ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Nov
23

T2108 Update (November 21, 2014) – Overbought for A Hot Minute With Breakout Charts Galore

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: 68.3%
T2107 Status: 53.3%
VIX Status: 12.9
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #25 over 20%, Day #23 over 30%, Day #20 over 40%, Day #18 over 50%, Day #13 over 60% (overperiod), Day #95 under 70% (underperiod)

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 paint has finally dried and the grass has grown. On Friday, November 21, T2108 experienced a brief encounter with overbought conditions (70% or higher). My favorite technical indicator reached as high as 71.3% before settling in for a close of 68.3%.

This milestone is “close enough” for trading purposes to initiate the overbought trading strategy. I am keeping if VERY simple.

In the coming week, if the S&P 500 closes below its low from Friday of 2056.76, I will assume some kind of top is in the market – definitely not “THE” top. I doubt I will try to chase the S&P 500 (SPY) lower with ProShares Ultra S&P500 (SSO) put options, but I will stop buying every dip with SSO call options. I will get much more comfortable shorting individual stocks at key technical levels. However, it is VERY difficult for me to get outright bearish on the market at this juncture without a breach of some major technical level, like 2000 or the 50DMA.

If the S&P 500 presses higher into overbought territory, I will assume the market is embarking on an overbought rally. In this case, I think the rally could be quite powerful given all the news recently of more stimulus from major central banks (China and the ECB). My strategy in this scenario will be to continue aggressively buying dips on SSO with call options. I will also lock in profits on select longs in individual stocks. This strategy only ends once a technical topping pattern appears (like a blow-off top) or T2108 drops out of overbought conditions.


A clean breakout to more all-time highs for the S&P 500

A clean breakout to more all-time highs for the S&P 500


Interestingly, the VIX still has not quite hit a new low for this up cycle. It is still about 20% away from the 7 1/2 -year low it hit back in early July. So technically, there should be plenty of room to the downside for the VIX before I need to consider extremes of complacency. Still, I would feel “more comfortable” staying bullish if the VIX were closer to the 15.35 pivot point. A little bit of fear indicates buying power still waits on the sidelines.


The dramatic turn-around in sentiment continues

The dramatic turn-around in sentiment continues


There are some VERY interesting, intriguing, and likely meaningful chart patterns to review. I post a few below.

Caterpillar, Inc. (CAT)
As regular readers know, I actively use CAT as a market indicator and a hedge whenever I am feeling very bullish (like now). On Friday, CAT made a very clean breakout. It gapped up over its 200DMA. This is as bullish as it can get. If CAT surpasses the high from September, traders should assume the stock has resumed its uptrend. Before THAT happens, traders should assume this breakout is a very bullish sign for the stock market in general. I plan to renew my hedge using CAT to enjoy the discount on the put options that I hope will help protect my backside as I look onward and upward.


Caterpillar leaps into a major, bullish breakout.

Caterpillar leaps into a major, bullish breakout.


In my humble opinion, there are NO comfortable shorts when the market is in bull mode…and especially when central banks around the globe are actively working against deflation and slowdowns in growth.

iShares MSCI Emerging Markets (EEM)
Speaking of central bank stimulus, emerging markets got a tremendous boost from Friday’s action. EEM reflects the fresh bullishness in a big breakout above its 200DMA on strong buying volume. This milestone marked a great time to re-initiate another one of my favorite trades, a hedged strategy on EEM of buying call and put options. EEM can travel far and very quickly, and the options are usually not priced for such a possibility. In this case, I biased to the long side given the technical breakout. I like having the put options because they serve double-duty: a hedge on my overall bullishness as well as a potentially profitable side of the trade if this entire setup turns into a vicious fake-out.


The third time is a charm - EEM breaks out above critical resistance at the 200DMA

The third time is a charm – EEM breaks out above critical resistance at the 200DMA


The rest of these charts are interesting more from the perspective of the individual stock and not as implications for the larger market.

King Digital Entertainment plc (KING)
I should have been ready for this nice burst off the bottom given my previous bullishness on KING, but I sheepishly acknowledge I completely missed it. The clean breakout above the 50DMA has been confirmed by post-earnings follow-through.


KING is trying to prove critics and skeptics wrong...

KING is trying to prove critics and skeptics wrong…


Wix.com Ltd. (WIX)
I have stubbornly stuck by WIX and have FINALLY been rewarded. This is one I will continue to hold.


WIX warmly welcomes its newly arrived 200DMA with a bullish breakout

WIX warmly welcomes its newly arrived 200DMA with a bullish breakout


Amazon.com Inc. (AMZN)
All year AMZN has had poor post-earnings performances. Two of the four have featured complete comebacks. This latest one, featuring an important 200DMA breakout, is particularly impressive given analysts and pundits insisted that investors were finally fed up with AMZN’s profitless growth. I guess not quite yet… Having said that, I LOVE AMZN as a short if (when?) it sneaks back below its 200DMA.


Amazon.com is down 17% for the year in a bout of very poor relative performance with the market...but it refuses to go down quietly

Amazon.com is down 17% for the year in a bout of very poor relative performance with the market…but it refuses to go down quietly


CONSOL Energy Inc. (CNX)
An energy company making a bullish move? Especially one that extracts COAL as part of its business?! That is indeed what we have with CNX. I follow CNX casually, but I should have been paying closer attention with that earlier retest of the QE2 and QE3 reference price.


Yep. Yet another breakout. CNX leaps over its 200DMA and becomes the rare energy company with a very bullish chart

Yep. Yet another breakout. CNX leaps over its 200DMA and becomes the rare energy company with a very bullish chart


Terex Corporation (TEX)
I consider TEX a poor man’s CAT. You can bet with CAT”s bullish breakout, I am watching TEX with keen interest. TEX has its own “mini” breakout going on above its 50DMA. This is a much more difficult trade than CAT on the bullish side given the downtrend is steep and well intact. TEX has filled its post-earnings gap down from last month, but it needs to close ABOVE its intraday high directly ahead of earnings before I even dare consider taking the bait. I do like the hammer pattern that followed earnings. The “tail” is a bit long for my liking, but the post-earnings follow-through produces a convincing confirmation of a bottom. I just need one more confirmation…


A bottoming underway for TEX?

A bottoming underway for TEX?


Netflix, Inc. (NFLX)
Last and definitely least among this current crowd of breakout charts is NFLX. I STILL see no solid news explaining the sudden bout of weakness. The technicals tell me all I need to know for now though. I covered this trade and the decisions confronting me in the last T2108 Update. As I feared, NFLX popped from its over-extension below the lower-Bollinger Band. However, given my running suspicion that “something” is up, I took the opportunity to fade NFLX with put options expiring on Black Friday (this coming week). After NFLX obliged with a fade from its intraday high, I went ahead and locked in the profit. On Friday, the selling resumed and took NFLX to a low for the week. It began with a gain at the open and again I went after put options. This time, my profit-taking was pre-mature, and I left a LOT on the table by the close. The good news for me was that I was in the end able to close out the original bearish trade with the 365/355 put spread with a profit.

I almost feel naked without having a fresh set of put options on NFLX going into the week. Needless to say, I will continue to look for opportunities to fade the stock.


NFLX looks ready for a major sell-off...news still pending as technicals scream loudly

NFLX looks ready for a major sell-off…news still pending as technicals scream loudly


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 SSO shares, log EEM put and call options,

Nov
19

T2108 Update (November 19, 2014) – A Buy Point for Alibaba, A Breakdown for Netflix

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: 62.8%
T2107 Status: 51.2%
VIX Status: 14.0
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #23 over 20%, Day #21 over 30%, Day #18 over 40%, Day #16 over 50%, Day #11 over 60% (overperiod), Day #93 under 70% (underperiod)

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
Watching T2108 has become similar to watching the grass grow while paint dries. Today T2108 closed slightly down at 62.8% and is now on an 11th day levitating above 60% without hitting overbought levels. The S&P 500 (SPY) declined fractionally with a 0.15% loss as buyers convincingly picked the index off its lows for the day.


The S&P 500 is still poised to follow-through on its latest breakout to new highs

The S&P 500 is still poised to follow-through on its latest breakout to new highs


There is not a lot to say about T2108 until this consolidation period ends with a breakdown or breakout. I mainly posted today to showcase two charts of interest: Alibaba (BABA) and Netflix (NFLX).

Ironically enough, the “Ali Rah Rah Pop” is leaving behind Alibaba (BABA). The market hype around China’s Singles Day seems to have exhausted buying power for the moment. BABA has declined 5 out of 7 days since then even as the S&P 500 has continued to creep higher. Now, BABA has neatly retested its strong uptrend defined by the 20-day moving average (DMA). I am betting this support will hold. However, there is no need to play “hero” on a stock like this. I will not buy until the buying power shows up again in the stock. A great signal for that possibility is a trade above today’s intraday high of $110.68. A natural stop from this position would be today’s intraday low essentially at the 20DMA at $107.08. Such a break would immediately put the $100 level and a complete post-earnings reversal into play.


Has BABA finally found support at its 20DMA uptrend?

Has BABA finally found support at its 20DMA uptrend?


I last covered Netflix (NFLX) on October 24th. At the time, I suggested that NFLX’s post-earnings upward momentum was likely coming to an end, and I set around $379 as a line in the sand to define a shortable breakdown. The very next day, NFLX dropped below that line only to close marginally above it. Two days later NFLX closed below the line and I took the bait buying a $365/355 put spread that expires THIS Friday. NFLX then proceeded to pop to a fresh post-earnings high before settling back into an extended range of churn.

Going into this week, I had all but given up on the put spread until “something” happened today to cause NFLX to plunge 4.7% on high volume. At the time of writing, I still have yet to find any solid news to explain the drop. Without any news, I was VERY tempted to lock in my profits and thank my lucky stars, but this drop looks so ominous I felt it was worth the risk to hold for at least one more day. Granted, NFLX is extended well below its lower-Bollinger Band and could snap right back if some catalyzing news does not appear soon. In favor of the sellers is a breakdown from a Bollinger Band (BB) squeeze. As I have shown in previous charts, the market tends to sustain big moves out of a BB squeeze.


Netflix breaks down from an extended consolidative range and a Bollinger Band squeeze

Netflix breaks down from an extended consolidative range and a Bollinger Band squeeze


In other news, the oil patch is still on shaky ground. PowerShares DB Oil ETF (DBO) continues to precariously tip toe along a support line that has held since May 2009. Halliburton (HAL) has been (rightfully) punished for the premium it is paying to acquire oil-patch competitor Baker Hughes (BHI). HAL closed at a fresh 10-month closing low, dragging down BHI as well. BHI now looks ready to completely reverse all its gains since the acquisition deal was officially announced. The price action here continues to be important to watch. I am kicking myself because this was a VERY rare case of free money in an inefficient market. HAL declined just as I said it should after announcing this deal, and BHI still moved higher even though deal rumors had already sent the stock much higher. Yet, I did not take either side of this trade. Another lesson learned!

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 SSO shares, long NFLX put spread

Nov
18

T2108 Update (November 18, 2014) – Onward and Upward

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: 64.3%
T2107 Status: 52.3%
VIX Status: 13.9
General (Short-term) Trading Call: Hold (bullish positions); aggressive bears should have stopped out (and I am still recommending that shorts stop trying to call a top here)
Active T2108 periods: Day #22 over 20%, Day #20 over 30%, Day #17 over 40%, Day #15 over 50%, Day #10 over 60% (overperiod), Day #92 under 70% (underperiod)

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


Bears are still itching for a top in the stock market, and the market continues to stubbornly refuse to comply. I post fund manager Doug Kass’s quotes in my blog not to pick on him specifically, but because I find them very useful accounts of bearish sentiment, especially the permabear kind. The aggressiveness of shorting into this strong uptrend surprises me, but it is indicative of the impatience that is likely growing among bears for a return to the palpable fear of October’s oversold period.

At this point, bears who continue to try to call a top are not using any definable method except that they do not like the market, think valuations are too high (probably for years at this point), are latched to memories of so many negative catalysts and headwinds that the market has long since left behind, and/or are over-estimating the small odds of a sudden market collapse and crash. Mind you – at SOME point, the bears will really nail it (and I hope to be there among them!). It will happen because the bears are consistently repeating the same song all the way up, and simple history tells us that sell-offs are inevitable. The problem of course is that it does us little good to miss, or even worse to FIGHT, a 20% rally to catch a 10% sell-off or anything similar. It is even sub-optimal to fade every little uptick and then cover on the next downtick while failing to notice the steady upward march of the indices (staring at trees and missing the forest). In an uptrend like this it is much better for bears to wait for SOME kind of confirmation; in other words, let the market come to you.

In the meantime, I am sticking by my favorite indicator T2108 to help identify the market’s extremes of sentiment – for both bullish and bearish seasons. I also continue to carry shorts where it seems the technicals support them, like last week’s short on Energy Select Sector SPDR ETF (XLE). That trade was a classic case of allowing a bearish trade to come to me rather than chase it. Overall, T2108 continues to allow me to stay firmly biased on the bullish side of the ledger.

Anyway, a top proved elusive yet again as the S&P 500 (SPY) made an impressive print to a new all-time high.


A stubborn S&P 500 breaks out from potential topping patterns

A stubborn S&P 500 breaks out from potential topping patterns


T2108 closed marginally higher at 64.3% and so just barely avoided another bearish divergence. Now, with T2108 likely back in sync with the S&P 500, a path opens for more upside as I anticipate the next rendezvous to overbought conditions. I have been VERY surprised at how long T2108 has been able to hover above 60% and not trip the overbought threshold of 70%. The 60% overperiod has now lasted 10 days. I hesitate to make another prediction at this point!

In the meantime, I finally sold my latest tranche of ProShares Ultra S&P500 (SSO) call options. They expire on Friday, and it made sense to lock in the profits from the breakout given the profits would likely not survive a pullback from here or even a lack of follow-through. My strategy remains the same – buy (any) dips aggressively with SSO call options and continue holding my SSO shares accumulated during October’s oversold periods at least into the Spring. The assumption is that the stock market will enjoy a seasonally strong period going into the Spring. I will revisit everything once/if the S&P 500 hits overbought conditions or defintively pulls away from the current “close call.”

In the last T2108 Update, I pointed to a fade in Apple (AAPL) as one potential sliver of hope for the bears. As you might guess with the S&P 500’s breakout, AAPL failed to confirm the fade. It too closed with a fresh all-time closing high. The day’s gains delivered another profitable day for the Apple Trading Model (ATM). The ATM is conflicted for Wednesday’s trading with essentially 50/50 odds of a gain. Odds are much higher for a gain from the open at around 80%. Note well that I trade more frequently off the odds of a gain from the previous day’s close. I like the odds from the day’s open when they agree with the core of the model. Also note that given Apple’s strong uptrend, the ATM SHOULD be doing pretty well as the general patterns are for upside on Mondays and Tuesdays, marginal odds for Wednesdays and Thursdays, and downside for Fridays. The main trick these past several weeks has just been getting good (meaning discounted) entry points.

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 SSO shares

Nov
17

T2108 Update (November 17, 2014) – Apple Watch: An Important Fade from All-Time Highs?

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: 63.3%
T2107 Status: 51.6%
VIX Status: 14.0
General (Short-term) Trading Call: Hold (bullish positions); aggressive bears can short with a tight stop at fresh all-time highs
Active T2108 periods: Day #21 over 20%, Day #19 over 30%, Day #16 over 40%, Day #14 over 50%, Day #9 over 60% (overperiod), Day #91 under 70% (underperiod)

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 wait for a resolution between the forces of a bearish divergence and a bullish coiled spring continue even as the S&P 500 (SPY) continues making very marginal closing all-time highs.


A fifth straight day of essentially going nowhere

A fifth straight day of essentially going nowhere


T2108 however, is sagging a bit. Today, it slipped slightly again to close at 63.3%. This continues a slight (bearish) divergence from the S&P 500. The volatility index, the VIX, is marginally adding to the bearish interpretation of the divergence as it continues to creep higher during this period; note however that the VIX gapped up and faded today.

This all leaves us in a wait and see mode. Perhaps Apple (AAPL) holds the key to resolution.

Apple’s stock printed an ominous blow-off pattern today with a gain as much as 0.8% when it hit a fresh all-time intraday high of $115.09. If AAPL continues selling off from here, traders should assume a top is firmly in place with a 50DMA retest in play. Such a move would remove an important partner in the bullish interpretation of the market action. Two important caveats: 1) the daily chart seems to have a poor print with the high going over $117 – I used the intraday chart to get the true high; 2) volume was below average and even below some of the recent buying – a blow-off top is much more convincing when volume surges because it more closely signals the potential last gasp of buyers and the exhaustion of buying power.


A blow-off top for AAPL?

A blow-off top for AAPL?


So now the “Apple Watch” has taken on a new meaning, and I will be watching more vigilantly than ever. The Apple Trading Model (ATM) is projecting 69% odds of upside for Tuesday. Note well though that the ATM does NOT take into consideration chart patterns or highs of the day (just opens and closes).

Here is one big investor/trader who will be VERY relieved to see a top in Apple here:


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 SSO shares and call options, long AAPL call options

Nov
15

Millennials Are Poised to Deliver the Next Critical Juncture for the Housing Market

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on August 3, 2014. Click here to read the entire piece.)

Demographic shifts can be key drivers of housing trends. To date I have spent more time examining the impact of aging Baby Boomers on the housing market than aging millennials, defined here as the generation born between 1985 and 2004 (inclusive). In this piece, I combine the research of three different sources to conclude that 2015 likely represents a first make or break point for millennials to have a positive impact on the housing market and on the prospects for home builders. This piece is essentially a follow-up to last year’s “The Pent-Up Housing Demand Of Young People Could Support ‘Selling Seniors’” and “The Housing Recovery Will Proceed Even With The Changing Preferences For Living At Home.” Here are my references:

{snip}

(This is an excerpt from an article I originally published on Seeking Alpha on August 3, 2014. Click here to read the entire piece.)

Full disclosure: no positions

Nov
13

T2108 Update (November 13, 2014) – A Coiled Spring Or A Bearish Divergence

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: 63.6%
T2107 Status: 51.4%
VIX Status: 13.8 (held 2-month closing low)
General (Short-term) Trading Call: Hold (bullish positions); aggressive bears can short with a tight stop at fresh all-time highs
Active T2108 periods: Day #19 over 20%, Day #17 over 30%, Day #14 over 40%, Day #12 over 50%, Day #7 over 60% (overperiod), Day #89 under 70% (underperiod)

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
A ray of hope just opened for the bears…or a fresh nightmare is about to begin. This is the dichotomy the technical signals are flashing to me right now.

The S&P 500 (SPY) has made almost no progress all week: 8 points for a 0.4% gain so far. The last three days have been true stalemates with candlestick patterns known as “evening stars.” These are typically topping patterns at the end of a run-up. An evening star proceeded the sell-off that led to the October correction. An evening start that started the month of November only stalled the rally for another day.


Is the S&P 500 topping out again?

Is the S&P 500 topping out again?


This week’s pattern of evening stars matter a lot more because at the same time T2108 closed down ominously just short of overbought (70% or higher) – a little similar to what happened in September.


T2108 declines from its latest highs while the S&P 500 hangs tough at its high - a potential bearish divergence

T2108 declines from its latest highs while the S&P 500 hangs tough at its high – a potential bearish divergence


Caterpillar (CAT) is adding to the wariness as it continues to struggle to move through its 200DMA. I earlier thought CAT was about the burst through this resistance and issue a clear, bullish market signal.


Caterpillar continues to struggle with resistance

Caterpillar continues to struggle with resistance


So that is the bearish case. It is a warning sign, but not a sell sign for me just yet. First of all, I want confirmation: a notable drop in the S&P 500 in the next day or two would do the trick. Aggressive bears who have been pained to find new reasons to hate the market can short here with a tight stop at fresh all-time highs. I am fine avoiding the bearish bandwagon until/unless the S&P 500 closes below 2000 or even its 50DMA. I am sticking with my plan to hold my hard-earned shares in ProShares Ultra S&P500 (SSO). I also have call options expiring next Friday that I will just ride out. I will give fresh consideration to loading up more on put options on CAT as a firm hedge.

So what is the case for a coiled spring?

First, T2107, the percentage of stocks trading below their respective 200DMAs, is nowhere close to its previous high or even the post-recession downtrend line. This represents potential upside and shows there are still stocks out there that buyers might find relatively “cheap.” Bears of course will see this as exhaustion at critical resistance (for example, CAT).


Fatigue at resistance or the rest that refreshes for further upside?

Fatigue at resistance or the rest that refreshes for further upside?


On the forex front, the Australian dollar versus the Japanese yen (AUD/JPY) is as bullish as it can be. It is not signalling or confirming any downward move here. Note how AUD/JPY turned downward at the September 19 peak and proceeded to accompany the stock market downward.


The Australian dollar versus the Japanese yen is as bullish as it can be

The Australian dollar versus the Japanese yen is as bullish as it can be


And how can a trader hate a market that is still sending Apple (AAPL) to clean breakouts to fresh all-time highs on good buying volume? The post-earnings uptrend is a thing of technical beauty.


Apple is as bullish as it can be

Apple is as bullish as it can be


THESE signals bias me to continue thinking of the S&P 500 as a coiled spring that will further confirm the “Ali Rah Rah Pop.” A clean breakout to fresh all-time highs will be VERY bullish as it will completely invalidate the bearish side of the argument I showed above. Stay tuned and brace yourselves.

I have one very important trading update from the energy complex. In my last T2108 Update, I described the setup for shorting Energy Select Sector SPDR ETF (XLE). It was as simple as could be: shorting XLE as it faded from 50DMA resistance. Today delivered a clean breakdown that allowed me to lower my stop and lock in profits. I continued to lower the stop as XLE continued plunging. Just as I was starting to wonder how low XLE might go, HUGE news broke near the close of trading.


So many thoughts ran through my mind at once, but at least I had enough clarity of thought and purpose to know the first and most important implication: XLE is likely done selling off. Baker Hughes (BHI) is not in the top 10 holdings of XLE. In fact, Exxon (XOM) and Chevron (CHV) make up a hearty 30% of the ETF. Halliburton (HAL) is in the top 10 but a mere 3.3% of XLE. None of that matters. What matters is the potential shift in sentiment that can come from a deal like this. Investors and traders alike will, probably rightly, interpret such a deal as signal of some kind of bottom in the oil patch – a signal that they should be bargain-hunting along with HAL. Indeed, XLE immediately started higher into the close, and I quickly covered my position and locked in the remaining profits.


A great setup for a short interrupted by a blockbuster deal

A great setup for a short interrupted by a blockbuster deal


I am also VERY grateful I did not haplessly target a single company to short in the oil patch. XLE was a great choice exactly because I did not need to worry much about waking up some morning to find a merger announcement plunging my short position into an instant and very large loss. The ramp in BHI was an amazing site to behold (yes, I was too busy watching to dare a buy myself!). Even HAL initially benefited. In retrospect HAL made for a great fade given it makes little sense for HAL to surge immediately on a deal where it is likely to spend a massive amount of money/capital – not to mention no details are known. The intraday charts are 5-minute views.


A massive bumrush into Baker Hughes shares

A massive bumrush into Baker Hughes shares

Halliburton benefited for a brief moment before fading a bit into the close

Halliburton benefited for a brief moment before fading a bit into the close

How convenient - a close just under the 50DMA...no doubt awaiting confirmation of the rumor before moving higher

How convenient – a close just under the 50DMA…no doubt awaiting confirmation of the rumor before moving higher


This deal could be well-timed to carve out a bottom in the oil patch. PowerShares DB Oil ETF (DBO) freshly plunged today and officially retested 5-year support.


Oil plunges again and now tests critical support that has held for 5 years

Oil plunges again and now tests critical support that has held for 5 years


Since energy is about 12% of the S&P 500 (I heard this from a podcast from Investor’s Business Daily), a turn-around in the oil patch may be just the incremental push the S&P 500 needs to pop that coiled 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: long SSO shares and call options, long CAT put options

Nov
10

T2108 Update (November 10, 2014) – The Ali Rah Rah Pop

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: 65.1%
T2107 Status: 53.2%
VIX Status: 12.7 (fresh 2-month closing low)
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #16 over 20%, Day #14 over 30%, Day #11 over 40%, Day #9 over 50%, Day #4 over 60%, Day #86 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
Going into and during the October sell-off, bears were fond of noting that the top in the S&P 500 (at the time) coincided with the IPO of Alibaba (BABA). It was a neat and convenient story of buyer’s exhaustion and a peak in complacency. I saw this milestone called the “Ali Blah Blah” top on twitter. Now that BABA is making fresh all-time highs day after day, I am wondering whether these same bears are leveraging this nifty technical signal to either get out of the way of the uptrend or hop aboard.


Alibaba (BABA) is sprinting along its upper Bollinger Band as post-earnings momentum continues apace

Alibaba (BABA) is sprinting along its upper Bollinger Band as post-earnings momentum continues apace


The BABA uptrend is quite impressive, strong and persistent. I really missed big on that one. The Ali Blah Blah top has turned into what I will now call the “Ali Rah Rah pop” until the name no longer applies. The Ali Rah Rah pop now features a resumption of upward momentum that seems unperturbed by the jeers and derision of market detractors who keep calling for a market top with each step higher. The S&P 500 is oblivious to scandalized bears and is instead blithely pushing along to the “rah rah” cheers of the momentum and trend-following crowd.


The S&P 500 keeps marching along in a well-defined uptrend between Bollinger Bands

The S&P 500 keeps marching along in a well-defined uptrend between Bollinger Bands


T2108 is also trundling along higher. At 65.1%, T2108 is just barely higher than it was a week ago. My favorite technical indicator is starting to make me wonder whether a coiled spring is getting ready to pop. Either way, overbought conditions seem almost certain at some point in the coming days (I was hoping for overbought to coincide with Friday’s jobs report). However, if T2108 takes a notable dive before returning to overbought conditions, I will stand up and take notice given this is exactly how the selling in September began. A descent below the 60% level might make me give the bearish case more serious consideration.

Volatility continues its descent. The volatility index, the VIX, has essentially completed a roundtrip from late September’s breakout that came the trading day after (Monday, September 22) the BABA IPO. Funny how these things can seem so interconnected.

Caterpillar (CAT), my favorite bulldozer in the coal mine, may have the “final” say on whether we go breakout or go bust from here. Surprisingly, it is already pushing against resistance at the 200DMA and now looks ready to break out higher. Just as I could not get with the bearish program with transports pushing bullishly higher, a CAT bulldozing higher simply fortifies my bullishness on the market. CAT is also my favorite hedge on bullish sympathies, so I will still look for an opportunity to rebuild put options “just in case.”


Caterpillar (CAT) is on the edge of a significant breakout from stiff resistance

Caterpillar (CAT) is on the edge of a significant breakout from stiff resistance


Finally, in trading action, I sold my call options on Baidu (BIDU) into today’s very cooperative 4.7% move off support from the first Bollinger Band (click here to see the discussion of this setup). The options essentially doubled off this one move – a great reminder of what I love about trading options for short-term positioning. I also shorted Energy Select Sector SPDR ETF (XLE) as it faded off 50DMA resistance. This is NOT a hedge, just a trade following very simple technical rules…


Energy Select Sector SPDR ETF (XLE) falls back in what looks like a notable failure at 50DMA resistance

Energy Select Sector SPDR ETF (XLE) falls back in what looks like a notable failure at 50DMA resistance


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 SSO shares and call options, short XLE, long CAT put options

Nov
10

A Major Breakout for Whole Foods Market

written by Dr. Duru
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I first identified a potential bottom in Whole Foods Market (WFM) back in July. The following month I became even more convinced of a bottom after a rumor of Carl Icahn’s involvement allowed me to sell another round of call options at a nice profit. After that trade, I made another swing trade with shares in what was essentially becoming a trade-the-range strategy.

So, I can only shake my head at a major missed opportunity as Whole Foods Market made a major breakout after last week’s earnings.


Whole Foods Market, Inc. (WFM) prints a major breakout that confirms its bottom with an exclamation point

Whole Foods Market, Inc. (WFM) prints a major breakout that confirms its bottom with an exclamation point


Source: FreeStockCharts.com

I had no position on going into earnings. In fact, it did not even occur to me to make sure I had a position going into earnings. Sure the stock was hurtling to the top of the previous range going into earnings, but I had no reason to think at the time that a major breakout from this range was imminent.

Without even knowing the news or even reading the earnings report, WFM prints as a clear “buy-the-dip” opportunity now. The stock gapped up and closed with a 12.1% gain in the trading day following the earnings report. The stock closed near its high of the day well above the upper-Bollinger Band (BB). Even MORE impressive is the stock’s ability to press forward with a 4.4% follow-up gain even further above the upper-BB. Buyers are definitely scrambling to get back into WFM in a sharp shift in sentiment.

I am not even sure trying to interpret the fundamentals in this situation is useful. It was surely the fundamentals which drove investors to dump WFM overboard in May for a major breakdown. Those sellers are experiencing major regret right now. Just six months later, investors and traders have practically made the exact opposite conclusion as that May gap has almost filled. Traders and investors looking to go long WFM should treat any pullback toward the 200DMA as a gift. I will at least.

In honor of this major bullish moment, I cannot help myself in reposting this incredibly funny video by a rapper from my hometown (and high school even): “Whole Foods Parking Lot.” Traders better find a spot quick…the quinoa is flying off the shelves…



Be careful out there!

Full disclosure: no positions (regrettably!)

Nov
7

T2108 Update (November 6, 2014) – A Market Launching Pad (includes chart reviews)

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: 63.2%
T2107 Status: 51.9%
VIX Status: 13.7 (fresh 5-week closing low)
General (Short-term) Trading Call: Aggressive bears should have stopped out of most shorts by now; bulls can of course continue holding
Active T2108 periods: Day #14 over 20%, Day #12 over 30%, Day #9 over 40%, Day #7 over 50%, Day #2 over 60% (ending 1 day under 60%), Day #84 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 closed at 63.2% so no overbought conditions to increase the drama of the U.S. jobs report for October. This report should effectively be a “last stand” for the bears although I actually cannot remember the last time a jobs report generated significant selling on the S&P 500 (SPY). With the index closing at yet another all-time high, increasing its distance from the psychologically important round number of 2000, and crawling upward through the neat upward trend channel created by the two Bollinger Bands (BB), the S&P 500 looks like it is carving out a launching pad for a fresh run-up. The Bollinger Bands are wide open and carving out a path pointing upward.


Back to recurring all-time highs  - topping patterns obliterated

Back to recurring all-time highs – topping patterns obliterated


I am spending the rest of this update with some chart reviews that I find very compelling for bullish and bearish reasons. Ironically enough, mostly bearish reasons.

First, the bullish pictures (more or less!).

GoPro, Inc. (GPRO)
The market cannot decide what to think of GPRO’s earnings. On August 1st, the stock gapped down post-earnings only to recover and soar ahead of the October 31st earnings report. The stock gapped UP after its second earnings report as a public company, but it has not quite beaten out the previous (pre-earnings) high. Now it looks like the 50DMA is an important pivot point. GPRO has been a great trading stock, and I am now looking for the 50DMA to keep support. A breakout or breakdown should lead to a sustained follow-through of trading.


GoPro, Inc. (GPRO) has had one unstoppable run. I expect the next run, up or down, to be just as unstoppable

GoPro, Inc. (GPRO) has had one unstoppable run. I expect the next run, up or down, to be just as unstoppable


Baidu, Inc. (BIDU)
After July earnings I was very bullish on BIDU and waited for a dip to make the next trade. It came, but I was not rewarded as the stock continued to consolidate. I caught September’s bounce off 50DMA support. But after that run-up ended quickly, I got wary and concerned that BIDU had just printed the dreaded triple top. The October breakdown seemed to confirm the top. Earnings on October 29th took care of those concerns with the stock printing a fresh all-time high. I finally got in long again as the stock pulled back “gently” to the bottom of what I think is now a fresh upward trending channel between the two Bollinger Bands.


Baidu, Inc. (BIDU) invalidates the triple top in convincing post-earnings fashion

Baidu, Inc. (BIDU) invalidates the triple top in convincing post-earnings fashion


Wix.com Ltd. (WIX)
I noted WIX back in June for what looked like a very strong breakout above its 50DMA. Since then, the stock has effectively gone nowhere in a very extended consolidation period oscillating around the 50DMA. Two sets of earnings have failed to break the stock out of its range. I include this in the bullish camp because the stock has held up relatively well, especially through the sharp market correction in October. An eventual breakout could deliver a very powerful upside move. A breakdown will still need to break the all-time low from May to cause me significant alarm.


Wix.com Ltd. (WIX) in a holding pattern

Wix.com Ltd. (WIX) in a holding pattern


I know there are still plenty of stubborn bears out there. The next charts should give them a glimmer of hope that they have plenty of fields for frolicking even if the general market continues to contradict their dour moods.

Google Inc. (GOOG)
GOOG was one of my favorite post-earnings plays coming out of October’s oversold conditions. Its earnings were perfectly timed – right as the general stock market got slammed for the final time. The sharp post-earnings bounce demonstrated that the market likely over-reacted to GOOG’s earnings but could not help itself given the negative sentiment in the air. However, GOOG’s chart is sagging again. It printed a topping pattern right below a declining 50DMA with convincing follow-through selling. Moreover, it is looking like July’s earnings marked a lasting top in the stock. GOOG has to set a fresh post-earnings low to confirm a fully bearish move.


Google Inc. (GOOG) is sagging again as its post-earnings reversal has lost momentum

Google Inc. (GOOG) is sagging again as its post-earnings reversal has lost momentum


iShares MSCI Emerging Markets (EEM)
EEM was another great play coming out of oversold conditions. The call options were extremely cheap at the time. NOW, EEM has failed to break resistance at its 200DMA twice. The 50DMA is quickly descending. There is now a red flag planted directly over EEM. I only want to try another long (outside of oversold conditions) after a breakout above resistance. A break of the October low confirms a new downtrend.


iShares MSCI Emerging Markets (EEM) looks like it is in trouble with a double failure at resistance

iShares MSCI Emerging Markets (EEM) looks like it is in trouble with a double failure at resistance


zulily, Inc. (ZU)
I offered up ZU as a way to play traditional strength in retail stocks in the second half of the year. I should have stuck to an ETF of retail stocks. ZU went absolutely nowhere after my recommendation in June…until earnings this week took the stock to (marginal) all-time lows. For now, I am hanging on to see what happens in the post-earnings follow-through period.


zulily, Inc. (ZU) disappoints - can it recover in time for Christmas?

zulily, Inc. (ZU) disappoints – can it recover in time for Christmas?


SolarCity Corporation (SCTY)
Unlike BIDU, SCTY has definitively confirmed its triple top. BIDU’s triple top occurred at all-time highs while SCTY’s happened at sub-all-time highs. This distinction could have made all the difference in sentiment. The stock has broken through 50 and 200DMA support and recently failed at 50DMA resistance with significant selling that has picked up post-earnings. A new 2014 low would represent a major breakdown for SCTY and would likely invite a LOT of follow-up selling.


SolarCity Corporation (SCTY) may be a major breakdown in the making. It is definitely worth a bright, red flag.

SolarCity Corporation (SCTY) may be a major breakdown in the making. It is definitely worth a bright, red flag.


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 SSO shares, long BIDU call options, long GOOG call spread and short shares, long WIX, long ZU, long SCTY put options

Nov
6

Trading the Breakdown of the Australian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 6, 2014. Click here to read the entire piece.)

The pressure is building on the Australian dollar (FXA). If it were not for the fresh collapse in the Japanese yen (FXY), the proverbial risk trade would be looking very shaky.

As the U.S. dollar (UUP) continues its current climb, it is applying pressure on major currencies across the board. On November 5, CurrencyShares Australian Dollar ETF (FXA) finally gave in.


The Australian dollar buckles under the pressure from the U.S. dollar

The Australian dollar buckles under the pressure from the U.S. dollar


I was bearish the Australian dollar for quite some time until American equity markets reached what I thought was a bottom supported by resilient trade in the Australian dollar versus the Japanese yen (AUD/JPY). The Bank of Japan’s massive expansion of its quantitative and qualitative easing program last week had me thinking that ALL manner of risk trades would be supported – not just stocks, but high-yielding currencies like the Australian dollar as well. This assumption has not proven out. For example, the Australian dollar has rapidly lost ground to BOTH the euro (FXE) and the British pound (FXB) since the Bank of Japan’s announcement.


The Australian dollar was right on the edge of breaking through the 200DMA when the BoJ announced the expansion of QQE

The Australian dollar was right on the edge of breaking through the 200DMA when the BoJ announced the expansion of QQE

Even the euro has gained against the Australian dollar so far this month

Even the euro has gained against the Australian dollar so far this month


{snip}


A 15-minute chart shows the potential for a blow-off top in the U.S. dollar versus the Japanese yen

A 15-minute chart shows the potential for a blow-off top in the U.S. dollar versus the Japanese yen


{snip}

The BoJ accelerated an ascent that was already well-established from the October lows

The BoJ accelerated an ascent that was already well-established from the October lows


{snip}

The Australian dollar broke down at an intriguing juncture. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on November 6, 2014. Click here to read the entire piece.)

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

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