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

T2108 Update (September 22, 2014) – A Bearish Chill

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

T2108 Status: 31.7%
VIX Status: 13.7%
General (Short-term) Trading Call: Hold (TRADERS REMAIN READY FOR WIDE SWINGS)
Active T2108 periods: Day #313 over 20% (includes day #280 at 20.01%), Day #29 over 30%, Day #6 under 40% (underperiod), Day #9 under 50%, Day #11 under 60%, Day #53 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
Another Fed-inspired pop is long forgotten again.

T2108 closed at 31.7%, a level last seen in mid-August. The 2-day loss of 24.9% qualifies for quasi-oversold conditions. The T2108 Trading Model (TTM) estimates 70% odds of further downside to follow Monday’s selling. The classification error is a very high 46% (10x cross-validation); the error rate when fit just to history is about 30%. The lesson from the last quasi-oversold episode is to operate as though the S&P 500 (SPY) will close down but to recognize that the market is stretched and a simple positive catalyst could send it lurching higher. For example, the TTM cannot anticipate the catalyst we saw last week: a journalist talking Happy Fed talk that the market uses as an excuse for buying. T2107, the percentage of stocks trading above their 200DMA further underlines the quasi-oversold condition. T2107 has quickly plunged to 51.3%, a level last seen in February!


T2108 plunges to oversold conditions

T2108 plunges to oversold conditions

T2107 is now at a level where a bounce could happen at any time

T2107 is now at a level where a bounce could happen at any time


I do not have a formal model for interpreting extremes in T2107. Since the August lows occurred at similar T2107 levels, traders should stay on alert that the market could bounce sharply at ANY time. For a mental model, think about the psychology of buyers and folks eager to participate in the market. They are looking at their favorite stocks falling very fast to or through key price and other technical levels. In many cases, they missed buying the last time their favorite trades reached this level. Punches through the 200DMA can look particularly over-extended to folks looking for a buying excuse. So, when an influential voice flips the right switch, the party gets started.

For the rest of us, we need to stay calm and remain VERY circumspect. A bearish chill is still descending upon the market in my opinion. I have a HOLD for the trading call only because no key technical level has broken to justify telling longs to stop out and/or lock profits. I also see a few pullbacks that indeed look worth the risk to justify a quick trade. Make no mistake though, but the S&P 500 (SPY) and the NASDAQ (QQQ) are still looking toppy.

The S&P 500 printed a fresh all-time high after the Federal Reserve announced its latest monetary policy decision. It was yet another no-news event that the main media insisted on turning into a moment of financial drama. This print may turn into a false breakout given it was followed by a moment of indecision: a candlestick doji called an evening star. Monday’s selling confirmed the bearish interpretation of this potential sign of the end of the uptrend and thus a topping pattern.


The S&P 500 descends sharply off an ominous topping doji called an "evening star"

The S&P 500 descends sharply off an ominous topping doji called an “evening star”


Regular readers should also notice that Friday created a kind of divergence given T2108 definitively declined even as the S&P 500 remained flat. It was another divergence that signaled a big move the next day.

The NASDAQ (QQQ) is still in worse shape than the S&P 500. The NASDAQ not only failed to make a new high last week, but also it is STILL struggling to invalidate the bearish engulfing topping pattern from September 3rd.


The NASDAQ is STILL struggling with the ominous bearish engulfing (topping) pattern

The NASDAQ is STILL struggling with the ominous bearish engulfing (topping) pattern


The volatility index, the VIX, naturally jumped on today’s selling. It just happened to gap up from a retest of August’s lows. This move once again verifies that the ever so slight bias of volatility is now to increase NOT decrease (are central banks across the planet starting to breathe sighs of relief?!?)

Finally, as you can imagine, the swift trading has created some very important and even enticing stock chart patterns. I do not have the time to post these charts, so I will trust interested readers to look these up on your own. Some of the stocks in this list are also follow-ups to trades I have proposed in previous posts.

  • iShares MSCI Emerging Markets (EEM): gap down of -1.5% confirmed 50DMA breakdown. Sold latest round of puts. I will continue to fade EEM rallies at key points of resistance.
  • iShares MSCI Turkey (TUR): Broke its 200DMA on Friday. With the Turkish lira (USD/TRY) losing out to the U.S. dollar, I moved quickly to buy puts on TUR. I may get more aggressive on USD/TRY longs.
  • SolarCity Corporation (SCTY): Confirmed breakdown of 200DMA and a topping pattern I pointed out on September 15. A complete reversal of the June 17 surge is now in play. I locked in profits and sold my put options. This one is good to fade on rallies to ressitance.
  • Zillow (Z): I screwed up last week trying to hold on for more profits from the decline and ended up empty-handed! I should have just shorted the stock instead of buying puts. Shares are hard to borrow though. I bought a small number of shares as a play on Z’s tendency to surge for no apparent reason immediately following active selling.
  • Rio Tinto plc (RIO): Gapped down and confirmed bearish developments I wrote about earlier. See “Warning Signs: A Sharp Rush Away From The Australian Dollar And Related Trades” for a follow-up. I am holding onto my January puts as I anticipate a LOT more selling in the coming weeks or months.
  • Monster Beverage Corporation (MNST): My timing was off and I had to sell my call options at a loss last week. I somehow neglected to make sure a fresh order on Friday executed. Sure enough, an upgrade on Monday sent the stock up 2.9% on a bout of impressive relative strength and a new 1-month high. As a good friend noted, the current plunge in commodity prices will help beverage companies like MNST.
  • Caterpillar Inc. (CAT): I sold my puts last week for a nice profit but wish I had bought longer-dated put options. On Monday, CAT fell another 1.6% to stop just short of hitting its 200DMA, my downside bearish target. A break of this level will sound the bearish alarm bells VERY loudly. I like continuing to fade CAT on bounces.
  • Rackspace Hosting, Inc. (RAX): I was VERY fortunate to have a stop in place for my previous tranche of call options. I was taken out when RAX punched below $38 briefly. I was not happy until last Wednesday’s fresh collapse on news that RAX had given up looking for a buyer. I moved into fresh, long-dated call options. This is pure speculation now because a catalyst to regain lost ground is much less clear now. A market sell-off will undoubtedly take RAX even lower.
  • Baidu (BIDU): This trade was my best one of last week. BIDU popped on cue after a 50DMA retest. I sold out a little early, but I was nonetheless happy. I was VERY tempted to dive right back in on Monday’s retest of the 50DMA on a 4.5% plunge. I decided to be a bit more patient this time since one could easily argue BIDU is starting to look like it is making a triple top. Gulp!
  • ProShares Ultra VIX Short-Term Futures (UVXY): Once again, the Fed successfully worked to depress volatility. Shortly after last week’s monetary policy announcement and press conference, I sold my UVXY puts. The main losses on UVXY occurred the day before when the market “celebrated” the notion that the phrase “considerable time” would remain in the Fed’s lexicon.

I think readers can tell from my trades which stock market beast currently has the strongest grip on my heart and mind even as I reserve some mettle for very select bullish plays…

Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, long TUR put options, long MNST call options, long RIO put options, long Z, long USD/TRY

Sep
21

Forex Setup Week (September 21, 2014) – A Time of Reckoning for the Australian Dollar

written by Dr. Duru
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This week’s forex setup is simply about the Australian dollar, especially against the U.S. dollar (FXA).

At the time of writing, the Australian dollar is testing the next round number on its stair-stepping down: 0.89. The last time AUD/USD hit this level, the Reserve Bank of Australia (RBA) talked up the Australian economy ahead of some strong economic reports. Those reports helped sustain the Australian dollar during its last rally: March and into April.


The Australian dollar looks ready for its next leg down

The Australian dollar looks ready for its next leg down


Source: FreeStockCharts.com

While AUD/USD may bounce meekly from 0.89, the most important aspect of this chart to note is the Bollinger Band (BB). The lower Bollinger Band is opening up far and wide with the 20-day moving average (DMA) declining sharply…all setting up what seems to be an imminent time of reckoning for the Australian dollar…much lower.

As has been my pattern learned from the days of the stubborn Australian dollar, I closed out my last short AUD/USD position to lock in profits at this important technical level. I am hoping to refade the pair on a bounce, and I am ready to reload on a fresh breakdown that comes instead.

Be careful out there!

Full disclosure: no position

Sep
21

Why the Pound Failed to Rally After the Scots Said No to Independence

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 21, 2014. Click here to read the entire piece.)

The people have spoken…and so apparently have the markets. The people of Scotland voted firmly in favor staying within the United Kingdom. In response, the British pound (FXB) sank sharply, defying some expectations that the currency would soar on a NO vote. Essentially, that rally may have already happened.


The British pound has returned to its level against the U.S. dollar right before poll results suggested the YES camp had greatly improved its odds to win the Scottish referendum on independence

The British pound has returned to its level against the U.S. dollar right before poll results suggested the YES camp had greatly improved its odds to win the Scottish referendum on independence


It is not possible to know for certain what explains the pullback in the British pound, but there are several clues available for investigation. It all starts with the gap down on September 8th in the wake of poll results which suddenly suggested that the Yes campaign had much improved odds of winning.

{snip}

This story is of course ex post (after the fact), and it fits what I can observe now with hindsight. {snip} However, the market’s relative comfort with the British pound was VERY evident and obvious against other major currencies I follow: the euro (FXE), the Japanese yen (FXY), and the Australian dollar (FXA). In each case, the British pound reversed its losses within days and achieved major milestones AHEAD of the referendum vote. {snip}


The British pound managed to a major six-year breakout against the yen ahead of the referendum vote

The British pound managed to a major six-year breakout against the yen ahead of the referendum vote

The British pound pushed EUR/GBP toward 2012 lows ahead of the vote. 2008 lows aren't much further down.

The British pound pushed EUR/GBP toward 2012 lows ahead of the vote. 2008 lows aren’t much further down.

A rare sight: from 11-month lows to 6-month highs in less than two weeks!

A rare sight: from 11-month lows to 6-month highs in less than two weeks!


Source for charts: FreeStockCharts.com

Sure each currency pitted against the British pound pair has its issues, but the market definitively stated with these observable moves that it was quite comfortable that the British pound was not in trouble from the results of the referendum. {snip}

I do not expect the British pound to immediately resume its pre-vote rally. {snip}

{snip}

So now back to the election results and some lessons learned when trying to tie real-world headline/event risk to currency trading. The market definitely had this one right in the days going into the vote: the final result was never even close or in question. {snip}

{snip}

Click for larger view…


A decisive victory for the NO campaign on Scottish independence

A decisive victory for the NO campaign on Scottish independence


Source: The Telegraph

Given these results, another question to ask is how did the YES camp get over-estimated in the final two weeks? {snip}


Whatever the reason, a big lesson and reminder I have taken from this episode is that it typically pays to follow the money. {snip}

Be careful out there!

Full disclosure: net short the British pound

(This is an excerpt from an article I originally published on Seeking Alpha on September 21, 2014. Click here to read the entire piece.)

Now you get it…

http://news.yahoo.com/katie-couric-scottish-independence-now-i-get-it-195951504.html;_ylt=AwrTHRoc8RtUyFwAD4RXNyoA;_ylu=X3oDMTEzMmcwdGpzBHNlYwNzcgRwb3MDMwRjb2xvA2dxMQR2dGlkA1NNRTY5OV8x



Sep
16

T2108 Update (September 17, 2014) – It Just Took One Man to Light Up the Market Tinder?!

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

T2108 Status: 39.2%
VIX Status: 12.7%
General (Short-term) Trading Call: Hold (TRADERS BE READY FOR WIDE SWINGS)
Active T2108 periods: Day #310 over 20% (includes day #280 at 20.01%), Day #26 over 30%, Day #3 under 40% (underperiod), Day #6 under 50%, Day #8 under 60%, Day #50 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 is what I tweeted after I blinked and noticed that buyers had already taken the market upward off the lows and to flatline. Little did I know at the time just how true these words would ring.

I came into the day with the T2108 Trading Model on my mind. It was predicting a down day so the sudden gap down seemed to confirm another day of selling. It was not until the market exploded higher that I realized I needed to switch to a different mental model: a quasi-oversold market just looking for an excuse to buy. That excuse came in the form of WSJ journalist Jon Hilsenrath – someone whose impact my poor little model simply cannot anticipate.

Hilsenrath is the WSJ’s “beat” reporter for the Federal Reserve. He is the one who typically gets to attend the press conferences and ask questions on behalf of the WSJ. Over time, he has apparently developed quite a trusted reputation as a Fed-watcher, but I do not think I have ever seen him (presumably) move markets like he did today – stocks and currencies combined!

Hilsenrath had a simple message, a message that I have essentially made over and over myself: “do not overthink the Fed.” He basically argued that the Fed is in no rush to get hawkish on monetary policy and will look to qualify its “considerable time” framework for raising rates such that the market does not pin the Fed down on a specific calendar date. That was enough to send the market higher in sweet relief. The first chart below shows the action on the S&P 500 (SPY) in 5 minute chunks so the changes in trading are more obvious.


In a blink sellers lost control of the open...and then Hilsenrath sealed the deal

In a blink sellers lost control of the open…and then Hilsenrath sealed the deal

Not quite 2000, but a bullish push for the S&P 500 above 50DMA support and after a "hammer" day on Monday

Not quite 2000, but a bullish push for the S&P 500 above 50DMA support and after a “hammer” day on Monday


The NASDAQ also benefited, but it is still underneath a bearish topping pattern.


The market rally also helped the NASDAQ but its bearish topping pattern remains intact for now

The market rally also helped the NASDAQ but its bearish topping pattern remains intact for now


I have adjusted the trading call slightly in the wake of this action. I am maintaining a hold for both bears and bulls, but noting that both sides of the fence need to be prepared for wide swings the rest of this week. I am not going to try to “out think” this one and just hope that I can react quickly and appropriately as the action reveals itself.

I forgot to mention in the last T2108 Update that I decided to go back to buying puts on ProShares Ultra VIX Short-Term Futures (UVXY) because of my perception (I still have not confirmed with the data!) that the Fed tends to dampen market volatility. Of course today’s rally on rate relief smashed volatility and sent UVXY plunging 9.7%. I am still holding a small amount of UVXY shares given September (and October) typically expose market weaknesses. I am definitely dumping the shares by November. In the meantime, trading puts on UVXY remains the big moneymaker.

The iShares MSCI Emerging Markets (EEM) was also a beneficiary of the rally. I was quick on THIS trade and rushed to load up on a fresh tranche of puts as EEM approached 50DMA resistance.


Dreams of a continuation of zero-interest-rate-policy (ZIRP) and a lower dollar even sent international markets higher with emerging leading the way

Dreams of a continuation of zero-interest-rate-policy (ZIRP) and a lower dollar even sent international markets higher with emerging leading the way


As I mentioned, Hilsenrath was even able to move currencies. While the overall dollar index looks like it just swung from one side of a small room to another…


The U.S. dollar in a holding pattern until the Fed bestows its next travelling papers

The U.S. dollar in a holding pattern until the Fed bestows its next travelling papers


…individual currency pairs, especially versus the Australian dollar had notable moves. Here is the 15-minute on the Australian dollar versus the U.S. dollar (FXA). I have stretched out the timeframe to show how, in typical fashion, the currency broke a significant technical level at 0.90 only to eventually shoot higher. There was one more tease for good measure.


The Australian dollar's major technical breakdown does not last long

The Australian dollar’s major technical breakdown does not last long


Given I remain firmly bearish on the Australian dollar, I promptly faded this move.


Through all of the excitement, I cannot forget what happened to Apple (APPL).

AAPL gapped down with the market, but its loss at the lows was much more significant, around 1.5%. Like the S&P 500, AAPL shot up immediately off the low. Unlike the general market, it could not manage to close with a gain. AAPL’s ominous behavior just got more ominous.

AAPL has now twice retested the all-time highs set before the September 9th product announcement and failed. This gap down essentially confirms some kind of topping action. As I have said in previous posts, I remain a fan of AAPL, but I think this poor trading action needs to be taken seriously. Only a fresh all-time high can invalidate the bearish reading. The Apple Trading Model (ATM) predicted an up day, but I was much too slow to get in at the great prices on call options at the lows (recall that the best trades on the ATM occur when the stock opens contrary to the prediction). Eventually I decided to match up calls and puts because it seems that AAPL is going to make at least one more big move this week in one direction or another.


It still looks like some kind of top in Apple (AAPL)

It still looks like some kind of top in Apple (AAPL)


Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, long AAPL calls and puts, long EEM puts, long UVXY shares and puts

Sep
15

T2108 Update (September 15, 2014) – Another Follow-Through on Divergence…But This Time Is Different

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

T2108 Status: 34.7%
VIX Status: 14.1%
General (Short-term) Trading Call: Hold (Aggressive traders can short with tight stops)
Active T2108 periods: Day #309 over 20% (includes day #280 at 20.01%), Day #25 over 30%, Day #2 under 40% (underperiod), Day #5 under 50%, Day #8 under 60%, Day #49 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
Another quiet divergence, another follow-through. Except THIS time is different.

If you only looked at the S&P 500 (SPY), you would think Monday was a surprisingly boring day. In fact, you might think that it was a bullish day given buyers picked up the index off 50-day moving average (DMA) support.


The S&P 500 bounces near 50DMA support to close essentially flat on the day - a nice hammer pattern

The S&P 500 bounces near 50DMA support to close essentially flat on the day – a nice hammer pattern


But next you might wonder why the volatility index, the VIX, crept higher by 6% to one-month highs.


The VIX gains a little again and hits a 1-month high

The VIX gains a little again and hits a 1-month high


So next you look at the NASDAQ (QQQ) and realize that the potentially bullish bounce for the S&P 500 is likely wiped out completely by the very bearish confirmation of a top for the tech-laden index.


The NASDAQ confirms the bearish engulfing top - setting up a critical retest of 50DMA support

The NASDAQ confirms the bearish engulfing top – setting up a critical retest of 50DMA support


At this point, your instincts should point you to trusty ol’ T2108, the percentage of stocks trading above their 40DMAs…if you have not already done so. Lo and behold, you find T2108 dropped another sizable amount, this time by 9.5% to close at 34.7%. This means that under the surface of the market, a bunch of stocks are still sliding rather dramatically. Indeed, as I continue with the chart review, you will see a sample of some of the carnage from today’s selling. Momentum and otherwise highly-valued stocks got hit particularly hard today.

This time is different from the other two examples we have seen of important T2108 vs S&P 500 divergences is that the immediate resolution was only in select stocks. If you had focused on shorting the S&P 500, you would have missed the best plays.

Looking for some positive signs, regular readers know at this point that a large 2-day decline in T2108 generates a “quasi-oversold” trading condition. The 2-day decline of 29.2% has been swift and dramatic. Unfortunately, instead of predicting a bounce, the T210 Trading Model (TTM) is predicting high odds (71%) of more selling (on the S&P 500) for Tuesday. The only solace for the bullish minded is that the classification error is extremely high for the model (45%). However, if you look just at the historical fit, the error rate for a prediction of a loss (or a gain) is only 22%. Consider it a toss-up filled with caution.

With technology identified as the likely culprit, your chart checks should get into high gear.

I checked some of the usual suspects for confirmation that the market attacked with ferocity: Renaissance IPO ETF (IPO), Global X Social Media Index ETF (SOCL), and iShares Russell 2000 (IWM). It just so happens that there are a LOT of potential catalysts this week to motivate selling. For example, there is a Federal Reserve meeting on Wednesday that has the market jittery about hawkishness (oh how quickly the narratives change!), maybe Chair Janet Yellen even takes aim at the valuations of small-caps and social media stocks. A blockbuster IPO from Alibaba (BABA) likely has big traders and investors cashing out of big name, highly liquid stocks to pay for the shares of the century. And there is a triple-witching (or is it quadruple?) options expiration on Friday. In forex, the sudden weakness in the (formerly) stubborn Australian dollar is confirming bearishness all around.


Small caps are right back where the Fed left them...

Small caps are right back where the Fed left them…

A double-top for Renaissance IPO ETF (IPO)?

A double-top for Renaissance IPO ETF (IPO)?

Global X Social Media Index ETF (SOCL) plunges 3.9% for a critical test of converged 50 and 200DMAs

Global X Social Media Index ETF (SOCL) plunges 3.9% for a critical test of converged 50 and 200DMAs


The list of stocks that I saw with massive losses are too much to chart. I wish I could. I just enough time for three down stocks of note, and one upbeat one.

Baidu (BIDU)
If internet stocks sold off because of a desire to move cash into BABA, then BIDU seems like a great choice to play a snapback. BIDU lost 3.3% while Google lost a small fraction of a percent. BIDU cracked its 50DMA and barely closed above support. I speculated ahead of waiting for confirmation with a fresh trade on the stock. The biggest caution is that BIDU made a fresh post-earnings low. One last tranche of buying makes sense if the stock closes the post-earnings gap around $206.


Baidu (BIDU) plunges and barely holds 50DMA support

Baidu (BIDU) plunges and barely holds 50DMA support


Twitter (TWTR)
Twitter is bouncing around the critical $50 level again. It is still above the newly formed 200DMA, so technically it is bullish. However, I think the struggles at $50 are bearishly ominous. TWTR is ripe for a fresh sentiment analysis given the impressive recovery from the point where I estimated negative sentiment had become overdone. I also later noted analysts stepping in to finally turn bullish.

Sorry about the mess of words in the chart below, but I want to keep my notes for future reference!


Twitter (TWTR) gyrates around the critical $50 point

Twitter (TWTR) gyrates around the critical $50 point


Solar City (SCTY)
This triple-top pattern is enough said.


Ominous triple-top kind of action for Solar City (SCTY)

Ominous triple-top kind of action for Solar City (SCTY)


Best Buy (BBY)
Finally, on the positive side, BBY managed to push higher. I am rarely so patient with a stock play anymore. Back in mid-January, I insisted that buying BBY made sense as a contrarian play on a sudden reversal in sentiment that itself seemed so bullishly optimistic in a contrarian way for most of 2013. (A double contrary makes a buy?). I sold a March put that worked out. I also bought what was at the time a long-term (or LEAP) call spread, Jan 27/35 with the assumption that $35 seemed like a good price target. Eight months later, the stock finally lunged at the $35 target, and I sold my position.


Best Buy (BBY) breaks out as it ever so slowly reverses January's massive gap down

Best Buy (BBY) breaks out as it ever so slowly reverses January’s massive gap down


This is a week to stay on your toes and refresh your price alerts!

Daily T2108 vs the S&P 500

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


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, long BIDU call spread, long TWTR calls and puts,

Sep
12

T2108 Update (September 12, 2014) – Another Quiet Divergence

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

T2108 Status: 38.3%
VIX Status: 13.3%
General (Short-term) Trading Call: Hold (Aggressive traders can short with tight stops)
Active T2108 periods: Day #308 over 20% (includes day #280 at 20.01%), Day #24 over 30%, Day #1 under 40% (underperiod), Day #4 under 50%, Day #7 under 60%, Day #48 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
On July 30th, I pointed out a “quiet” divergence between a plunging T2108 and a relatively calm S&P 500 (SPY). The next day, the S&P 500 took the plunge to the tune of a 2% loss. On Friday, September 12 another quiet divergence occurred.

Just like the last quiet diverge, T2108 has been steadily dropping while the S&P 500 has managed to trade relatively flat. This time around the divergence is particularly wide…and thus even more concerning. T2108 dropped from 49% on Thursday to 38%. Another big drop on Monday, and the market will hit quasi-oversold conditions! Under 40% with this kind of speed also has me wondering about an imminent visit toward true oversold conditions (below 20%).

T2108 plunges

T2108 plunges

While T2108 demonstrates that a good number of stocks are losing altitude again, the S&P 500 has barely responded. On Friday, it only lost 0.60%.

The S&P 500 has lost its primary upward momentum, but it has done well to hover above its 50DMA

The S&P 500 has lost its primary upward momentum, but it has done well to hover above its 50DMA

So if history repeats, we should brace for a notable pullback on Monday. Note well that the Federal Reserve announces another policy decision on Wednesday the 17th. I would normally say this meeting should provide more Novocaine for any of the market’s pains. However, there is some nagging fear that the Fed is going to come out the next meeting with guns blazing with hawkishness. It is amazing how quickly the market narrative can change. Just three months ago the (media-hyped up) fear was that the Fed was falling behind the inflation curve. I was quite skeptical at the time…and rightfully so.

While we wait for the resolution of the quiet divergence and then the Fed meeting, here are some interesting stock charts to study…

iShares MSCI Emerging Markets (EEM)
EEM was my great trade of the week. I mentioned the setup in the last T2108 Update. I almost got a double on the put options. I sold because I did not see any follow-through after the first 30 minutes of selling. With expiration coming up next Friday (September 19th), I thought it made sense to lock in the profits now before time, and perhaps the Fed, erode the value of the puts. These profits easily paid for the calls I bought for a hedge as well as leave me with a tidy net profit. So, if EEM retains its uptrend, I have some time to make money on both sides of the trade while letting the house pay for the bullish side. However, I think EEM’s slide – led by its Brazilian component – confirmed the flag is waving a bright red color.

Despite the small breakdown, EEM is still in an uptrend defined by the 50DMA

Despite the small breakdown, EEM is still in an uptrend defined by the 50DMA

Schlumberger Limited (SLB)
The oil complex is falling fast. Oil-related plays were the darling of 2014. They are quickly turning into goats. SLB has gone from about a 28% gain for the first half of 2014 to a complete reversal of the large surge on June 25th, to a failed retest of its 50DMA as resistance, to what now seems a near certain retest of 200DMA as support. I have this one on my active radar now!

Schlumberger Limited (SLB) looks set to retest its 200DMA support

Schlumberger Limited (SLB) looks set to retest its 200DMA support

Crocs (CROX)
CROX has quickly gone from bullish promise to bearish disappointment. The essential confirmation came last Thursday when a single analyst downgrade to neutral seemed sufficient to send the stock gapping down below 200DMA support. This move confirms a complete wipe-out of July’s large earnings surge (which I used to unload my last CROX) position) and the likely continuation of the downtrend in place since the large gap up on December 30th. Given THAT move failed to erase an earnings gap down from July, 2013, CROX should likely be treated like a broken stock.

The analyst-driven gap down confirms a bearish reversal of the 1-day post-earnings excitement in July

The analyst-driven gap down confirms a bearish reversal of the 1-day post-earnings excitement in July

Logitech (LOGI)
LOGI is having its own problems maintaining altitude through earnings announcements. The chart below does not show the year-to-date flat performance for LOGI that follows anincredible ramp up from 2013: from $7 to $17 from July, 2013 to March, 2014. The chart says it all in terms of fading momentum relative to earnings.

Logitech (LOGI) completes a reversal of the last earnings-inspired gap up - likely confirming waning momentum

Logitech (LOGI) completes a reversal of the last earnings-inspired gap up – likely confirming waning momentum

Monster Beverage Corporation (MNST)
Finally, MNST is facing a tremendous Bollinger Band (BB) squeeze. This one is already on my radar since I am already trying to play a return to upward momentum post-deal with Coke. I am still waiting…

A monster Bollinger Band (BB) squeeze for Monster Beverage Corporation (MNST)

A monster Bollinger Band (BB) squeeze for Monster Beverage Corporation (MNST)

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 put and call options on EEM, net short Australian dollar, long USD/TRY

Sep
12

Accumulate McDonald’s

written by Dr. Duru
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On September 9, 2014, McDonald’s (MCD) produced yet another awful monthly sales report:

“McDonald’s Corporation today announced that global comparable sales decreased 3.7% in August. Performance by segment was as follows: U.S. down 2.8%; Europe down 0.7%; Asia/Pacific, Middle East and Africa (APMEA) down 14.5%.”

In the U.S. the problem is sluggish industry growth paired with intense competition. In Europe it is poor performance in Russia (surprise, surprise) and weak consumer sentiment. In Asia, MCD is dealing with major supplier issues in China. The Wall Street Journal blames millennials, but I am skeptical of this explanation. The bad news completely overshadowed an announcement later in the day that McDonald’s will accept Apple Pay throughout the U.S. Or perhaps this news helped propel MCD to an apparent bottoming the following day?

MCD closed on September 9th at a fresh 21-month low with a loss on the day of 1.5%. The next day, MCD gapped marginally lower, traded marginally downward from there, and then the buyers took over. On volume of 12.0M shares – more than double the daily average for the past three months and much higher than the 9.7M shares traded on September 9th , MCD closed the day with a GAIN of 2.1%. This 2-day whiplash created what is known as a bullish engulfing pattern: a common bottoming pattern as buyers finally swoop in to pick up shares on the “cheap”, the weakest hands are finally washed out, sellers are exhausted, and bulls and “value” players begin to reverse negative sentiment. In other words, this is a contrarian trade here…


McDonald's (MCD) finally finds some surer footing as buyers rush in

McDonald’s (MCD) finally finds some surer footing as buyers rush in


It is not easy to find such an emphatic bottoming pattern. So when I find one, I get excited. I am as bullish as I can get on this one by beginning a phase of aggressive accumulation of a position in MCD. I am starting with long-term call options since I do not expect a quick and easy road back to all-time highs. After all, MCD is NOT a momentum stock despite a decades long rise (see chart below). With a 3.4% yield, I am very interested in buying shares as well but will wait out the bottoming pattern a little longer: stiff resistance is looming overhead with a declining 50-day moving average (DMA). Traders have a very clear stop sitting right below the intraday low for the year. If sellers manage to push MCD that low again, the bullish engulfing pattern is invalidated. I rate those odds to be very low. MCD seems like a great risk/reward buy here.


A near relentless uptrend over the decades

A near relentless uptrend over the decades


Source for charts: FreeStockCharts.com

Sep
9

T2108 Update (September 9, 2014) – Red Flags Get Brighter

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

T2108 Status: 50.0%
VIX Status: 13.5%
General (Short-term) Trading Call: Hold (Aggressive traders can short with tight stops)
Active T2108 periods: Day #305 over 20% (includes day #280 at 20.01%), Day #19 over 40% (overperiod), Day #1 under 50% (underperiod – minus rounding), Day #4 under 60%, Day #45 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
First there was an ominous print that flagged the end of upward momentum. Next was a close call that demonstrated stubborn resilience again for the buyers. Today, September 9, 2014, the market has swung back into a danger zone. The red flags have brightened enough for me to give the (reluctant) go-ahead for aggressive shorts to stake their claims…with tight stops of course.


The S&P 500 takes an ominous downward turn as 20DMA  gets tested for first time since breakout

The S&P 500 takes an ominous downward turn as 20DMA gets tested for first time since breakout

The NASDAQ's primary uptrend officially comes to an end as bearish engulfing top remains in place

The NASDAQ’s primary uptrend officially comes to an end as bearish engulfing top remains in place

The VIX did not retest recent lows and is now positioned for a new run-up

The VIX did not retest recent lows and is now positioned for a new run-up


The confirming part of these bearish signals is T2108. It closed a fraction under 50% for the first time in three weeks. Its large drop, 11.4%, confirms the end of its run-up and the divergence that I did not dare call bearish last week. T2108 is now leading the S&P 500 downward.

The currency market is providing some additional confirmation for me. Just as I pointed out that the last month of the U.S. dollar’s rally made little to no progress against high-yielding currencies, the U.S. dollar breaks out against the Turkish lira (USD/TRY), and, even more importantly, the Australian dollar breaks down against the U.S. dollar. Moreover, the Australian dollar’s run-up against the Japanese yen (AUD/JPY) has likely come to a definitive end.


The U.S. dollar breaks out against the Turkish lira to a new 6-month high

The U.S. dollar breaks out against the Turkish lira to a new 6-month high

The Australian dollar FINALLY breaks down and confirms the topping action

The Australian dollar FINALLY breaks down and confirms the topping action

The Australian dollar even manages a sharp reversal against the Japanese yen which itself has considerably weakened against all major currencies over the past month or so

The Australian dollar even manages a sharp reversal against the Japanese yen which itself has considerably weakened against all major currencies over the past month or so


Regular readers know I have looked to the Australian dollar versus the Japanese yen for confirmation of bullish and bearish changes in the market. I see here a confirmation of a bearish change. While I am not yet comfortable taking a short position against the S&P 500 (SPY) here, I did rush to buy a hedged options position in iShares MSCI Emerging Markets (EEM) with a heavy bias on put options. EEM has been surprisingly calm during the U.S. dollar’s run-up. It is still in an uptrend as defined by the 50DMA. However, the currency signals above and the increasing volatility in the currency markets in general tell me to expect greater odds of a significant pullback in EEM. The current pricing for EEM options suggests that the market thinks the relative calm will continue, so I like this trade even more since I can buy a potential pullback on the cheap.


Can the relative calm persist for EEM?

Can the relative calm persist for EEM?


To reiterate, the sentiment and momentum is slowly but surely swinging away from the bulls and buyers. The market is not outright bearish, but all the signs for caution are there. Aggressive traders can certainly feel a lot more comfortable going into short positions with well-defined stops. Look out in particular if the S&P 500 breaks through its 50DMA support again. Let’s also not forget that September is one of the most “dangerous” months of the year.

I must end this stock market update with another chart review of Apple (AAPL). The company had its big product announcement today. Despite trading history that tells us NOT to buy into a product announcement, traders did it anyway. The end result was a very wild trading day with large swings in the stock that ultimately settled out into an effective stalemate above 50DMA support. I still think the big sell-off last week ahead of this announcement was ominous enough to take seriously the potential for a more sustained pullback in Apple’s stock. Only a trade to new all-time highs can erase that bearish signal.


A wild ride from one announcement milestone to the next

A wild ride from one announcement milestone to the next

A stalemate, for now, just above 50DMA support

A stalemate, for now, just above 50DMA support


Of course, AAPL’s gyrations just as the NASDAQ (QQQ) is hitting a topping pattern makes the red flags shine all the brighter…

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 put and call options on EEM, net short Australian dollar, long USD/TRY

Sep
8

Going Beyond the January Barometer: A More Nuanced View of Monthly Versus Yearly S&P 500 Performance

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

With February providing the lift the S&P 500 (SPY) needed to reverse January’s losses, it is time to take a look once again at the January barometer. The big fear last month was that this barometer indicated 2014 was headed for losses. I demonstrated that the January barometer is actually not useful for predicting down years. {snip}

{snip}

The bubble chart below enhances the chart I showed in the last piece on the January barometer. Here, I have layered in the performance of the subsequent February using bubble size to indicate the magnitude of the change in the S&P 500 for a given February and using color to indicate the direction of the change – white for negative (an unfortunate limitation of Microsoft Excel), green for positive. {snip}


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

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


As bad as January is at predicting down years, it turns out the remaining months fare worse, sometimes a lot worse. {snip}


January is the best month for predicting a negative year for the S&P 500

January is the best month for predicting a negative year for the S&P 500


While no pattern exists amongst the months to signal the high likelihood of a down year, down years are distinct from up years in the number of negative monthly performances. {snip}



Source for price data in all charts: Yahoo Finance

1974 sticks out as the most brutal – all but one month performed in the red. Otherwise, the pattern seems to be a streak of negative performances occurs in the beginning of the year or in the middle. {snip}

Overall, I think these various nuanced views add more color than the simplistic January barometer. There is of course still no magic crystal ball, but there are interesting monthly patterns to reference throughout the year.

Be careful out there!

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

Full disclosure: long SSO puts

Sep
8

Hints of Bottoming for Twitter

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

I last wrote about Twitter (TWTR) three months ago to conclude that the “crescendo top” in the stock was confirmed and to review the importance of sentiment in determining the fate of the stock. I now see a high probability that a crescendo bottom has occurred for TWTR, placing another bookend on the trading opportunity in the stock. In this piece, I update the sentiment picture on TWTR and provide its potential implications.

{snip} The reason’s for some optimism include: a powerful combination of strong revenue growth, especially internationally, and a decline in variable costs; and potential ad revenue growth helped by healthy timeline metrics. I add to that list continued product innovation.

Let’s now see how sentiment has changed for Twitter…

Analyst sentiment
{snip}

Right after TWTR’s last post-earnings sell-off, Deutsche Bank and Goldman Sachs bravely reiterated their buy ratings. Deutsche also lowered its price target from $65 to $52. Since these were rating reiterations, they provide little new information for sentiment.

More interesting are the upgrades that occurred after the disastrous end of the last lock-up period. {snip} Until some analysts start downgrading the stock, I consider the analyst-driven pivot underway for TWTR.

Open interest put/call ratio
{snip}


Twitter's open interest put/call ratio is on the decline again

Twitter’s open interest put/call ratio is on the decline again


Source: Schaeffer’s Investment Research

The $50 bet and momentum
{snip}

The $50 point was not just important as a round number, but it also marked the intraday high on TWTR’s first day of trading. {snip}

What I could not foresee three months ago was that the stock market overall would remain bullish while the market for stocks like TWTR would collapse. {snip}

Lock-up expiration
TWTR’s lock-up expiration on May 6th unleashed a 2-day flurry of selling. {snip} However, just as an extreme surge in buying helped mark a top for TWTR back in December as the market ran out of its most eager buyers, I believe an extreme in selling has helped make a case for a bottom in TWTR as the market may have run out of the majority of its most eager sellers.

{snip}


Twitter attempts to bottom

Twitter attempts to bottom


Source: FreeStockCharts.com

Short interest
Short interest may be the last piece of the puzzle. Bears have yet to release the pressure. {snip}


Shorts have steadily increased the pressure on Twitter. Sentiment now hinges on their next move.

Shorts have steadily increased the pressure on Twitter. Sentiment now hinges on their next move.


Source: Schaeffer’s Investment Research

Given the current data, I am trading for a bottom in TWTR…{snip}


Twitter sentiment on the upswing

Twitter sentiment on the upswing


Source: StockTwits

Be careful out there!

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

Full disclosure: short TWTR put spread and puts, short covered call

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