ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Aug
21

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

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


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

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


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

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

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


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

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


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

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


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

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


Source for charts: FreeStockCharts.com

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

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



Be careful out there!

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

Aug
20

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

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

T2108 Status: 53.8%
VIX Status: 12.2%
General (Short-term) Trading Call: Hold
Active T2108 periods: Day #291 over 20% (includes day #280 at 20.01%), Day #5 over 40%, Day #3 over 50% (overperiod), Day #30 under 60%, Day #31 under 70%

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

Commentary

“The leaders of the European Union, Ukraine and Russia will meet in Minsk on August 26 to discuss energy security and the conflict in east Ukraine, Ukraine’s President Petro Poroshenko said on Tuesday.” – from Reuters, August 19, 2014.

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

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

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


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

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


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

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


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

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

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


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

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


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

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

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

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

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

Finally, here are some more charts of interest.

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


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

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


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


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

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

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

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


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


GrubHub is looking ready to surge much higher...

GrubHub is looking ready to surge much higher…


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


A dramatic turn in sentiment for LinkedIn

A dramatic turn in sentiment for LinkedIn


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

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

Aug
19

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

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

T2108 Status: 50.3%
VIX Status: 12.3%
General (Short-term) Trading Call: Can add to existing buys now that the S&P 500 has broken out above its 50DMA. Stop on a close below the 50DMA. Cannot consider shorting until such a breakdown or T1208 overbought conditions.
Active T2108 periods: Day #289 over 20% (includes day #280 at 20.01%), Day #3 over 40%, Day #1 over 50% (overperiod), Day #28 under 60%, Day #29 under 70%

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

Commentary
Monday’s surge for the S&P 500 (SPY) above its 50-day moving average (DMA) provided great validation of my rule to avoid trading on headlines. The 0.85% gain also took the index above the previous bear/bull line. With oversold conditions fading in the mirror and likely leaving behind overly aggressive bears who yet again failed to chase the market down, today’s move on the S&P 500 is fully bullish.


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

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


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

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


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

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


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

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

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

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


Can the VIX's upward trending channel hold?

Can the VIX’s upward trending channel hold?


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


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

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


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

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


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

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

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

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


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


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

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


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

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

Aug
17

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

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

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

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


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

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

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

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


Source: FreeStockCharts.com

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

Be careful out there!

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

Aug
15

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

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

T2108 Status: 41.9%
VIX Status: 13.1%
General (Short-term) Trading Call: Hold on further buys until/unless S&P 500 confirms a 50DMA breakout. Otherwise, aggressive traders can attempt a fade at 50DMA resistance. See below for more.
Active T2108 periods: Day #288 over 20% (includes day #280 at 20.01%), Day #2 over 40% (overperiod), Day #16 under 50%, Day #27 under 60%, Day #28 under 70%

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

Commentary
It looked like the perfect confirmation of the bullish bounce from T2108 oversold conditions. The S&P 500 (SPY) gapped up over its 50DMA, sellers could only barely push the index back to the 50DMA for a minutes, and then the buyers began applying fresh upward pressure. But news headlines from Ukraine caused a quick change in the game. And yet, sellers could only take advantage for less than two hours. By the close, the S&P 500 was exactly even with the prior close.


A stalemate at the 50DMA

A stalemate at the 50DMA

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

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


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

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


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


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

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


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


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

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


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


Is EWP failing a test of its 200DMA?

Is EWP failing a test of its 200DMA?


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

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


Apple is ever so quietly creeping upward and onward

Apple is ever so quietly creeping upward and onward


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


Zillow continues to ride its 50DMA ever upward this year

Zillow continues to ride its 50DMA ever upward this year


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long UVXY shares and puts, long SSO call options, long EWP puts

Aug
15

T2108 Update (August 14, 2014) – S&P 500 Faces Its First Big Test After Lifting From Oversold Conditions

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

T2108 Status: 41.2%
VIX Status: 12.4%
General (Short-term) Trading Call: Hold on further buys until/unless S&P 500 confirms a 50DMA breakout. Otherwise, aggressive trades can attempt a fade at 50DMA resistance. See below for more.
Active T2108 periods: Day #287 over 20% (includes day #280 at 20.01%), Day #1 over 40% (overperiod), Day #15 under 50%, Day #26 under 60%, Day #27 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 pays to keep tabs on the technical signals.

In the last T2108 Update I flagged a 50DMA breakout on the NASDAQ as clearing a path for the S&P 500 (SPY) to retest its 50DMA (as resistance). I thought the move higher would be slow and grinding. Instead, it only took three more days for the test to line up.


A 50DMA retest for the S&P 500

A 50DMA retest for the S&P 500

The NASDAQ 50DMA breakout continues

The NASDAQ 50DMA breakout continues


The buyers managed to close the day at the intraday highs. Yet another bullish signal.

T2108 continued its surge upward by closing at 41%. My favorite indicator has doubled from oversold conditions in just 7 trading days. This action has also confirmed the bullish bias.

The VIX has plunged and seems headed for a test of the bottom of the presumed (upward) channel. Note that the 50DMA did not act as a brake in today’s trading. I will be monitoring the VIX more closely as the S&P 500 tests the 50DMA.


The VIX continues its retreat toward the bottom of the presumed channel

The VIX continues its retreat toward the bottom of the presumed channel


Given the rapid decline in the VIX, ProShares Ultra VIX Short-Term Futures (UVXY) has plunged. UVXY has not only completely reversed its big breakout at the end of July, but it also looks in danger of cracking new all-time lows.


Back to regularly scheduled programming? UVXY plunges, barely resting at its 50DMA

Back to regularly scheduled programming? UVXY plunges, barely resting at its 50DMA


I used today’s decline to close out the rest of my UVXY put options. This latest cycle of UVXY trades was a great learning experience. I managed to profitably sell three tranches of UVXY shares AND a fistful of put options. I am now left with a small number of UVXY shares as a potential play on the S&P 500 failing to break through its 50DMA. Since T2108 is nowhere close to overbought, I am not interested in any aggressive bearish bets here. In fact, if the S&P 500 breaks out ABOVE its 50DMA, I will get even more aggressive on bullish bets (and likely keep the UVXY shares as a partial hedge). In another (re)lesson, my ProShares Ultra S&P500 (SSO) call options will most likely expire worthless on Friday. As I mentioned in a previous T2108 Update, I should have bought SSO shares instead of call options. The shares would have allowed me to wait patiently for the uncertainties swirling around the oversold conditions to resolve to the upside. The S&P 500 is now up 2.5% since its oversold lows.

The Australian dollar (FXA) is the final bullish indicator. It is rallying against the Japanese yen (FXY) and serving as a solid confirmation of the bullish jump from oversold conditions. I will be watching AUD/JPY very closely along with the VIX on the S&P 500 50DMA retest. AUD/JPY is in a critical position as it yet again reaches its recent highs. If AUD/JPY manages to leap over the top of the presumed trading channel, I will be compelled to get aggressively bullish if I am not already there at that time.


Confirming growing market bullishness: The Australian dollar is on the move against the Japanese yet again

Confirming growing market bullishness: The Australian dollar is on the move against the Japanese yet again


Overall, the trading rules remain in place. Aggressive traders can short the S&P 500 here on an assumption that the technical damage from July 31st’s massive breakdown below the bear/bull remains intact. I am only interested in SSO put options if/when T2108 goes overbought. My remnant UVXY shares are serving as my main bearish nibble here.

I conclude with a few telling charts….

Whirlpool (WHR)
WHR pool has followed-through on its post-earnings bullish engulfing pattern with a breakout above the 200DMA. This is the second time since earnings and includes a successful test of the 50DMA as support along the way. WHR is looking very bullish now and is on my radar if the S&P 500 manages to succeed in its 50DMA rendezvous.


Whirlpool is following through on its bullish post-earnings move

Whirlpool is following through on its bullish post-earnings move


Yelp.com (YELP)
I was ready for a follow-through on the 50DMA breakdown for YELP. Instead, the stubborn stock has reversed course. While this second 200DMA breakout is still at a lower high, YELP looks like it is gathering steam for a fresh run-up.


Yelp.com manages to break out again

Yelp.com manages to break out again


Caterpillar, Inc. (CAT)
A limit order on a fresh CAT put spread triggered today. It was a little early, but CAT is “close enough” to its 50DMA to play another fade. Just like the S&P 500, if CAT manages to breakout above its 50DMA, my outlook gets aggressively bullish on the market.


Caterpillar rises to its own 50DMA retest

Caterpillar rises to its own 50DMA retest


Intercept Pharmaceuticals, Inc. (ICPT)
Two days earlier, I wrote about my growing skepticism on ICPT from a technical standpoint. Of course the stock is currently passing my very first test of buyer exhaustion. Buyers stepped right in the day after the big gap and crap. The upper Bollinger Band (BB) has served as a firm support in a sign that buyers are still in control. I was also right about the likelihood I might not get into any options. I have left open an order on a put spread that remains unfilled… I will be closing it out soon and moving on from a trading perspective.


Technicals looking a little better for ICPT as buyers manage to maintain ICPT's gap up

Technicals looking a little better for ICPT as buyers manage to maintain ICPT’s gap up


King Digital Entertainment (KING)
Sometimes it is better to be lucky than smart… I wrote about my hesitation to jump back into KING ahead of earnings on a technical breakdown. What a close call. KING thoroughly disappointed on its very first earnings call as a public company. This implosion has demonstrated once again that skepticism is a good tool for filtering your eyes and ears in the stock market.


King Digital Entertainment blows up just as so many skeptics expected

King Digital Entertainment blows up just as so many skeptics expected


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long UVXY shares and puts, long SSO call options, long YELP puts, long CAT put spread and shares, net short the Australian dollar

Aug
12

A Technician’s Wary Eye On Intercept Pharmaceuticals, Inc.

written by Dr. Duru
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Intercept Pharmaceuticals, Inc. (ICPT) may indeed have the $5B blockbluster liver drug that RBC Capital Markets claimed in hiking its price target on the stock from $425 to $500. Gilead (GILD) may indeed buy out the company. Other analysts like Leerink Partners who raised its price target from $270 to $445, and Deutsche Bank who raised its price target from $395 to $500 may end up being correct. But on the day after ICPT reported earnings and announced the results of its FLINT trial of obeticholic acid in nonalcoholic steatohepatitis, the stock experienced a massive fade from the initial euphoria. Moreover, the the initial pop still placed the stock well below the highs of January’s amazing euphoria. That euphoria took the stock to and past current price targets. It is like the adrenaline shots are losing their impact…


A wild ride for ICPT

A wild ride for ICPT


Source: FreeStockCharts.com

Today, August 12, 2014, ICPT gapped up 46% but faded to end the day with “only” a 16.6% gain. If the ICPT story is still golden, there is certainly an amazing upside potential still left here. But the caution of a wary technician has me skeptical.

It is almost never a good sign when a stock sells off and/or fades despite unbridled (headline) enthusiasm. Moreover, if the risk of failure has now decreased in ICPT as RBC claims (from 40 to 30% chance of failure), then it seems odd that the stock is trading so far off the initial enthusiasm in January, much less unable to hold today’s highs. Contrast today’s behavior with January’s ability to hold most of the gains from the open AND plow even more buying power into the stock the very next day, both times well above the upper-Bollinger Band (overbought territory).

The failure in March to make new highs, followed by a 1-month loss of 50%, followed by churn with a bias lower, finally followed by a “gap and crap” all makes for a high likelihood of buyer exhaustion. The first test comes right away. Buyers must be able to keep the gap from closing and re-establish momentum. Otherwise, a resumption of the previous drift lower is in play.

Short interest also caught my eye. The ICPT bears clearly called the stock disastrously wrong as they ramped up positions going into January’s announcement. In subsequent months, shares short gradually got cut in half as bears licked their wounds. But oddly enough – as if they could not get enough – bears went right back to work and ramped up positions to fresh highs before pulling back a bit ahead of today’s news.


Are these stubborn bears just reckless or are they onto something...?

Are these stubborn bears just reckless or are they onto something…?


Source: Schaeffer’s Investment Research

The large swings in ICPT are a trader’s dream, whether bullish or bearish. The well-behaved technical patterns also provide strong trading potential. For example, note how the break below the 50-day moving average (DMA) confirmed the large swoon the week prior that created a failed retest of all-time highs. A classic bearish 1-2 combo. I wish I had been paying attention at the time. The bulls got some relief after ICPT retested the lows from January’s pop multiple times and each time bounced until July. After THAT failure, the 200DMA held up support. So while I think bears now hold the upper-hand again, they still have a lot to prove when (if?) ICPT eventually retests these support levels.

I am definitely not one to short this stock: I do not have that kind of capital to put at risk. I prefer options. The bid/ask spread on options are understandably wide, so it may not even be possible to trade this stock “safely” and at a reasonable price. If I could play options, I would go for a spread in order to eliminate a lot of the premium paid for the stock’s extremely high (implied) volatility. I would go for something like a $210/200 or $220/200. $200 appears to be a reasonable first target if buyer exhaustion eventually leads to a break of current support levels. Bulls looking for new entry points should at least wait to see whether they can get a better deal on a 50DMA retest around $245.

(Note, I would have included a review of insider transactions, but Yahoo! Finance does not have them available at this time).

Be careful out there!

Full disclosure: no positions

Aug
11

T2108 Update (August 11, 2014) – The NASDAQ Clears An Important Hurdle and Prepares A Path for the S&P 500

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

T2108 Status: 34.4%
VIX Status: 14.2%
General (Short-term) Trading Call: Selective buying for short-term trades. Fade rallies ONLY at or near resistance. Nuances explained in the recent T2108 Updates.
Active T2108 periods: Day #284 over 20% (includes day #280 at 20.01%), Day #8 under 30% and 40% (underperiods), Day #12 under 50%, Day #23 under 60%, Day #24 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
My eyes are open wide after reviewing today’s closing metrics. T2108 put on a spectacular show surging from 28% to 34% that seems to confirm last week’s bullish divergence. I even have just one minor caveat for today.


A huge and very bullish surge in T2108 suggests last week's bullish divergence is confirmed (reminder: blue line is oversold, red line is overbought)

A huge and very bullish surge in T2108 suggests last week’s bullish divergence is confirmed (reminder: blue line is oversold, red line is overbought)


The only caveat this time around is that the S&P 500 had a weak close. The index finished with a fade from its highs even as it broke above the current downtrend channel. Still, the S&P 500 seems all-clear for a test of the 50DMA as resistance. This is the spot where I will next give the bearish case a re-consideration. At T2108′s current pace, it is VERY possible my favorite indicator will actually approach overbought levels on such a retest (a perfect combination).


The S&P 500 tentatively moves above the downtrend channel, putting in play a critical retest of its 50DMA as resistance

The S&P 500 tentatively moves above the downtrend channel, putting in play a critical retest of its 50DMA as resistance


The path looks all clear for a 50DMA retest on the S&P 500 for several reasons. First of all, the NASDAQ has now CLEARED the hurdle over its 50DMA. Assuming this is a bullish breakout, a NASDAQ rising should help drag the S&P 500 higher…even if it is slow and grinding.


The NASDAQ pops over its 50DMA in an important, bullish move

The NASDAQ pops over its 50DMA in an important, bullish move


The VIX gapped down neatly below the 15.35 pivot point. Even though it is hovering over its 200DMA, I have no reason to believe from recent history that the 200DMA is a meaningful indicator for the VIX. Instead, the 50DMA and the bottom of the current trading channel for the VIX should be much more important. I am assuming that a VIX heading into those lows will accompany a higher S&P 500. A side-effect of the VIX’s 10% plunge is the end of the primary uptrend for ProShares Ultra VIX Short-Term Futures (UVXY). I bought a second small tranche of shares “just in case” I am flat out wrong about a 50DMA retest for the S&P 500. Otherwise, I am well-positioned with UVXY puts. It is still going to be a close call with my ProShares Ultra S&P500 (SSO) call options expiring this Friday.


The VIX drpos neatly below the 15.35 pivot point

The VIX drpos neatly below the 15.35 pivot point

UVXY breaks its primary uptrend and faces a test of its 50DMA

UVXY breaks its primary uptrend and faces a test of its 50DMA


In a surprising development, Marc Faber, one of the more famous permabears around, proclaimed on CNBC today that the market has recovered from a “fully oversold condition.” Interested in what indicator Faber uses, I watched the short video clip and read the accompanying article. Lo and behold, he used an indicator similar to T2108: the percentage of stocks trading above their 50-day moving average, available as $NYA50R in stockcharts.com.


Like T2108, the percentage of stocks trading above their 50DMAs took a nosedive in July

Like T2108, the percentage of stocks trading above their 50DMAs took a nosedive in July


Source: StockCharts.com

Stockcharts.com has a series of 50DMA indicators for the major indices. I have always wanted to transfer my analysis of T2108 to a 50DMA version, but Stockcharts.com does not allow data downloads and only shows historical data 3 years at a time (without a subscription). Once Worden2000 went free through FreeStockCharts.com, it made complete sense to stick with T2108.

Faber went on to make an assessment that fully agrees with the one I made when the S&P 500 sliced through the last bear/bull line and the 50DMA on the same day with a 2% loss (emphasis mine):

“…Now a rebound is underway in my opinion. But I doubt we will make new highs, and if we make new highs, maybe just with the very limited number of shares, because the technical damage is quite significant…”

Note well that Faber, probably unlike most committed bears, is contemplating the possibility of the market making new highs. He is describing a situation where the market makes marginal new highs with, say T2108, failing to keep pace, perhaps even declining. Stay tuned on that one. First let’s see what happens on a 50DMA retest for the S&P 500.



Finally, I conclude with an update on King Digital Entertainment (KING). I explained the trade on June 30th. At the time I concluded with the following:

“I am currently holding a single tranche of shares that I bought on the first day of trading that are now finally even. I bought a second tranche at a much better price (using patience that was more appropriate for the extreme skepticism thrown at KING) and sold that for a nice profit on a nice pop two days later. The options trade has thrown my core hold strategy for a loop because it produces a good possibility that the stock could burn out buyers in the next two weeks. I wanted to hold through earnings as I think the market will get positively surprised by the results: KING will remind the market that it is actually a profitable company with a healthy business. Stay tuned on this one.”

Sure enough, buyers are burning out ahead of earnings. I would try another shot here given the market’s bullish tone, but I am too leery of the 50DMA breakdown and persistent pre-earnings weakness. KING reports earnings after market on Tuesday, August 12th. I will be “on watch.” Short interest has continued to climb with shorts in KING at 19.7% of float, about 10% higher since I wrote about KING.


KING breaks down ahead of earnings

KING breaks down ahead of earnings


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long UVXY shares and puts, long SSO call options

Aug
10

The Canadian Dollar Hangs in the Balance Between Weak Jobs Growth and Strong High-End Housing Demand

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 14, 2014. Click here to read the entire piece.)

Employment picture remains lackluster

On Friday, Statistics Canada painted another disappointing jobs picture for the country. Instead of the 20,000 additional jobs expected by the “consensus” for June, the Canadian economy lost 9,400 jobs. This means that year-over-year, the Canadian economy has only added 72,000 jobs, a growth rate of 0.4% that Statistics Canada described as “…the lowest year-over-year growth rate since February 2010, when year-over-year employment growth resumed following the 2008-2009 labour market downturn.”

{snip}


After getting back to even for the year, the Canadian dollar falls against the U.S. dollar in response to a much weaker than expected employment report

After getting back to even for the year, the Canadian dollar falls against the U.S. dollar in response to a much weaker than expected employment report


Source: FreeStockCharts.com

{snip}

Poor jobs growth is not slowing down the high-end of Canada’s housing market

At the same time that employment remains moribund, the high-end of Canada’s housing market is red hot as reported in the 2014 Mid-Year Top-Tier Real Estate Report for Canada produced by Sotheby’s International Realty Canada. {snip}

This dynamic represents a slowly increasing dilemma for monetary policy in slow-growth economies (whether it is GDP and/or employment), and something where I have decided to spend more of my attention. {snip}

The Sotheby’s report summarizes some amazingly strong year-over-year growth numbers for residential real estate units from the first half of 2013 to the first half of 2014 (sorted in descending order of growth rates):

{snip}


Vancouver and Toronto lead Canada's high-end markets for unit sales growth

Vancouver and Toronto lead Canada’s high-end markets for unit sales growth


Presumably, some of this robust growth comes from international sales. {snip}

{snip}


Comparison of High-End Housing Sales to Overall Market (2013)

Comparison of High-End Housing Sales to Overall Market (2013)


{snip}


Comparison of Average Housing Price in Major Canadian Metro Areas Versus the Share of Sales from Homes Priced At Least $1M Canadian

Comparison of Average Housing Price in Major Canadian Metro Areas Versus the Share of Sales from Homes Priced At Least $1M Canadian


{snip} Regardless, the main point here is that the high-end is small enough for Canada’s central bank to more or less ignore the heat coming from this side of the market. The dichotomy between slow jobs growth and strong growth in the high-end of the housing market can continue for quite some time. {snip}

{snip}


Single-Family Detached Residential Housing Comparison: Starts Versus MLS Sales of Homes Priced At Least $1M Canadian

Single-Family Detached Residential Housing Comparison: Starts Versus MLS Sales of Homes Priced At Least $1M Canadian


Source for all charts: 2014 Mid-Year Top-Tier Real Estate Report for Canada produced by Sotheby’s International Realty Canada and Canada Mortgage and Housing Corporation’s Housing Market Outlook for 2014 to 2105

Putting all the pieces together
Assuming a soft landing for Canada’s overall housing market, the Bank of Canada will have scope and reason to maintain accommodative policies in the hopes of supporting the disappointing labor market. The sudden rebound in the Canadian dollar this year gives the Canadian central bank the scope for keeping rates low in the hopes of supporting stronger growth in exports through a weaker currency. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on July 14, 2014. Click here to read the entire piece.)

Full disclosure: long USD/CAD

Aug
10

A Subtle Change In Tone As the U.S. Dollar Achieves Year-to-Date Highs

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on July 31, 2014. Click here to read the entire piece.)

The U.S. dollar index (UUP) has increased steadily all of July. The dollar index has gained 2% month-to-date. This matches a similar gain from the dollar’s last low in early May to a peak in mid-June. Stringing these two streaks together, along with a marginal new high for 2014, and it suddenly seems like the U.S. dollar is experiencing a change in tone, albeit subtle.

Overall, the dollar remains stuck in an extended trading range; it is far too early to speculate on a breakout. {snip}


The dollar is almost running in a full sprint now

The dollar is almost running in a full sprint now

Overall, the dollar has essentially gone nowhere the last 2 1/2 years

Overall, the dollar has essentially gone nowhere the last 2 1/2 years


Source: FreeStockCharts.com

This current run is important because many analysts had expected 2014 to be the dollar’s year. U.S. economic growth was supposed to lead global growth but a harsh winter helped stunt those expectations.

{snip}

I have also pounded the table for the U.S. dollar especially against the euro (FXE), yen (FXY), and Canadian dollar (FXC). A slide in the euro long-awaited by the European Central Bank (ECB) seems to be finally underway. {snip}


After an extended consolidation period, the U.S. dollar finally looks poised to resume its 2013 strength against the yen

After an extended consolidation period, the U.S. dollar finally looks poised to resume its 2013 strength against the yen

The British pound is putting a squeeze on the Japanese yen - an imminent breakout?

The British pound is putting a squeeze on the Japanese yen – an imminent breakout?


Interestingly, the Australian dollar (FXA) matched the Japanese yen in weakness. It looks like the Australian dollar has finally lost its upward momentum.


The Australian dollar finally looks like it has lost its upward lift against the U.S. dollar

The Australian dollar finally looks like it has lost its upward lift against the U.S. dollar


Source for charts: FreeStockCharts.com

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on July 31, 2014. Click here to read the entire piece.)

Full disclosure: net long the U.S. dollar

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