ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Oct
20

The Apple Pre-Earnings Trade: October, 2014 Edition

written by Dr. Duru
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My favorite part of earnings season is typically the Apple (AAPL) earnings call. Apple’s earnings attracts out-sized amount of attention, and it is a time when I get to recalibrate my trading models.

My apologies to regular readers who were expecting a more timely update of the pre-earnings trading model for AAPL. I simply ran out of time before the bell. I did manage to do a quick review of the data and tweet this:


The rest of this post is a quick review of what I saw.

As a reminder, the main point of the pre-earnings trade is to determine whether Apple’s price and stock action going into earnings can suggest anything about the behavior of the stock in the day immediately following earnings. These relationships are only potentially interesting because Apple can produce some stellar one-day, post-earnings results with a very strong upside bias.


Distribution of One-Day Price Changes After Apple Reports Earnings (Jan, 2007 to Jul, 2014)

Distribution of One-Day Price Changes After Apple Reports Earnings
(Jan, 2007 to Jul, 2014)


The most common of the price ranges is between 2 and 4% (exclusive of 2%, inclusive of 4%). Overall, since 2007, AAPL has a strong bias to trade UP in the day after earnings: 19 out of 32 tries or 61%.

That alone is powerful enough information: traders could just bet on upside every earnings and get a nifty 3 out of 5 win rate. The model could be even more powerful if it could identify the times that are best to bet on upside and the times to bet on downside. In fact, there ARE situations where AAPL has displayed distinct patterns.

April and July are the best months for making post-earnings bets.


Number of Positive Versus Negative One-Day Reactions to Apple's Earnings By Month of the Year (Since 2007)

Number of Positive Versus Negative One-Day Reactions to Apple’s Earnings By Month of the Year (Since 2007)


I also look to see whether the price changes in AAPL’s stock going into earnings indicate any additional information.

Since 2012, a distinct shift happened in AAPL where the market tends to sell AAPL on average in the 7 and 14 days leading up to earnings. I have yet to use this information to FADE AAPL rallies ahead of earnings, but it could be about time that I try (in combination and confirmation with the Apple Trading Model of course).

Click image to see larger view…


Apple's Average Daily Price Change During the 7 and 14 Days Prior to Earnings Since 2007

Apple’s Average Daily Price Change During the 7 and 14 Days Prior to Earnings Since 2007


This time around, AAPL was pretty much stuck in a trading range except for a brief breakdown period. The average 7 and 14-day price changes for the October, 2014 earnings were BOTH 0%! AAPL even managed to exactly test 50DMA ressitance/support going into earnings almost in the middle of the current consolidation area.


A locked battle between buyers and sellers ends right at the 50DMA...AND the $100 mark...ahead of October, 2014 earnings

A locked battle between buyers and sellers ends right at the 50DMA…AND the $100 mark…ahead of October, 2014 earnings


Source: FreeStockCharts.com

Because of the flat performance going into earnings, I could not use the tendency toward inverse correlation between the average price change going into earnings and the price performance on the day following earnings.

Click image to see larger view…


Correlation of Apple's 14, 7, and 1-Day Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change

Correlation of Apple’s 14, 7, and 1-Day Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change


AAPL closed the day with a very strong 2.1% gain the day ahead of earnings. So, according to the last chart showing the correlation of the pre-earnings and the post-earnings days of price changes, AAPL should sell-off after this October’s earnings. The first two charts are not usable for the October earnings.

On a quarterly basis, it turns out that only April earnings delivers a very strong correlation of pre and post-earnings price changes. The other months under different scenarios are quite mixed.

Click image to see larger view…


Quarterly Correlation of Apple's 14, 7, and 1-Day Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change

Quarterly Correlation of Apple’s 14, 7, and 1-Day Average Daily Pre-Earnings Price Change to the One-Day Post-Earnings Price Change


So, net-net, the price relationships left me with a very mixed picture. So I turned to some sentiment indicators to try to break the tie. Unfortunately, sentiment is quite mixed as well. However, the soaring put/call open interest ratio may be the most important indicator below. All snapshots are from Schaeffer’s Investment Research.

First, analysts are very bullish: 22 strong buys, 5 buys, 6 holds, and no sells or strong sells.

Next, shorts are almost non-existent and at lows unmatched in at least two years.


Shorts are almost non-existent in Apple with shares short even at a 2+ year low

Shorts are almost non-existent in Apple with shares short even at a 2+ year low


Finally, traders have sent the put/call ratio nearly straight up.

Bears have ramped up bets against AAPL over the past 3 months as AAPL's stock went almost nowhere

Bears have ramped up bets against AAPL over the past 3 months as AAPL’s stock went almost nowhere


Although the sentiment signals are mixed, the ramp in the put/call open interest ratio really caught my attention. It tells me that a lot of people are betting against Apple and/or sitting on well-protected positions. I think more of the latter since Apple’s stock has been stuck in a trading range. So, IF Apple can maintain bullish momentum post-earnings, I am inclined to think the rally will be sustained.

This analysis led me to the mixed position indicated in the tweet above. I grabbed a fistful of weekly $97 puts for the case of AAPL severely disappointing. Given the market is fresh out of an oversold period, I expected Apple to lose at least 5% in the case of a big disappointment as sellers rushed back in. For example, see what happened to IBM!

I balanced the bearish bet call spreads expiring the following Friday. As I noted above, if AAPL gets a post-earnings thumbs up, I expect the stock to go on a sustained run-up. It is very likely that the quick breakdown of the consolidation period took out stops and washed out the weakest hands in AAPL. With positive news, those sellers will rush back in as buyers and/or the strong hands will be quite content to keep riding the stock higher. I bought a call spread mainly because I did not want to pay pre-earnings premium on both sides of the trade. Moreover, my suspicion of the strong pre-earnings move led me to expect that odds were slightly in favor of downside.

I hate making such a wishy-washy play, but it seemed best given the risk/reward outlook. It is harder to make good profits given the upside is capped by the spread, and I pay more in commissions. Anyway, time to see what happens. At the time of writing, AAPL produced a positive result but the stock was only up about 1% in after-market trading.

Be careful out there!

Full disclosure: long AAPL puts and AAPL call spread

Oct
18

T2108 Update (October 17, 2014) – The Technical Case for A Bottom

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: 21.3% (ends 6-day oversold period, the 3rd oversold period in 12 trading days)
T2107 Status: 34.2%
VIX Status: 22.0 (gap down from failed attempt to hold 2012 highs, 21 is the buy signal)
General (Short-term) Trading Call: Shorts should exit when/if 200DMA resistance gives way (should have already taken profits during the oversold period!); aggressive traders OK to take some profits on longs bought during oversold period; conservative traders can continue to wait for 200DMA resistance to fail, not worth the risk to enter upon end of oversold period. See below for details.
Active T2108 periods: Day #1 over 20% (ends 6-day oversold period), Day #19 under 30%, Day #25 under 40%, Day #27 under 50%, Day #29 under 60%, Day #71 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
Sometimes, good technical fundamentals are exactly what you need to maximize your trading…


I responded but to the wrong tweet…


And in turn, I had THIS earlier tweet on my mind when I sent my response.


It was not clear to me what technical resistance concerned the voodoo doctors, but I believe MOST technically-minded people are singularly focused on the 200-day moving averages (DMAs) and now the flatline levels for 2014. I am of course even more focused on T2108. Let’s dive right in to the story with charts.

This was a day to celebrate as the oversold period finally ended a particularly difficult period of churn. I am going to lay out a case for a sustainable bottom but not THE absolute bottom.

T2108 finally emerged from oversold territory, but it wavered into the close. I half-worried it would sink again under the 20% oversold threshold. Big relief over small favors.


The last of three oversold periods finally ends at 6 days

The last of three oversold periods finally ends at 6 days


The pattern is VERY sloppy, but it looks like T2108 is finally stabilizing. I do not think it is going lower anytime soon even if T2108 drops into oversold territory again. Recall that the period of seasonal weakness for stocks generally ends with October. (I will soon trot out the Black Friday analysis to make this point even more poignant).

The percentage of stocks trading above their 200-day moving averages (DMAs), T2107, still has a downtrend to wrestle, but at least it has strung together two very solid days for the first time since August.


T2107 is also attempting to bottom

T2107 is also attempting to bottom


Both the S&P 500 (SPY) and the NASDAQ (QQQ) struggled as expected following Wednesday’s steep sell-off and equally steep comeback. However, “the line in the sand” held firm and the indices printed their best 2-day performances in a very long time.


The S&P 500 rallies out of oversold conditions but essentially fails to break through 200DMA resistance

The S&P 500 rallies out of oversold conditions but essentially fails to break through 200DMA resistance

The NASDAQ gaps away from its lows but falls short at 200DMA ressitance

The NASDAQ gaps away from its lows but falls short at 200DMA ressitance


The major indices continue to face similar technical challenges as 200DMA resistance held very firm for both. This is clearly a setback, but I am also not surprised that the indices were unable to both hurdle out of oversold conditions AND conquer key technical resistance all on the same day. The proximity of the end of the oversold period and resistance at the 200DMA is exactly the scenario I warned “conservative traders” about. There is little point in buying now hoping that the markets overcome resistance before you lose your nerve. The better risk/reward is still in the waiting.

Further supporting a bottom is what looks like a blow-off top of volatility. Note very well that the VIX failed to hold above 2012 highs TWICE and on the third day it gapped down in what looks like an exhaustion of fear. These movements translated into some very bearish fade action on UVXY. I flagged this potential in the last T2108 Update.


The VIX fails to hold 2012 highs - a bullish sign

The VIX fails to hold 2012 highs – a bullish sign

Similarly, UVXY fails to hold 200DMA support

Similarly, UVXY fails to hold 200DMA support


Note very well I am NOT claiming the markets will no longer be volatile. I think the days of ultra-low volatility are decidedly over for now. I AM expecting a good respite from growing or even accelerating volatility.

The currency markets are also indicating subsiding angst. My favorite indicator on this score – the Australian dollar versus the Japanese yen (AUD/JPY) – would simply not stay down this past week. While the downtrend is still in place, sellers have not been able to maintain a hold on the breakdown.


The Australian dollar is starting to hold its own against the Japanese yen even as the overall downtrend from recent highs remains intact

The Australian dollar is starting to hold its own against the Japanese yen even as the overall downtrend from recent highs remains intact


Overall, these collection of signal says at least that sellers and fear are tiring. Since volatility is likely to remain elevated, it is very likely that lows could be retested in the near future before the market is able to make a firm run through resistance. Buyers and bulls still have a LOT to prove going forward.

Now I turn the storytelling over to some tell-tale individual stocks.

I have not had a lot to say about Apple (AAPL) in recent days and weeks as the stock mainly churns about in a range. This week, on October 15th, AAPL finally broke down with follow-through seling before buyers came to the rescue. After a gap down and a gap up, AAPL is barely clinging to the bottom edge of the trading range. It is also now travelling in a budding downtrend. AAPL has remained overall resilient during the sell-off in the last month. I am watching closely as I think a fresh sell-off in AAPL could flag fresh weakness in market sentiment. Similarly, a resumption of the previous uptrend would be a very bullish development. Earnings are coming up after-market October 20th – I hope to get a pre-earnings trade review done soon.


AAPL clings to the bottom of its recent trading range

AAPL clings to the bottom of its recent trading range


I am still leery of the apparent triple top in Baidu (BIDU), but this week’s impressive bounce from a bullish engulfing pattern has me thinking BIDU may garner enough buying support to break through resistance. Next stop is the 50-day moving average.


BIDU makes a statement with strong buying volume o the heels of a bullish engulfing pattern

BIDU makes a statement with strong buying volume o the heels of a bullish engulfing pattern


Caterpillar, Inc. (CAT) finally broke its steep (and primary) downtrend. The 2011 close may indeed end up being the bottom for now. Earnings will occur before the open on October 24th – I will be watching the reaction as a key “final” confirmation of market sentiment. In particular, a clean breakdown below the 2011 close opens up the possibility of a complete reversal of the 2013 breakout back to around $85. I took profits on my CAT calls and switched back to a put spread as a “just in case” CAT’s earnings are a complete disaster and help take the market for another loop.


Caterpillar tries to show signs of life.Caterpillar tries to show signs of life.

Caterpillar tries to show signs of life.


The disaster of the week had to be Netflix (NFLX). However, the washout of sellers may turn this collapse into an opportunity assuming the oversold bounce continues from current levels. I last wrote extensively about NFLX in early July. I remained stubborn with my short position backed up with periodic hedges with call spreads (amazingly, all but one I closed out with good gains). My stubbornness paid off big-time as NFLX severely disappointed on earnings this past week.


Netflix collapses BUT it still holds 2014 lows

Netflix collapses BUT it still holds 2014 lows


I closed out my short position in after hours trading because I did not want to deal with what I assumed would be a rush of buying and short-covering at market open. Sure enough, the opportunity now is in the high volume bounce from lows (note the high volume BEFORE earnings – someone “knew” something). First, NFLX is so far below its lower-Bollinger Band (BB) that I fully expect it to tag the lower-BB before resuming any downward momentum. I flipped in and out of a long position on Friday with that expectation in mind (still kicking myself that I did not move fast enough on Thursday to do the same). The next opportunity is that IF NFLX somehow manages to make a fresh post-earnings low, the move will be a resounding confirmation of a new bearish run for NFLX. I continue to stay on high alert on NFLX.

There are no absolute cases for bottoms in these individual stocks, just encouraging signs. They are each making valiant attempts to bounce from bottoms which could be tell-tale signs to confirm the battle that will now unfold between 200DMA resistance and recent lows for the S&P 500 and the NASDAQ. For tech, AAPL needs to hold its trading range. For industrials, CAT needs to hold the 2011 low. If the market manages to plunge into a new oversold period that takes out the current lows in the indices, we will then know that “this time is indeed different.” As always, I take this one step at a time.

The final element of bottom-fishing is the market’s reaction to bad news. As I noted in the last T2108 Update, the market abruptly moved from caring about nothing to caring about everything. Most investors and traders may have missed it, but a major washout of negative sentiment may have occurred well before the market opened on Thursday, October 16th.


It turns out that Putin was NOT threatening to lob nuclear weapons. Instead, he made a thinly veiled threat referencing the dangers of nuclear powers saber-rattling over Ukraine. Moreover, this was the SECOND time Putin made such references. Putin made it clear to the world that Russia will not be bowed by attempts to isolate it. I am not sure who still pays attention to zerohedge beside Kass, permabears, “apocalypsists”, and various fear-mongerers, but I feel for anyone who panicked at that headline or similar ones and joined the stampede in thin pre-market trading. They got an extreme case of whiplash by the close when the S&P 500 ended the day flat after some gyrations. Even Kass bought into that panic as he made clear later in the day with his recount of his fast-trigger day-trading. His reference to half-regret for selling too early was from a position he put on accepting shares from a panicking market.

Anyone following the oversold indicators would have known the extreme danger of selling short into a further extreme in sentiment. They should have also known that selling into a panic rarely produces satisfactory results. However, I am honestly not even sure whether futures really “collapsed.” When I look at currency markets, I see absolutely no evidence of a market in panic. (A reminder of why it is useful to have multiple technical signals that can confirm each other). Anyway, whatever happened, I like this little example of market sentiment in action. I hope my regular readers will never make trading or investing decisions to satisfy any urges to panic. Heck, please NEVER panic if you can help it!

I conclude with a summary of trading strategies for my three trading archetypes:

The conservative “wait and see” trade
Conservative traders should continue to stay happily on the sidelines. T2108 has emerged from oversold conditions, but the indices are too close to important 200DMA resistance to make trades/investments worth the risk. Wait now for a confirmed close ABOVE the 200DMAs.

The growling bear trade
Stubborn bears who have held through all the oversold churn can still sit on their hands. If they followed the oversold trading rules, they can be even more patient having already taken a bunch of profits during the oversold period. Even though I think a sustainable bottom is in place, the bears still hold the upper-hand on sentiment and on the technicals. Buyers and bulls still have a LOT of repair work to accomplish.

The aggressive trade
Again, I fall mainly in this camp even as I use the logic of the growling bear to justify the hedges. The aggressive trader follows the T2108 rules to be a strict contrarian against extremes in fear and complacency. This is the fear stage. I bought during the oversold churn and the emergence from oversold conditions gave me an opportunity to finally take some profits on SSO call options. Given the extensive length of the oversold period, I switched to SSO shares for my “hold.” This last oversold period was much longer than usual, so I had to part with a large fistful of SSO calls that expired worthless. Only profits from hedges and the successes from the first two oversold periods eased my pain on those!

This last difficult oversold period does not change my strategy one bit because I am focused on the overall history of T2108 behavior. I am holding the SSO shares in the expectation that the market will “eventually” resume a run-up toward overbought conditions. This could of course change if the market makes fresh lows. In the shorter-term, I am still holding onto some put options on UVXY.

Jim Cramer of TheStreet.com and CNBC fame provided a great trading analogy in his fantasy football predictions for this weekend: go contrary to the grain – don’t give up on star fantasy football players just as they are about to perform.



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 UVXY puts, net short the Australian dollar, long CAT put spread

Oct
16

T2108 Update (October 15, 2014) – Buyers FINALLY Draw A Line in the Sand

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: 17.2% (5th day of 3rd oversold period in last 11 trading days)
T2107 Status: 30.1% (low was 25.4%!)
VIX Status: 26.3 (intraday high was 31.1, surpassing the 2012 high!)
General (Short-term) Trading Call: Continue reducing shorts – although aggressive traders can hold remaining shorts until S&P 500 recovers and closes above its 200DMA again; aggressive traders could have added to or started positions when VIX cracked the 2012 high although, per earlier advice, waiting until the VIX confirms the end of momentum makes a LOT of sense now; conservative traders can continue to wait until T2108 exits oversold conditions OR the S&P 500 closes above its 200DMA. See below for more details and explanations
Active T2108 periods: Day #5 under 20% (5th day of oversold period), Day #17 under 30%, Day #23 under 40%, Day #25 under 50%, Day #27 under 60%, Day #69 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 bulls and buyers FINALLY drew a line in the sand today. It was a dramatic day of sell-off and recovery. The advance had to reach so far and so long though, I will not be surprised to see a lot of churn back and forth instead of a moonshot back to overhead resistance. Pictures tell this story well, so let’s dive right in.

BOTH the S&P 500 (SPY) and the NASDAQ (QQQ) went negative for the year at today’s lows. The stock market can be a cruel beast as it takes away in a flash what took months to build.


The S&P 500 plunged as much as 3% on the day before making a dramatic comeback

The S&P 500 plunged as much as 3% on the day before making a dramatic comeback

Using SPY to show the punch through the year-to-date flatline

Using SPY to show the punch through the year-to-date flatline

On an intraday basis, a hammer-like day looks like a "V" - eager sellers in the first half of the day, and eager buyers to take their place the rest of the way

On an intraday basis, a hammer-like day looks like a “V” – eager sellers in the first half of the day, and eager buyers to take their place the rest of the way

Buyers on the QQQ put on a valiant fight to keep the ETF "above water"

Buyers on the QQQ put on a valiant fight to keep the ETF “above water”


To me, that was an insane plunge below the lower-Bollinger Band (BB), especially for the S&P 500. It was an awesome display of the fear that has gripped the market. The equally incredible comeback was also a sight to behold. As awful as it feels, the trading opportunities are too numerous to count…for bears AND bulls.

As you can imagine, the VIX also put on an awesome display. It cracked the 2012 high before getting faded hard to end the day. Like the indices, the VIX also stretched too far away from its Bollinger Band. So in the span of just 3 months, the VIX has gone from 7 1/2 year lows to near 4-year highs (not shown in the chart below). As I heard one commentator say…the market has sharply shifted from worrying about NOTHING to worrying about EVERYTHING. (For more on the prospects for volatility, I strongly recommend you read my post “Stern Warnings To Financial Markets“).


The volatility index has almost gone parabolic. An "end" may finally be on the horizon.

The volatility index has almost gone parabolic. An “end” may finally be on the horizon.


The revenge of the ProShares Ultra VIX Short-Term Futures (UVXY) continues. Amazingly, not only has UVXY managed to printed a higher high, but also it has traded above its 200DMA twice in the past two days. I have duly noted the failure to CLOSE above this important trendline. This failure could also be signalling the run-up is closer to its end than its beginning. Many traders who chased UVXY higher are already sitting on nasty 1-day losses of as much as 20%. They should be quite eager to get out. I hope no regular reader of mine was chasing anything to the extremes today!


The revenge of the ProShares Ultra VIX Short-Term Futures (UVXY) continues

The revenge of the ProShares Ultra VIX Short-Term Futures (UVXY) continues


Another sliver of positivity came from the currency market where the U.S. dollar (UUP) went into fresh convulsions. The currency index has certainly lost its momentum for now, and it set in motion a dizzying array of vacillations on the day.


The U.S. dollar seems to have finally blown a top for now as upward momentum comes to a screeching halt

The U.S. dollar seems to have finally blown a top for now as upward momentum comes to a screeching halt


I wish I could spend the hours needed to untangle the many intricate things going on in the currency market right now. Instead, I will focus in on the Australian dollar (FXA) and the Japanese yen (FXY) again. When the indices plunged to their depths, AUD/JPY accompanied them in a loud statement of affirmation and confirmation. AUD/JPY punched to fresh lows and created solid bearish confirmation. But the subsequent bounce just as quickly erased away the hurt feelings. On the margin, AUD/JPY is providing hope that the lows are here. I continue to watch this closely.


The Australian dollar continues to confirm the breakdown in the stock market, but some kind of bottom may finally be in the making

The Australian dollar continues to confirm the breakdown in the stock market, but some kind of bottom may finally be in the making


Many traders noted the impressive relative strength on iShares Russell 2000 (IWM). It actually ended the day with a GAIN of 1.0%. Very impressive for such a day of otherwise vicious selling. However, not even the resilient small caps are out of the woods until they break the vicious downward channel that is in place between the Bollinger Bands. Let’s say a close of 108 or so brings some sunshine back in. Note the high volume on the day – a good sign of a potential washout of sellers.


Are small caps actually ready to lead the way higher!?!?

Are small caps actually ready to lead the way higher!?!?


Adding to a bit of sunshine, T2108 may have printed a bit of bullish divergence. Even when the stock market’s selling was at its worst, my favorite technical indicator refused to print a new low for this cycle. Granted, at these levels, it gets harder and harder to find stocks to plunge below their 40DMAs, but we have to take positive signs where we can get them. A positive close would have sealed the deal on bullish divergence.


T2108 may be adding to the signs of bottoming

T2108 may be adding to the signs of bottoming


T2107, the percentage of stocks trading above their 200DMAs, was not so optimistic. It plunged to a fresh low, levels last seen almost 3 years ago, before joining the bullish rush in the afternoon’s trading session. Theoretically, T2107 could still fall a LOT further. While T2108 has churned in a wide range this month, T2107 has broken down from a previous period of consolidation.


Sellers keep finding fresh stocks to shoot off their longer-term trends supported by the 200DMA

Sellers keep finding fresh stocks to shoot off their longer-term trends supported by the 200DMA


Now it is time to weave together these indicators into the “so what?” I will try by referring back to the three trading themes (or memes) I introduced in the last T2108 Update.

The aggressive “I don’t want to miss the rally” trade
I fall most closely into this camp, so I will lead off with this aggressive theme.

It has been tough sledding going for gold as the market has failed every challenge during this vicious oversold period. At each VIX hurdle, I pulled the trigger for some ProShares Ultra S&P500 (SSO) call options, anticipating the same kind of fantastic reward I received from the first of the three oversold periods. No luck. With the benefit of hindsight, I should have held my UVXY shares given my overall bullish outlook on volatility. I just never imagined the VIX would go so high. Yes, I know that uncertainty is exactly why I should have held onto UVXY as a valuable hedge.

I see a lot more positives than negatives now. Signs are converging toward a bounce IF T2107 can avoid fresh lows. It does not appear T2108 will go any lower for this cycle. IWB is very encouraging as a sign of relative strength. At the time of typing, the currency market is still cooperating with AUD/JPY staying aloft. STILL, I am now more comfortable waiting for a notable pullback in the VIX before getting aggressive again.

I have become so cautious that in the last round I only bought a few SSO call options (thank goodness). And even with today’s monster move, I did not get as aggressive as my rule book says I should. Instead, I spread out a few bets. One example of such a bet was, gasp, Caterpillar (CAT). My earlier prediction of a freefall has played out even “better” than I could have expected. After selling my latest round of puts, I realized that CAT was setting up for another bounce toward the upward limit of its downward channel. After CAT bounced back above its 2011 close, I made the move for call options. I thankfully ended the day solidly green on this position. Instead of selling right away, I decided to wait at least one more day to see whether CAT will continue the run.


CAT has traded down in a near freefall in a very well-defined channel

CAT has traded down in a near freefall in a very well-defined channel


I will get aggressive again ONLY once I see the VIX make a confirmation move downward. Currently, that would be a move below 21. This bar moves up the higher the VIX trades. Of course, such a pullback will likely place T2108 out of oversold territory…melding me right into the conservative trading rules.

The conservative “wait and see” trade
Conservative traders continue to stay happily on the sidelines. The rules remain the same: do not even think of buying until T2108 closes outside of oversold territory. Even better, perhaps wait until the S&P 500 can recapture its 200DMA. At the current pace, the end of this oversold period will likely occur perilously close to 2000DMA resistance.

The growling bear trade
Stubborn bears who have held through all the oversold churn are still hooting, howling, and growling in glee. They are still in the driver’s seat with the 200DMA breakdown. However, if they have not been covering any shorts, their greed is pushing them dangerously close to a payback moment. The bounce from today’s depths are sending bears a big yellow caution sign. Regardless, the 200DMA provides a very clear dividing line between pressing the bearish case and abandoning ship.

Conclusion
Buyers and bulls finally managed to draw a line in the sand with the lows on Wednesday. Advantage bulls until/unless this low melts away.

All traders should be watching the clock. This oversold period is now 5 days long. Now that the duration is sailing past the median and mean duration for an oversold period, I am now watching for the next milestone: 10 days. After 10 trading days in oversold territory, the expected performance of the S&P 500 turns decidedly negative. Stay tuned!


S&P 500 Performance By T2108 Duration Below the 20% Threshold (Oversold)

S&P 500 Performance By T2108 Duration Below the 20% Threshold (Oversold)


And if you need some feel-good words (bears excluded of course), here is an assessment on the U.S. economy from Wells Fargo’s (WFC) Chairman and CEO, John Stumpf. This quote is from the Seeking Alpha transcripts of Q3 2014 Results:

“While the path to a full economic recovery remains uneven, including the volatility we’ve seen recently and the current low rate environment provides some challenges, I am very optimistic about the future. The U.S. economy added 248,000 jobs last month, the 48 straight monthly employment gain tying the record for the longest consecutive string of job gains ever.

There are currently more job openings than at any time since early 2001. Household wealth is at an all-time high and after years of paying down debt, the consumer debt burden is at the lowest level in over 30 years. Consumers are now better positioned for increased spending and borrowing.

The U.S. economy is also benefiting from the increasing domestic oil and gas productions, which is at the highest level in almost 30 years and rising fast, up 14% over the past year. Fiscal conditions have improved at all levels of government, and government payrolls are once again on the rise for the first time this decade.”

Hey, I even caught a blurb on the news Wednesday morning the that U.S. budget deficit is actually back to 2007 levels…

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 call options and shares, long UVXY puts, net short the Australian dollar, long CAT calls

Oct
14

An Unusual View of Timing Panic (Regarding Oil Prices)

written by Dr. Duru
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This is a “quick hit” post – too long for a tweet, but not a complete blog post either. Maybe I will call these quickits.

Anyway, I caught a snippet on CNBC this morning discussing the plunge in oil prices. The on-air personality recounted a conversation she had with an oil analyst. The oil analyst assured her that people should not panic because the current drop has not yet reached the depths of the financial crisis.

Oil is in the $80s now. During the financial crisis, oil went from $140 to $33. (Hard to fathom now, right??!). So, the reassurance is that oil has not yet gone into the $30s and that the time to panic will only come at some lower price. My view is this: by the time oil gets to the $30s, the time to panic has long gone. At the same, there can be no reassurance in prices just because they have yet to reach some rock-bottom, panic level. If oil does manage to crash again, we should be thinking about buying, not panicking.

I am not sure what oil price is the right panic level, but I am pretty sure that panic never helped anyone succeed.


This monthly view of PowerShares DB Oil ETF (DBO) suggests that the price of oil  for the last five years has mainly been a lot of noise. Is the time to buy already upon us?

This monthly view of PowerShares DB Oil ETF (DBO) suggests that the price of oil for the last five years has mainly been a lot of noise. Is the time to buy already upon us?


Source: FreeStockCharts.com

Note that the International Energy Agency is already “panicking” about oil prices. From Reuters today in “IEA sees 2015 oil demand growth much lower, supply hitting prices“:

“Demand for oil in 2015 will grow far slower than previously forecast as global economies remain weak, the International Energy Agency said on Tuesday, and prices may extend their sharp fall so long as OPEC shows no sign of countering a supply surge…

…Global oil supply rose by almost 910,000 bpd in September to 93.8 million bpd, almost 2.8 million bpd higher than the previous year.

In a rare IEA comment on OPEC’s strategy, its chief analyst Antoine Halff said the producer group may no longer be willing or able to adjust production as the market has been transformed by the U.S. shale oil revolution.”

Be careful out there!

Full disclosure: no positions

Oct
13

T2108 Update (October 13, 2014) – A Bearish Cold Front Takes Over

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: 13.5% (3rd day of 3rd oversold period in last 9 trading days, a new 38-month closing low)
T2107 Status: 30.1% (a fresh 34-month low)
VIX Status: 21.2 (intraday high was a 22-month high)
General (Short-term) Trading Call: Continue reducing shorts – although aggressive traders can hold remaining shorts until S&P 500 recovers closes above its 200DMA again; aggressive traders should have added to positions when VIX cracked the new high (yes, yet again!); conservative traders can continue to wait until T2108 exits oversold conditions OR closes above its 200DMA. There are several important caveats and nuances here, so please read below for more details.
Active T2108 periods: Day #3 under 20% (3nd day of oversold period), Day #15 under 30%, Day #21 under 40%, Day #23 under 50%, Day #25 under 60%, Day #67 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
Suddenly, it has become MUCH easier to get bearish and stay bearish.

All seemed to be going well for another oversold bounce. The Australian dollar was on the rebound and seemed to verify important bottoms. (At the time of writing, the Australian dollar is making a fresh charge higher and given me renewed expectations for a bullish run in stocks). The S&P 500 did not gap up, but it at least opened in the green. Early selling pressure was erased in short order and led even to a new high of the day seemingly safely perched above 200DMA support. But in selling reminiscent of vicious bear markets, everything fell apart in the last hour of trading.


The S&P 500 makes a very bearish break of its 200DMA, the first time since November, 2012

The S&P 500 makes a very bearish break of its 200DMA, the first time since November, 2012

The market made two attempts to hold 200DMA support before it all fell apart into the close (5-minute chart)

The market made two attempts to hold 200DMA support before it all fell apart into the close (5-minute chart)

The NASDAQ confirmed its 200DMA breakdown with another day of selling

The NASDAQ confirmed its 200DMA breakdown with another day of selling


This is a VERY ugly and bearish picture. No oversold T2108 analysis can smooth this picture over! So now what? Now that the bears have fully taken a hold of the market, trading has become both trickier and more simple. Trickier because oversold bounces potentially have even less upside potential, and simpler because some definitive lines in the sand are drawn. And trickier again because surging volatility is increasing the odds that both bears and bulls will suffer serious whiplash for holding onto short-term trades too long. I will step through this case-by-case.

The T2108 oversold trade
T2108 is 13.5% and getting to rock bottom levels. It will get harder and harder for the market to push this number lower. T2107 confirms just how bad things are getting as the percentage of stocks trading above their 200DMAs fell further to 30%. Both T2107 and T2108 are at multi-year closing lows. The rule for aggressive traders is to initiate positions on a surge in volatility that breaks through previous highs (if volatility is already “very” high – coming with 25% of the previous high is sometimes good enough). The assumption is that such a break represents a blow-off top in fear. Unfortunately, fear still knows no bound right now.


Fear still knows no bound -next up 2012 highs?!?!

Fear still knows no bound -next up 2012 highs?!?!

Revenge of ProShares Ultra VIX Short-Term Futures (UVXY)

Revenge of ProShares Ultra VIX Short-Term Futures (UVXY)


I am of course tempted to call an end to this rise given UVXY is at what SHOULD be stiff 200DMA resistance, but I have to remain circumspect given the major breakdowns underway for the indices.

Aggressive traders have now seen two lines in the sand melt away on the VIX and here is a third. I bought a fresh tranche of SSO calls but dialed back the position size dramatically. I am now considering keeping all further bullish trades on hold until a major PULLBACK in the VIX occurs. Stay tuned on this. No matter the rule, the best to expect out of a short-term oversold bounce is a retest of the 200DMA as resistance. I would prefer to get aggressive again the further away the market falls away from this line. Regular readers know the drill – I would LOVE to see a large gap down, huge spike in the VIX, and a steep plunge in T2108 for buying a large truckload of SSO call options.

The conservative “wait and see” trade
Conservative traders have happily stayed on the sidelines after getting churned following the previous two oversold periods. Here is where it finally pays to stay conservative and wait for the oversold period to end before going long. HOWEVER, the looming 200DMA resistance makes this approach even trickier since it is very possible that the next emergence from oversold conditions will happen right at 200DMA resistance. So, for now, conservative traders might as well wait until the S&P 500 (SPY) can reprove its mettle with a firm close (and follow-through buying) above 200DMA resistance.

The growling bear trade
Stubborn bears who have held through all the oversold churn are now hooting, howling, and growling in glee. The 200DMA breakdowns put them in the driver’s seat. The continuing spike in fear helps deliver up ever lower prices for their shorts. They also have no rush now to close out short positions since bulls are the ones on the ropes for once. Aggressive bears can now sit on ALL positions until the S&P 500 recovers above its 200DMA. They are in an even better position if they took SOME profits on the way down to provide cushion. I am still not a bear, so I released another short into the wild. This time it was Splunk (SPLK). Note this position grew larger as I added on a play for 200DMA resistance.


Analysts still cannot keep Splunk lifted

Analysts still cannot keep Splunk lifted


Like the bears, I see no rush to close out any other short positions, but I am at the point where I am pretty thin on (partial) hedges! Unlike the bears, I will NOT short fresh shares during oversold conditions. For SPLK, I took a sliver of the profits, bought a put option and offset with call options. I think fireworks are yet to come that could benefit either (both) sides of the trade. The technicals AND the valuations still work firmly against SPLNK. I will write more on this one later.

Conclusion
It seems so long ago when I noted the clock was ticking on selling pressure (it was just September 25th!). T2108’s extended stay below the 30% level has now turned the tables on the bulls. Not only is the 15-day duration of the 30% underperiod well above the median and average, it is also now in territory where the projected performance of the S&P 500 will head downward into negative territory linearly with time. The S&P 500 crossed below 30% on September 23rd with the S&P 500 closing at 1982.77. THAT seems like a mile away now!


Mean and Median Duration Below Given T2108 Threshold

Mean and Median Duration Below Given T2108 Threshold

S&P 500 Price Change By Duration Below the T2108 30% Threshold

S&P 500 Price Change By Duration Below the T2108 30% Threshold


In other words, the short-term upside for an oversold bounce gets more and more limited the longer T2108 spends in low under-periods…another reason why even LOWER prices are now key to making oversold trades most worthwhile from a risk/reward perspective.

Be careful out there!

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 call options and shares, long UVXY puts, net short the Australian dollar, short FB

Oct
11

T2108 Update (October 10, 2014) – A Bearish Chill As Indices Break Down and Key Indicators Reach Multi-Year Lows

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: 13.5% (2nd day of 3rd oversold period in last 8 trading days, a new 38-month closing low!)
T2107 Status: 31.7% (a fresh 34-month low!)
VIX Status: 21.2 (intraday high was a 22-month high)
General (Short-term) Trading Call: Here we go again! Continue reducing shorts, aggressive traders should have added to positions when VIX cracked the new high, conservative traders can continue to wait until T2108 exits oversold conditions. See below for more details and explanations.
Active T2108 periods: Day #2 under 20% (2nd day of oversold period), Day #14 under 30%, Day #20 under 40%, Day #22 under 50%, Day #24 under 60%, Day #66 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
“Here we go again. Except THIS oversold period looks ominously different” – this is what I said in the last T2108 Update, and it turned out to be even more appropriate than I was expecting. Sellers are firming their grip on the market and causing technical damage that may take a very long time to repair without fresh, positive catalysts.

There are at least two very obvious and clear observations anyone active in the stock market can make. No complicated analysis is required to see a bearish chill developing as the major indices break down decisively and as fear accelerates.

The S&P 500 (SPY) slammed right into its 200-day moving average (DMA). It probably avoided a breakdown just because sellers ran out of time before the close. The lower low is the first since February of this year, and it officially breaks the primary uptrend. The lower low in February was the first since the S&P 500 last broke down below its 200DMA in November, 2012. The uptrend defined by the 200DMA is in grave danger.


The S&P 500 slams into is most critical test since the 200DMA last cracked in Nov, 2012

The S&P 500 slams into is most critical test since the 200DMA last cracked in Nov, 2012


The NASDAQ has already broken its primary uptrend as it suffered the hardest brunt of the selling on Friday (October 10th). While the S&P 500 lost 1.1% on the day, the NASDAQ did one better with a whopping 2.3% loss.


No picture-perfect retest of the 200DMA this time. Instead, a clean breakdown.

No picture-perfect retest of the 200DMA this time. Instead, a clean breakdown.


QQQ and SPY have moved together much of the year.

QQQ and SPY have moved together much of the year.


The VIX appropriately soared, increasing 13.2% to 21.2. Somehow, it managed to pull back below recent highs.

Click image for larger view…


The VIX soars in what is now  a very familiar pattern

The VIX soars in what is now a very familiar pattern


This is all the obvious stuff. What is not nearly as obvious is what to do about it.

Some of your response will depend upon whether you are fundamentally bullish or bearish or agnostic. If you are bearish, I do not have much for you yet except a warning not to chase the market downward with fresh short positions unless you have a LOT of cash to buffer yourself through the inevitable snapbacks. Per the trading call above, you should be peeling off at least SOME positions to lock in profits and give yourself powder to short again at higher prices. If you are bullish, there is plenty of hope for bounces but a warning that the easy part of this bull market may have soundly ended. If you are agnostic, you should enjoy this increase in volatility. So now on to some details and revealing stock charts…

Sticking to my T2108 trading rules, I grabbed a second tranche of ProShares Ultra S&P500 (SSO) call options even as I had to bid farewell to an earlier tranche that expired today worthless. This was the half I decided to try to ride after taking profits on the timely bounce on Wednesday, October 8th. For good measure, I added to my small gathering of put options on ProShares Ultra VIX Short-Term Futures (UVXY). I still did not get as aggressive as I am itching to do because of the critical technical breakdown in the NASDAQ and the S&P 500. The next, and likely the last, buy for this oversold period will happen if the VIX cracks the high from December 28, 2012 of 23.23.

Here are some reminders about the context of the T2108 trading environment.

First, the typical oversold period (below 20%) does not last long: a median of 2 to 3 days and an average of 5 to 6 days. We are on day number 2 now. Given this is the THIRD oversold period in 8 trading days, I think it makes to think of this period as a kind of continuation of the psychological angst characteristic of a deeply entrenched oversold period.


Mean and Median Duration Below Given T2108 Threshold

Mean and Median Duration Below Given T2108 Threshold


Second, the 30% underperiod is ticking away toward a dangerzone. T2108 has traded under 30% for 14 days. Not only does the 30% underperiod RARELY last this long, but also in another 4 or 5 trading days, the projection for S&P 500 performance once T2108 trades above 30% again starts turning negative. The S&P 500 first dove under 30% on September 23rd with the S&P 500 closing at 1982.77. Even without this analysis, I find it difficult to imagine buyers can muster up the strength to take the S&P 500 up that high on the next bounce. Another test of 50DMA resistance would be doing well. The 50DMA is currently at 1972.27.


S&P 500 Price Change By Duration Below the T2108 30% Threshold

S&P 500 Price Change By Duration Below the T2108 30% Threshold


Third, T2108 is trading at an extremely low level. It has not closed at or below 13.5% in over three years. Last week, it traded as low as 13% before bouncing. A close below this level would suggest that the selling pressure is far from over.

Click image for larger view…


T2108 plunges again

T2108 plunges again


Fourth, T2107, the percentage of stocks trading below their 200DMAs, is also now at 3+ year lows with a close at 31.7%. Anyone looking at charts of the stocks and ETFs in their portfolio is now looking at a LOT of broken uptrends…and getting really nervous as a result. Many of these stocks will take a long time to recover. Collectively, these breakdowns sow the technical and psychological seeds of a more significant sell-off.


An alarming plunge in T2107

An alarming plunge in T2107


Fifth, the Australian dollar versus the Japanese yen (AUD/JPY) has finally broken down over the last two days and confirmed the sell-off in stocks. It is in bearish territory as long as it remains below 200DMA support turned into resistance.


The Australian dollar is at 5 month lows versus the yen and has flashed a bright red warning sign

The Australian dollar is at 5 month lows versus the yen and has flashed a bright red warning sign


Sixth, breaking the litany of bad news, Caterpillar (CAT) managed to hold steady despite the selling in the major indices. Could the persistent selling finally be over in CAT? Regular readers should recall that I like using CAT as a downside hedge and a confirmation (or early indicator if I am lucky) of trouble for the stock market. The daily chart shows a day of indecision where bulls and bears fought to a stalemate. The intraday chart may provide an even MORE telling story. CAT quickly sank after the open on a surge in volume and bounced sharply and quickly. Sellers hurriedly took control again but could not punch out a fresh low. Buyers were then able to take CAT into positive territory before the stock finally closed near flatline.


CAT reaches a stalemate in the middle of its sharp daily downtrend

CAT reaches a stalemate in the middle of its sharp daily downtrend

Did CAT finally shake its most determined sellers in a surge of volume right after the open?

Did CAT finally shake its most determined sellers in a surge of volume right after the open?


From all this, I have concluded that the S&P 500 is due for a significant bounce in the coming week, but gains must be locked in quickly (no more patiently waiting for high risk trades to grow ever higher profits!). I am likely holding onto my few remaining short positions (all else being equal). The bulls and buyers now have the burden of proof. Resistance is presumed guilty until proven innocent.

The breakdown in the NASDAQ ahead of something similar for the S&P 500 puts tech stocks into (grim) focus.

Google (GOOG) failed at 50DMA resistance on Monday and the very next day sold through its 200DMA support. Trading volume has surged as GOOG has expanded its 200DMA breakdown. If only I had been paying closer attention and buying PUTS this week! Note that GOOG is trading right back to where it closed four months ago when I claimed that a technician on CNBC was too early in declaring a breakdown in Google. That was a good 4-month run…


Google is breaking down

Google is breaking down


I am long overdue for writing an updated sentiment check on Twitter (TWTR). Friday’s plunge straight to the important $50 pivot makes things very interesting now. To-date TWTR has been amazingly resilient and oblivious to the selling in the stock market. The stock even hit a 7-month HIGH this week! Needless to say this is NOT a stock to short until it shows some evidence of a breakdown.


Amazingly, Twitter's post-earnings (and post lock-up expiration) momentum has survived right through the stock market's sell-off

Amazingly, Twitter’s post-earnings (and post lock-up expiration) momentum has survived right through the stock market’s sell-off


Intel (INTC) accompanied/led the semiconductor sector down in resounding fashion. In one fell swoop, INTC closed its post-earnings gap up. Sellers could not hold the lows as the stock was VERY extended below its lower-Bollinger Band (BB). I wish I had seen THAT when I was loading up on SSO calls. Needless to say, I am now watching INTC a lot more closely…especially given my budding strategy to buy INTC between earnings. The volume surge combined with the vicious breakdown from 50DMA resistance likely indicates that INTC has seen its highs for a good while now.


Intel may have finally met its match and carved out a top

Intel may have finally met its match and carved out a top


Facebook (FB) is trading somewhere between Twitter and Google in terms of technical behavior. Until Friday’s 4% plunge, the stock was churning in place directly above 50DMA support. That support has now decisively broken. I will not consider a top confirmed unti FB wipes out the rest of its gains from its July earnings gap up. Even after that, a 200DMA test will still offer another chance for support for this expensive stock.


Facebook has fared a lot better than most tech stocks - it is only inches away from its all-time high and successfully kept sellers at bay until Friday

Facebook has fared a lot better than most tech stocks – it is only inches away from its all-time high and successfully kept sellers at bay until Friday


Finally, this quick review of tech stocks would be incomplete without Apple (AAPL). Partially thanks to the latest Icahn drama, Apple has been completely oblivious to the market’s sell-off. The stock still comfortably sits within an extended trading range that has used $100 as a pivot that is frustrating bulls and bears alike still waiting for a decisive move.


Apple's chart shows absolutely no hints of the misery besetting the rest of the stock market!

Apple’s chart shows absolutely no hints of the misery besetting the rest of the stock market!


Oh, and did I mention it is now earnings season? It looks like this time around, we are going to get some fairly significant and meaningful pre-warnings. Juniper (JNPR) had the unfortunate timing to release its warning after hours on Thursday. The results on Friday were spectacular: a gap down, a 9.1% loss at the close, and an 11-month low for a year-to-date loss of 16%. I put some speculative call options as I expect Elliot Management to up the ante on getting JNPR management to “create value” for shareholders.


Juniper tumbles hard on a small adjustment downward in earnings and revenue expectations

Juniper tumbles hard on a small adjustment downward in earnings and revenue expectations


This sample range of motion in stocks should serve as a good reminder that traders should still consider a stock’s individual merits and technical condition even when the general market is pointing decisively in a given direction.

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 call options and shares, long UVXY puts, net short the Australian dollar, short FB

Oct
9

T2108 Update (October 9, 2014) – An Important Change in Signals In the Race to Market Exhaustion

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: 17.1% (1st day of 3rd oversold period in last 7 trading days)
T2107 Status: 36.7% (near 3-year low!)
VIX Status: 18.8
General (Short-term) Trading Call: Here we go again! Reduce shorts, aggressive traders add/start longs and accumulate more if/when VIX breaks a previous high, conservative traders wait to see what happens after the oversold period ends. See below for more details and explanations.
Active T2108 periods: Day #1 under 20% (1st day of oversold period), Day #13 under 30%, Day #19 under 40%, Day #21 under 50%, Day #23 under 60%, Day #65 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
Here we go again. Except THIS oversold period looks ominously different.

T2108 plunged a nasty 30% to 17.4% to return its entire gain from yesterday (October 8th). T2107, the percentage of stocks trading above their 200DMAs, is nearing a 3-year closing low.


A third trip to oversold conditions in October

A third trip to oversold conditions in October

From a trend perspective, the landscape suddenly looks a LOT more bearish

From a trend perspective, the landscape suddenly looks a LOT more bearish


The big change occurred in the currency market. My favorite bear/bull confirmation took a very bearish tumble today. The Australian dollar versus the Japanese yen (AUD/JPY) finally broke through 200DMA support and confirmed today’s steep drop in the S&P 500 (SPY) with an exclamation point.


The Australian dollar tanks against the Japanese yen and breaks important support

The Australian dollar tanks against the Japanese yen and breaks important support


I took this snapshot shortly after the market close. At the time of typing, AUD/JPY continues is mounting a very small comeback. I will be following its direction and momentum closely going into the U.S. open.

I anticipated the potential quick return to oversold conditions last time based on overhead resistance at the 50DMA. I thought the second bounce from oversold would give the 50DMA resistance more of a challenge. Instead, it seems the market is now primed for a more extended stay in oversold territory.


The S&P 500 is now stretching for a retest of 200DMA support

The S&P 500 is now stretching for a retest of 200DMA support

The NASDAQ is also making a stretch for 200DMA support

The NASDAQ is also making a stretch for 200DMA support


This constant bouncing up and down is going to exhaust one, or even both, sides of the market. Either the market is shaking out buyers or shaking out sellers. In each case, traders who have chased the momentum of the day have found themselves clobbered the next day. Those who have patiently waited at resistance or, like me, patiently waited for entries ahead of an oversold bounce, have received the pay-offs. This kind of churn cannot continue because at some point traders start to anticipate and that anticipation forces new patterns to emerge.

I was following the action as best I could (I did not have stock price alerts handy). When I noticed the VIX creeping upward, I got ready. THIS time, there was no magical end to the surge at the previous high. Once the VIX broke higher, I bought a new tranche of SSO call options. I did not get aggressive because the new bar to hit is a high higher than the last: 21.4 on February 3rd. I bought the small amount “just in case” sellers and fear fail to push the VIX to or past the next point of aggressive oversold trading. I also bought a small amount of SSO shares as I am getting a stronger feeling that getting through this oversold period may require a good helping of patience.


Does fear have enough fuel to set a fresh 2014 high?

Does fear have enough fuel to set a fresh 2014 high?


I would have added to my position of ProShares Ultra VIX Short-Term Futures (UVXY), but I did not get the discount I was looking for despite the 17% gain. The upshot is that my existing puts on UVXY “only” lost all their profit and are price where I bought them. (It was still HARD to watch all that green evaporate as I stuck to my position!).

In addition to welcoming shares and a fresh crop of SSO call options to the family, I released one more short position back into the stock jungle: First Solar (FSLR). FSLR looks like it has made a classic topping pattern with two rounded tops that both failed to take out the highs set by a climactic style of buying after this year’s analyst day in April. The breakdown below the 200DMA, a fresh low, and a complete reversal of the analyst day surge all confirm weakness. FSLR is one that can likely be faded on strength. The on-going collapse in energy prices and commodities will likely dampen sentiment further. Like steel stocks, I need to get back to the soapbox analyzing solar stocks!


First Solar has finally completed a roundtrip wiping out all its gains from April's analyst day

First Solar has finally completed a roundtrip wiping out all its gains from April’s analyst day


I considered FSLR a good short to close out during the oversold period because the selling extended so far below the lower-Bollinger Band. It does not have to bounce sharply from here, but it is very likely to do so soon…especially once the general stock market makes a move out of oversold conditions (trust me, it WILL at some point!).

Another stock of interest is LinkedIn (LNKD). I have wrestled with this stock for much of the year. I took advantage of the pre-earnings run-up to close out my last position at a profit. So, it has been VERY tempting to get back in on the current dip, but the technicals are so mixed here. I like the consolidation but hate the break below the 50DMA. I like the retest of the 200DMA but hate the long 1-day trip to do it. I LOVE the Bollinger Band squeeze building, but I cannot develop an opinion on a breakout or a breakdown. So, it seems like a perfect options straddle or strangle candidate.


Is LinkedIn coiling ahead of a really big move?

Is LinkedIn coiling ahead of a really big move?


So, how low can T2108 go before the S&P 500 bounces again? That is anyone’s guess. T2108 went as low as 1.25% (yikes!!!) in 2008 in an awesome display of cataclysmic fear. T2108 went as low as 6.5% during the last big sell-off in 2011. These experiences have taught me to combine the VIX with the timing of entries for oversold trading. They have also taught me to buy shares instead of options when the going seems particularly rough (like now).

You may also ask why not focus on fading strength given the apparent stiff resistance at the 50DMA. I think that is a comfortable move for anyone who expects a much deeper sell-off. I am not there yet. Plus, a fresh bounce from oversold conditions is a poor risk/reward play even though it looks like pure genius right now. Of course I apply a huge exception to downside hedges like Caterpillar (CAT). I sold the latest round of puts right away today…and apparently a bit too early!

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 call options and shares, long UVXY puts, net long the Australian dollar

Oct
8

T2108 Update (October 8, 2014) – Oversold Conditions Deliver Again – What to Watch Next

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: 24.6% (ending a 1-day oversold period)
T2107 Status: 42.6%
VIX Status: 15.1
General (Short-term) Trading Call: Hold remaining shorts (should have already closed most); take profits on some longs, try to ride through test of 50DMA resistance (see below for more details)
Active T2108 periods: Day #1 under 20% (undersold period), Day #11 under 30%, Day #17 under 40%, Day #19 under 50%, Day #21 under 60%, Day #63 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
THIS time I used today’s pop to load up on some put options on Caterpillar (CAT) as my favorite downside hedge. Beyond that, it was a day to celebrate all things T2108. The market’s powerful surge higher served as a powerful reinforcement of the importance of following trading rules. This day also reminded me (and hopefully regular readers) why I love T2108 so much as a market indicator.

Speaking of rules, I will start this post off with another entry in the “you wouldn’t believe it unless you saw it” category. I just can’t make this stuff up. As you may recall from the last T2108 Update, my next trigger for accumulating more call options on ProShares Ultra S&P500 (SSO) featured the volatility index, the VIX, punching through earlier highs. Such a move typically marks either the peak of market fear or the beginning of its end. The VIX traded RIGHT up to that high and then sharply reversed. Leaving me without a trade that perhaps could have delivered one of my biggest of the year given my plans to ramp up my aggressiveness on the long side.


The VIX spikes right to the last intraday high before sharply reversing

The VIX spikes right to the last intraday high before sharply reversing


So while today was a huge bonanza for me on SSO call options, it incredibly could have been a whole lot greater by a mere smudge on a chart. I used the rally to lock in profits on about half of my position. I will try to ride the rest. Another lesson I have learned and relearned from T2108 trades is that I have a bad habit of underestimating just how fast and high an oversold rally can move. I have left the other half of my position to take advantage of any buying follow-through in the coming days and week. The oversold bounce is off to a strong start with the VIX getting pushed below the 15.35 pivot. However, note that the grinding uptrend from 7 1/2 year lows is not over.

T2108 ended the 1-day oversold period with a tremendous exclamation point. T2108 closed at 24.7%, jumping by 42% over yesterday’s close of 17.4%. I fully recognize the rally is suspect given it comes in response to the minutes of the last Federal Reserve meeting (more on this in another post), but this kind of buying must be respected. Note well how post-Fed trading yet again featured a massive reversal in volatility. I decided to continue holding my put options on ProShares Ultra VIX Short-Term Futures (UVXY) as part of my attempt to remain more patient through the oversold bounce.

The baton has clearly moved from sellers back to buyers already. The buyers now have a major test immediately in front of them in the form of the 50-day moving average (DMA) as resistance on both the S&P 500 (SPY) and the NASDAQ (QQQ).


The S&P 500 rushes higher by  1.7%, just short of resistance at the 50DMA

The S&P 500 rushes higher by 1.7%, just short of resistance at the 50DMA


The 50DMA is starting to turn downward, and the 20DMA is already rushing fast downward. So resistance COULD be just as tough as it has been since the S&P 500 first sliced through the 50DMA on September 25th. Note in the chart above how easily the index has moved across this line. Bulls, and bears, should take nothing for granted here and need to just stay nimble (and follow rules!).

Two last things to point out on the prospects for this bounce. First, the Australian dollar versus the Japanese yen (AUD/JPY) once again came through as a strong stock market indicator. At the time of writing, this pair even quickly repaired a negative reaction to another poor Australian jobs report.


The Australian dollar versus the Japanese yen continues to hold support at the 200DMA through the accelerated selling of the oversold periods

The Australian dollar versus the Japanese yen continues to hold support at the 200DMA through the accelerated selling of the oversold periods


Second, T2108 is still below 30%. This level must be broken in the next five trading days or so to maintain a bullish outlook for this latest oversold bounce.

On both points, see the last T2108 Update for more details.

I conclude with two charts telling much different stories as another demonstration of how I prefer to remain flexible on a stock-by-stock basis even as I am bullishly focused on SSO call options during the oversold periods.

Monster Beverage (MNST) is finally breaking out, closing at a fresh all-time high. I have noted this trade several times. Stubborn persistence paid off bigtime here. Regular readers may recall that I did not want to give up on this trade specifically because the technicals suggested to me follow-through would eventually arrive. And here it is…


A Monster-sized breakout from consolidation and a Bollinger Band squeeze

A Monster-sized breakout from consolidation and a Bollinger Band squeeze


On the bearish side, I remain skeptical of Splunk (SPLK). I wrote more on the stock in “Splunk: An Insider Bonanza.” The 200DMA has served as stiff resistance despite at least two analyst upgrades, one of which created a false breakout. SPLK sunk initially despite the upgrade today, so I have to assume that its recovery was almost all due to the general market rally. I consider it very bearish that SPLK first failed to hold gains above a critical technical level and then failed to show gains immediately after an upgrade. I am now hedged with call options though given the possibility that some kind of upgrade cycle for analysts is occurring.


Analysts have so far failed to lift Splunk to a sustained breathrough of technical resistance

Analysts have so far failed to lift Splunk to a sustained breathrough of technical resistance


I am also on alert as the 50DMA is turning upward for SPLK. The timer has officially started ticking on this trade. Stay tuned on the potential drama building 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 call options, long UVXY put options, long MNST call options, long CAT put options, short SPLK and long SPLK call options

Oct
8

T2108 Update (October 7, 2014) – A Second Oversold Visit As Sellers Start Taking Control

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: 17.4% (1st day of oversold period)
T2107 Status: 38.4% (fresh 2-year closing low!)
VIX Status: 17.2 (fresh 7-month closing high)
General (Short-term) Trading Call: Start closing shorts; aggressive traders start buying, maximized on next VIX “spike”
Active T2108 periods: Day #1 under 20% (undersold period), Day #11 under 30%, Day #17 under 40%, Day #19 under 50%, Day #21 under 60%, Day #63 under 70%

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

Commentary
I should have used yesterday’s pop in Caterpillar (CAT) despite market weakness to launch a new fade on the stock.


The 200DMA breakdown accelerates as the anticipated selling continues

The 200DMA breakdown accelerates as the anticipated selling continues


I had been waiting for CAT to bounce and retest 200DMA resistance to rebuild my favorite downside hedge. That moment never came and instead CAT has continued on the slide that I feared was developing soon after CAT broke $100 below its 200DMA. I am still targeting a fill of the January gap up as CAT’s first solid locus of support.

The freefall in CAT is the clearest sign that sellers are starting to take firmer control of the market. However, there is still an oversold condition to cause sellers likely angst.

T2108 closed at 17.4% to begin a second oversold period just 2 days after the last oversold period. For context, recall that oversold period was the first since June, 2013. The chart below is a reminder that the 20% overperiod, the set of trading days where T2108 stays out of oversold conditions, can be quite short.


S&P 500 Performance By T2108 Duration Above the 20% Threshold

S&P 500 Performance By T2108 Duration Above the 20% Threshold


(When I last presented this chart, I neglected to point out that I should have and could have used this to predict the end of the 20% overperiod that began in June, 2013. The projected maximum gain of 27% was tagged almost exactly on September 18, 2014 – the current all-time closing high on the S&P 500. THe next day came the “evening star” – a classic candlestick topping pattern at the end of an uptrend. You just can’t make this stuff up!).

Time is still ticking on the selling pressure if the history of the 30% underperiod is any indication. As a reminder, the 30% underperiod has a mean duration of 7 days and a median between 3 and 4. The current 30% underperiod is now 11 days old.

The chart below suggests that if sellers are able to maintain this pressure for another 5 trading days or so, suddenly the expected performance for the S&P 500 upon exiting this underperiod starts to decline. It first becomes negative around 19 trading days.


S&P 500 Price Change By Duration Below the T2108 30% Threshold

S&P 500 Price Change By Duration Below the T2108 30% Threshold


The 30% underperiod began on September 23rd. The S&P 500 (SPY) is down 2.4% since then, well below projected levels for the end of this period. Since this period WILL end (trust me), aggressive traders can start buys here in anticipation of the next oversold bounce. And that is exactly what I did today. I started a fresh round of call options on ProShares Ultra S&P500 (SSO) expiring this Friday (very cheap but very risky) and next Friday (a lot less risky). I will not add to the position (or start a new one as the case may be) until/if the VIX spikes above the last high. That trigger worked well in the last short oversold period.

The volatility index, the VIX, spiked 11.3%. It fell short of the August 1st high but still hit a 7-month closing high.


The VIX surges again

The VIX surges again


Supporting this spike in the VIX was the surge in selling on the S&P 500 and the NASDAQ (QQQ).


The S&P 500 now trades at a 2-month closing low with a downtrend firmly defined by a rapidly declining 20DMA

The S&P 500 now trades at a 2-month closing low with a downtrend firmly defined by a rapidly declining 20DMA

The NASDAQ now trades at a 2-month closing low with a downtrend firmly defined by a rapidly declining 20DMA

The NASDAQ now trades at a 2-month closing low with a downtrend firmly defined by a rapidly declining 20DMA


Both major indices are moving in nearly identical technical patterns now. At the current intensity of selling, a rendezvous with the 200DMA at some point seems very likely for both indices, intervening oversold bounces notwithstanding. An ideal retest would involve a a gap down or large swoosh that sends the VIX skyward.

So why not just follow the short-term downtrend and press short positions? My explanation is simple: oversold trading conditions are an extreme, and the market does not like sitting still in extremes – especially selling extremes. The risk/reward for NEW short positions is much better on rallies. I am guessing plenty of bears took that risk as the S&P 500 ran into its 50DMA resistance. Ultimately, the biggest reason for not going overboard with shorts is that this is still a bull market, and there is still a very strong uptrend in place. I think charts are handy, visual reminders. I use SPY (weekly) here because my S&P 500 chart is full of notes.


A bull market uptrend for the ages

A bull market uptrend for the ages


This chart is what has helped make oversold periods such successful trades and overbought ones so tough to deal with! It is quite remarkable how few times since the historic lows in 2009 that the S&P 500 has actually printed a lower low on this uptrend. The most significant lower low was in the summer of 2011 when the U.S. government seemed intent on sending the U.S. back into a recession. That period produced an extremely sharp and notable sell-off. The last lower low was part of the January/February sell-off and that only lasted a few days before the S&P 500 shot higher. In other words, the perma-bears and sellers have yet to prove they can do serious damage to this market.

I contend that when this bullish uptrend hits its next true speed bump, we will know from a lower low: a break below the August low of 1899. Such a break will happen to coincide with a 200DMA breakdown – notable in of itself, given the LAST break of this powerful uptrend was in November, 2012! This also means that the Black Friday trade is reaching a historic two years without going negative.

Here is a very relevant video from CNBC featuring an anchor and some pundits trying to take to task my favorite permabear Bill Fleckenstein. Of all the bears I follow, I respect Fleck the most, but both sides of this lively argument missed key points. Bulls need to appreciate that this super-rally can easily drive us all to become very complacent. Bears need to admit that trying to call tops year-after-year has simply helped absolutely no one. To Fleck’s credit, he is sooooo non-committal on when to start shorting this market that he has been able to avoid the many wrong calls so many perma-bears keep making. But he has also not participated in the upside these many years…and as you will see from the video, he really doesn’t care! I can only assume he remains confident he will make it all up in a hurry once he finally decides to go short again.



But let’s not get too ahead of the game just yet. What is currently in front of us is a fresh oversold period, featuring intensifying selling pressure. Both the S&P 500 and the NASDAQ printed classic topping patterns last month that are helping to embolden sellers. As I have noted during each oversold period, remember these things always feel painful as they unfold…and they look like “obvious” buying points after they end. So, I stick to the time-test T2108 rules to guide the way.

And here is a chart of the Australian dollar versus the Japanese yen (AUD/JPY). It is STILL holding firm at 200DMA support and failing to confirm this sell-off.


AUD/JPY STILL oblivious to the sell-off

AUD/JPY STILL oblivious to the sell-off


Finally, here are charts to highlight the two mistakes I made on Monday, October 6th when I failed to monitor how BOTH major indices were faring at their 50DMAs. Google (GOOG) is now breaking down below BOTH its 50 and 200DMAs and looks like a short, especially if it cracks the August low around $560. iShares MSCI Emerging Markets (EEM) closed BELOW the 200DMA after gapping up and trading above that important line of resistance. Today, Tuesday, the follow-through selling has printed an ominous “abandoned baby top” which essentially trapped buyers like myself. I definitely prefer to be short EEM here regardless of T2108 conditions. The T2108 rules are only for the S&P 500 anyway. Like CAT, I consider EEM to be a great downside hedge at this juncture especially with the U.S. dollar soaring and commodity prices continuing to collapse.


Google is breaking down

Google is breaking down

EEM looks ready for a fresh bout of selling after printing an ominous abandoned baby top

EEM looks ready for a fresh bout of selling after printing an ominous abandoned baby top


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 call options, long UVXY put options, long GOOG call options, long EEM call options

Oct
7

T2108 Update (October 6, 2014) – Resistance Caps the Oversold Bounce

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: 21.1% (unchanged)
T2107 Status: 41.9% (essentially unchanged)
VIX Status: 15.5 (drop of 10% below 15.35 pivot)
General (Short-term) Trading Call: Hold longs, remaining shorts should be closed if/once S&P 500 and/or the NASDAQ close above 50DMA. More details in the last T2108 Update
Active T2108 periods: Day #2 over 20% (oversold period), Day #10 under 30% (undersold period), Day #16 under 40%, Day #18 under 50%, Day #20 under 60%, Day #62 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
Somehow, Caterpillar (CAT) managed to trade up on the day while the S&P 500 (SPY) and the NASDAQ (QQQ) ran into buzzsaws at 50-day moving average (DMA) resistance. Perhaps it was the sharp reversal in the U.S. dollar that boosted commodities (temporarily) and thus encouraged some buying in CAT. Whatever the reason, I do NOT consider this a bullish divergence.


The S&P 500 provided early confirmation of the oversold bounce, only to fade and confirm resistance instead by the close

The S&P 500 provided early confirmation of the oversold bounce, only to fade and confirm resistance instead by the close

The NASDAQ fails to break 50DMA resistance AGAIN

The NASDAQ fails to break 50DMA resistance AGAIN


The day started off in an encouraging fashion as the S&P 500 opened lower and then ran up above the 50DMA. I quickly moved to secure some profits in my ProShares Ultra S&P500 (SSO) call options. I started to move in more speculative call options on stocks and ETFs like Google (GOOG) and iShares MSCI Emerging Markets (EEM) as it gapped above its 200DMA mainly thanks to a post-election surge in Brazilian stocks. I stopped as soon as I noticed the upward momentum had stopped. Perhaps I never would have started if I had noticed that the NADSAQ ran smack into a brick wall of resistance at its 50DMA.

So, on balance, the bullish bounce from oversold conditions remains intact, but T2108 could easily slip back into oversold territory from here. If so, I will go right back to the T2108 rules and load up on fresh SSO call options. I will be much more aggressive the second time around as the T2108 30% underperiod is starting to get long in the tooth. Recall that the 30% underperiod has a mean duration of 7 days and a median between 3 and 4. The current 30% underperiod is now 10 days old.

Volatility is alive and strong and I think noticeably higher. The VIX raced back to the 15.35 pivot level and seems ready to put up a fight for the previous highs it gapped away from. The U.S. dollar took a sudden and abrupt dive demonstrating that volatility is definitely coming back in currency markets. It reversed all its gains and then some from Friday’s jobs report and just managed to close back on trend.


The U.S. dollar takes a sudden rest from its near non-stop surge higher since the summer

The U.S. dollar takes a sudden rest from its near non-stop surge higher since the summer


Speaking of abrupt reversals, I conclude with a nasty chart of GT Advanced Technologies (GTAT). It is one for the ages as I cannot remember a single time a company has declared bankruptcy so suddenly and abruptly. It is a stark reminder to us all how just about anything is possible in the stock market. I will not call this a Black Swan event, but I will call it a potential indicator of sustained increase in baseline volatility in the stock market.


Like a meteor from the sky, GTAT shocks the market

Like a meteor from the sky, GTAT shocks the market


As a friend pointed out to me, GTAT’s 183,290,799 shares traded on the day (not sure why Yahoo! Finance’s number is higher than FreeStockChart.com’s) is over three times the number of shares short as of September 15, 2014. This SHOULD mean shorts have pretty much covered – all that is left is the hope that somehow GTAT will somehow maintain its equity in the Chapter 11 filing (not likely it seems). (And if you are STILL short GTAT, you are truly defining the epitome of greed!)


Short sellers regained their nerve and zeal to bet against GTAT in recent months

Short sellers regained their nerve and zeal to bet against GTAT in recent months

Even put buyers had ganged up on GTAT in recent months. Note their failure to time a collapse at least twice earlier in 2013.

Even put buyers had ganged up on GTAT in recent months. Note their failure to time a collapse at least twice earlier in 2013.


Source: Schaeffer’s Investment Research

Here is how Seeking Alpha tried to help traders and investors come to grips with what happened:

  • “It seems abundantly clear that there was a fundamental, severe breakdown in the relationship between Apple (NASDAQ:AAPL) and GT,” says Raymond James’ Pavel Molchanov, taking stock of GT Advanced’s (NASDAQ:GTAT) bombshellChap. 11 announcement.
  • Molchanov, who downgraded GT to Underperform on Aug. 28, speculates Apple may have “unilaterally opted for a different sapphire supplier for purely business reasons,” or that GT’s Mesa, AZ plant may have “suffered serious technical defects and was unable to meet the agreed-upon obligations with Apple.” He expects GT’s equity will most likely prove worthless.
  • Gilford Securities Nimal Vallipuram thinks Apple may have requested “prepayment of some loans due to GTAT not meeting performance targets related to sapphire manufacturing.” Nonetheless, he doesn’t get why “the two companies did not restructure the agreement to buy some time for GTAT.”
  • Matt Margolis: “It is evident now that GTAT did not meet the required metrics to receive the final prepayment from Apple. In addition, GTAT burned through $248m of cash during the past two months.” Back in August, GT said it expected a final $139M prepayment from Apple by the end of October.

 

 

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 call options, long UVXY put options, long GOOG call options, long EEM call options

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