week that have been playing on my mind.

On Monday, 2 days ago, the S&P 500 futures experienced their lowest volume of the year, a potential sign of lack of support for these lofty levels. Yet, one cannot trade on a volume signal alone because the market has largely ignored volume for years now. As MrTopStep said on Monday in the following short video, the market is too high to buy but also too firm to sell. A move up in volatility and high-volume selling on AAPL shake some of that firmness in my opinion.



Also playing on my mind is the subtle “conciliatory” tone suddenly adopted by my favorite permabear. On Monday, he apparently discovered/accepted/conceded trend following.


For about two years or more (I have lost track), my favorite permabear has fought and fought momentum and trend, practically shouting into the wind. So I take note when instead of shouting “SELL” louder than ever and casting ever heavier aspersions on the market on Twitter, he is taking a more cautious approach.

The ultimate contrarian signal would be for him to actually try to trade with the trend on the S&P 500 (or the NASDAQ), but I am pretty sure he will not do such a thing. He is pretty consistent on rushing to sell/short into run-ups and sometimes rushing to buy sell-offs – he is the consummate contrarian (so ironic then that he himself has so often proven to be a contrarian in these latter years of the bull market). He is also as bearish as ever on Apple. As usual, I have to note I am not picking on him. I even have to admit he has a point about Apple sucking massive amounts of money from the rest of the market (although even in the Barron’s blog post, he is quoted as giving deference to price momentum). Regardless, all-time highs make a lot of bearish sentiments wrong. I just find his tweets appropriately educational from many vantage points.

So with all these things playing on my mind, all it took was for two trading friends of mine to express interest in buying volatility for me to jump on some call options on ProShares Ultra VIX Short-Term Futures (UVXY) right before the close.


ProShares Ultra VIX Short-Term Futures (UVXY) may be bottoming along with volatility

ProShares Ultra VIX Short-Term Futures (UVXY) may be bottoming along with volatility


Mind you, this is a VERY tentative trade. I cannot get firmly bearish until the S&P 500 closes below 2085 as I noted in the last T2108 Update.

My charts for today are more bullish than bearish. Strange how I can get focused on charts leaning away from overall trading bias!

Ambarella (AMBA)
Buyers have returned AMBA to a bullish position. The high-volume 50DMA breakdown I traded with a quickness has become a quick blip on the screen.


Ambarella (AMBA) has bounced right back from what was an ominous breakdown

Ambarella (AMBA) has bounced right back from what was an ominous breakdown


Arena Pharmaceuticals (ARNA)
ARNA caught my fresh attention when it soared 78% in early January. I have patiently waited since then for a buyable pullback to technical support. I have not yet pulled the trigger, but the time seems to be coming soon. Note the technical “ping-pong” around the converging 50 and 200DMA support/resistance.


Arena Pharmaceuticals (ARNA)  is trying to stabilize around the critical technical levels defined by the 50 and 200DMAs

Arena Pharmaceuticals (ARNA) is trying to stabilize around the critical technical levels defined by the 50 and 200DMAs


American Express (AXP)
I meant to post on AXP earlier. I went long with call options on Friday, February 13 after AXP followed-through on the previous day’s gap down. I consider this trade similar to the one I described last year for Digital River (DRIV). AXP released awful news about losing Costco (COST), but the company did NOT say that a re-negotiation is off the table. Moreover, I thought the sell-off was way overdone anyway. I bought April call options to give myself plenty of runway, but given my growing bearish tidings on the market I am likely to lock in profits this week.


With the post-Costco drop a likely trigger-happy over-reaction, American Express (AXP) is a great candidate for a gap-flll trade

With the post-Costco drop a likely trigger-happy over-reaction, American Express (AXP) is a great candidate for a gap-flll trade


McDonald’s (MCD)
I stick by my trading/investing call from September last year to accumulate McDonald’s. MCD has since then dipped lower not once, not twice, but THREE times. Vindication finally seems at hand with a huge breakout move today. Strangely enough, I could not find any news…perhaps in combination with AXP’s bounce there are some “value investors” going to work buying up fallen Dow stocks?


McDonald's (MCD) soars through its 200DMA for an impressive breakout

McDonald’s (MCD) soars through its 200DMA for an impressive breakout


While I am likely to sell my recent call options soon, I am sticking by the shares through whatever pullback is coming in the general market.

Terex Corporation (TEX)
TEX has fallen with the rest of the commodity complex and has even declined for about a year. The nature of trading in the stock is finally showing a different character. After a post-earnings gap down last October, the stock recovered and even broke through its 50DMA resistance for a short spell. After earnigns last week, TEX gapped down for just a brief moment before rallying right through 50DMA resistance. Support held for two days after that. If TEX prints a higher high, it should make a good risk/reward bottoming play.


Terex (TEX) is trying to change its fortunes with a spirited breakout and then defense of its 50DMA

Terex (TEX) is trying to change its fortunes with a spirited breakout and then defense of its 50DMA


Zillow (Z)
Z fell another 4% today and seems nearly sure to make a complete reversal of last week’s bizarre run-up. I discussed the trade last week.


Zillow continues to cool off

Zillow continues to cool off


This chart on the massive short interest in Zillow is enough said to help explain why Zillow is such a jumpy stock

This chart on the massive short interest in Zillow is enough said to help explain why Zillow is such a jumpy stock


Source: Schaeffer’s Investment Research

I daresay Zillow will overshoot and at least retest its 50DMA.


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 call options, long AXP call options, long MCD call options and shares, long Z put options and call options

Feb
22

T2108 Update (February 20, 2015) – All-Time Highs Increase Technical Tensions

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

T2108 Status: 64.0%
T2107 Status: 51.7%
VIX Status: 14.3
General (Short-term) Trading Call: Neutral – STILL waiting to see what happens when/if T2108 becomes overbought. Bearish on a S&P 500 close below 2085.
Active T2108 periods: Day #85 over 20%, Day #44 above 30%, Day #24 over 40%, Day #13 over 60% (overperiod), Day #155 under 70%

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

Commentary
The S&P 500 (SPY) sank as low as 2085.44 within the first 30 minutes of trading. I thought at last the market was providing a definitive trading signal. Recall that in the last T2108 Update, I drew 2087 as my latest line of support to determine whether to act on the bearish divergence at that time. It is a good thing I usually wait until the market close to make the final call. The S&P 500 traded nearly straight up from its lows, cruising right past the 2100 round number. Notch one more all-time high for the S&P 500.


The S&P 500 rebounds sharply into a fresh all-time high

The S&P 500 rebounds sharply into a fresh all-time high


Ordinarily, I would take this opportunity to flip firmly bullish in order to catch what could be a refreshed uptrend. After all, an uptrend between the Bollinger Bands (BB) is starting to unfold. However, the behavior of T2108 continues to confound me. Instead of flipping overbought, T2108 barely budged. It closed at 64.0% and remains below its level two weeks ago when it just missed hitting overbought status. This is now day #155 for T2108 trading outside of overbought conditions. The S&P 500 has gained an incredible 6.7% over this time period. To put this in perspective, see the chart below that shows the S&P 500’s performance charted against the duration of the T2108 70% underperiod (meaning trading outside of overbought conditions).


The duration of the current T2108 70% underperiod is exceptionally long compared to the historical record

The duration of the current T2108 70% underperiod is exceptionally long compared to the historical record


Not only is it extremely rare for T2108 to go this long without hitting overbought conditions, but also the performance of the S&P 500 is at the top of the expected range fror any duration. Moreover, other periods that have gone this long without overbought conditions have delivered very poor performances for the S&P 500. This chart also suggests that the odds are higher than ever that this tease below overbought conditions will end soon – hopefully THIS week!

The rally on Friday even succeeded in pushing the volatility index to its lowest point since it last bottomed in late December. Bears can certainly make a case that the odds favor a rebound over further losses for the VIX. The VIX is also now below the 15.35 pivot.


The VIX drops below the pivot point. Will it bounce off support or set new lows?

The VIX drops below the pivot point. Will it bounce off support or set new lows?


While I remain wary until I see the market’s behavior when T2108 finally hits overbought, I know there have to be some itchy trade fingers out there. I can certainly sympathize with an assessment that the market is once again a train leaving the station. For buyers of the S&P 500, I offer up a simple rule: load up on ProShares Ultra S&P500 (SSO) call options and stop out on a S&P 500 close below 2085. The dip on Friday has moved the dividing line a tad lower but also made that line all the more significant. I will be making a definitive bearish trading call once/if that close occurs. If the S&P 500 manages a strong close into new all-time highs when T2108 hits overbought, I will be inclined to rejoin the bulls (with 2085 as a likely stop).

Two of my other favorite supporting indicators are not helping much in tandem these days.

The Australian dollar (FXA) has managed to rally against the Japanese yen in the aftermath of a rate cut from the Reserve Bank of Australia (RBA). This is a bullish development; in retrospect, I could have used this bottom to make a case for playing an eventual breakout on the S&P 500. Now, I am anticipating stiff resistance at the declining 50DMA.


Much to the certain chagrin of the RBA, the Australian dollar has increased in strength in the weeks following the first rate cut in about 18 months.

Much to the certain chagrin of the RBA, the Australian dollar has increased in strength in the weeks following the first rate cut in about 18 months.


Caterpillar (CAT) reported an awful sales report on Thursday. The stock gapped down and ended its post-earnings relief rally right at the point of closing the post-earnings gap down. This move was a definitive score for the bears. However, the very next day CAT came back and nearly closed the latest gap. I continue to load up on put options on CAT, and any bullish plays I make on SSO will be tuned to the amount of hedging I think I have with CAT.


CAT's post-earnings relief rally ends with a poor sales report. The stock is now struggling to remove resistance at the 20DMA; 50DMA resistance looms overhead.

CAT’s post-earnings relief rally ends with a poor sales report. The stock is now struggling to remove resistance at the 20DMA; 50DMA resistance looms overhead.


Here are some of the other charts on my radar:

Zillow (Z)
Zillow has surged in response to news that the company has closed its deal to acquire Trulia. I made several trades into this volatility and missed several. I will summarize to say that I was quite stubborn at several points of resistance including the 200DMA and the apparent resistance formed from the launching point when rumors of the Trulia deal sent the stock soaring a whole 7 months ago. The big payoff came on Thursday as the stock dropped back to the upper-Bollinger Band (BB) which happened to coincide with the 200DMA at that point. (Regular readers know how much I like to make contrarian trades on stocks that move extremely far away from the upper/lower BBs). I am still bearish on the stock at these levels but a close above Wednesday’s high will be definitively bullish.


Zillow (Z) gets even more volatile than usual in the wake of the closing of its acquisition of Trulia

Zillow (Z) gets even more volatile than usual in the wake of the closing of its acquisition of Trulia


Splunk (SPLK)
As expected, SPLK surged ahead of earnings. I was not positioned as well as I would have liked and managed not to earn enough on my call options to pay for my puts. These puts are a play on an expected post-earnings plunge. The puts have a strike at $55 and are highly unlikely to benefit from a post-earnings plunge from current levels (definitely a case of poor positioning). With the earnings report not until Thursday, Feb 26, I may re-initiate the hedged trade.


As expected, Splunk (SPLK) has surged ahead of earnings

As expected, Splunk (SPLK) has surged ahead of earnings


Intercept Pharmaceuticals (ICPT)
I have written several times about trades on ICPT. My last trade setup was a hedged one going short shares and long call options. I was actually expecting a pullback after the stock offering but instead ICPT has surged well past its $176 offering price. I am thoroughly impressed with the resilience even with these extremely low trading volumes. If the stock manages to breakout above its 200DMA, I will have to assume a fill of the November earnings gap down is in play. I am watching volume closely under the assumption that the next volume surge will point the direction for the next sustained move.


Intercept Pharmaceuticals (ICPT) has surprised me with on-going strength post-offering. The stock is now fighting to break through 200DMA resistance

Intercept Pharmaceuticals (ICPT) has surprised me with on-going strength post-offering. The stock is now fighting to break through 200DMA resistance


Coach (COH)
COH broke out above its 200DMA several times in January. The final breakout was in response to earnings. The subsequent selling stopped right on the 200DMA. The stock has barely looked back since. It now looks like a bottoming process is confirmed for COH as it finally seems ready to leave behind a lot of post-earnings angst. I will like this stock a LOT when I am in a more bullish mood.


Coach (COH) is starting to leave behind post-earnings angst as a bottoming process seems to be underway

Coach (COH) is starting to leave behind post-earnings angst as a bottoming process seems to be underway



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: short AUD/JPY, long ICPT call options and short shares, long SPLK put options, long Z put options, long CAT put options

Feb
17

KB Home: Waiting on Margin News Despite Strong Preliminary Report

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 12, 2015. Click here to read the entire piece.)

KB Home (KBH) has made good on its promise to focus more on short-term monetization. Since reporting disappointing earnings on January 13, 2015, KBH has already announced six openings, grand openings, and new communities, all in time for the Spring selling season.{snip}


KB Home (KBH) has gained 16% from recent lows, but tough resistance looms overhead

KB Home (KBH) has gained 16% from recent lows, but tough resistance looms overhead


The momentum has culminated in a preliminary orders report that includes some very strong numbers for KBH:

{snip}

The company went on to applaud its “positive revenue outlook for the remainder of the year, particularly in the third and fourth quarters.” Notably absent was any information on gross margins, the biggest concern that investors had coming out of KBH’s last earnings report. {snip}

For context, home builders in general have enjoyed a strong rally since mid-January. {snip}


Is iShares US Home Construction (ITB) finally ready for a true breakout?

Is iShares US Home Construction (ITB) finally ready for a true breakout?


The rally in ITB has been supported by a series of earnings reports that provided great relief to the bad news KBH delivered on January 13th. As I suspected at the time, KBH’s problems were more company-specific than indicative of general industry woes.

{snip}


Toll Brothers has managed to rally to an overall gain since reporting earnings in November. The stock is now trading back to highs from last summer.

Toll Brothers has managed to rally to an overall gain since reporting earnings in November. The stock is now trading back to highs from last summer.


Source for charts: FreeStockCharts.com

Be careful out there!

Full disclosure: long TOL call options

(This is an excerpt from an article I originally published on Seeking Alpha on February 12, 2015. Click here to read the entire piece.)

Feb
17

Australia’s Heating Housing Market Pressures Monetary Policy

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 11, 2015. Click here to read the entire piece.)

The Australian Bureau of Statistics released its December, 2014 data on housing finance in Australia. The data show that first-time home buyers continue to decline as a percentage of all dwellings financed. The last time the share was lower than December’s 14.5% reading was June, 2004.


The share of first home buyers in Australia is at historic lows

The share of first home buyers in Australia is at historic lows


Source: Australian Bureau of Statistics

This decline in the share of first home buyers coincides with a continued increase in investor-driven activity in Australia’s housing market. These investors are likely steadily squeezing out first-timers as affordability declines. {snip}

Investor demand is likely helping to accelerate housing prices in Australia’s most populous cities: Sydney and Melbourne.


The take-off in housing prices in Sydney and Melbourne are driving overall growth in house prices in Australia

The take-off in housing prices in Sydney and Melbourne are driving overall growth in house prices in Australia


Source: Reserve bank of Australia Statement on Monetary Policy

The RBA is finally starting to worry about the robust growth in housing prices – particularly the activity of investors – as it attempts to balance the Australian economy with lower interest rates:

{snip}

One sign of a potential housing bubble is a fall in rent relative to housing prices that makes renting an exceptionally better value than buying. This is exactly what may be starting to happen in Australia:

{snip}

With consumer price inflation at 1.7% for 2014, the RBA does not technically have a lot of room to continue lowering interest rates to drive the currency down. So I was surprised that the Statement on Monetary Policy did not contain any stronger language about the persistent over-valuation of the Australian dollar. {snip}


The RBA's rate cut so far has had no net impact on the Australian dollar

The RBA’s rate cut so far has had no net impact on the Australian dollar


Source: FreeStockCharts.com

{snip}


RBA Rate Indicator - March 2015

RBA Rate Indicator – March 2015


Source: ASX RBA Rate Indicator

{snip}


The market expects an eventual cut to 2% but not much else

The market expects an eventual cut to 2% but not much else


Source: ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

While the market waits for the RBA’s next pronouncements, I am guessing the exchange rate will be buffeted by the gyrations in commodity prices, iron ore and oil in particular. {snip} Together, these bounces have likely helped the Australian dollar stay off its lows…for now.

Be careful out there!

Full disclosure: net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on February 11, 2015. Click here to read the entire piece.)

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