ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Mar
27

T2108 Update (March 26, 2015) – S&P 500 Reverses Post-Fed Gains – Waiting On Oil and Gold to Follow

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

T2108 Status: 44.5%
T2107 Status: 48.7%
VIX Status: 15.8
General (Short-term) Trading Call: Neutral. Assuming market is back to chopping around.
Active T2108 periods: Day #109 over 20%, Day #68 above 30%, Day #12 above 40% (overperiod), Day #2 under 50% (underperiod), Day #15 under 60%, Day #179 under 70%

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

Commentary
It looks like the market is back to a chopfest.

The S&P 500 (SPY) reversed all its post-Fed gains yesterday (Wednesday, March 25). The selling on the index followed through on Thursday and confirmed another breakdown from the 50-day moving average (DMA). T2108 has plunged all the way from a countdown to overbought status to a convincing end of upward momentum. T2108 closed at 44.5%, down about 13 percentage points in just two days. The volatility index, the VIX, has surged right through the 15.35 pivot although today’s pop was almost entirely faded.


The S&P 500 drops right back into a chopfest

The S&P 500 drops right back into a chopfest

The VIX quickly rebounds but today's fade leaves selling pressure in doubt

The VIX quickly rebounds but today’s fade leaves selling pressure in doubt


Given this setup looks like a return to a chopfest, my overall trading call remains neutral (of course I wish I had stayed firmly bearish ahead of the recent 2-day breakdown!). On Wednesday I successfully flipped call options on ProShares Ultra VIX Short-Term Futures (UVXY). I used the initial gap up on Thursday to close out my call options from last week that surprisingly went from the pits to a tremendous gain literally overnight. I bought right back in near the close in anticipation of more (rising) volatility in coming days. This ends my T2108/Fed related trades from last week as I rushed to salvage some value out of my losing put options on ProShares Ultra S&P500 (SSO) which expire on Friday.

Now while the S&P 500 reversed its post-Fed gains and the VIX reversed its post-Fed losses, oil (USO) and gold (GLD) have maintained their post-Fed momentum. I think this divergence sets up an interesting tension that I think will get resolved with oil and gold reverting as well.

In particular, oil seems to be supported by recent weakness in the U.S. dollar (UUP) and fresh tensions in the Middle East, this time in Yemen. Anyone who even casually tracks the oil market knows that these conflagrations tend to have ephemeral impact on the oil market. Yet, traders can use the rapid rise in fear and tensions to whip the market around. Despite my skepticism, I think the recent bottoming action in USO that I pointed out last week will continue to hold. With a chopfest from and center in my brain, I used the run-in with the declining 50DMA, to sell my USO call options. I then took some of that profit to dive right into put options.

The U.S. dollar’s rest from near-parabolic trading conditions seems to be coming to an end. A bounce here will hurt oil and certainly pressure gold back down.


The United States Oil ETF (USO) has seemingly confirmed a bottom yet resistance at the declining 50DMA could prove a formidable checkpoint

The United States Oil ETF (USO) has seemingly confirmed a bottom yet resistance at the declining 50DMA could prove a formidable checkpoint

SPDR Gold Shares (GLD) has generated another relief rally that appears doomed to disappoint yet again

SPDR Gold Shares (GLD) has generated another relief rally that appears doomed to disappoint yet again

The U.S. dollar looks ready to resume its upward momentum as a hammer pattern appears above the strong 50DMA uptrend

The U.S. dollar looks ready to resume its upward momentum as a hammer pattern appears above the strong 50DMA uptrend

The euro is clinging to a sharp uptrend from a recent bottom. A wedge is forming with stiff resistance around the 1.10 level converging with a sharply declining 50DMA

The euro is clinging to a sharp uptrend from a recent bottom. A wedge is forming with stiff resistance around the 1.10 level converging with a sharply declining 50DMA


As the last chart above shows, the tension building on the U.S. dollar’s direction is enhanced by the euro reaching a critical technical juncture against the U.S. dollar. I think this wedging pattern will get resolved to the downside given the euro’s inability to break through overhead resistance after repeated attempts. Also see my description of the rapid dollar squeeze that happened post-Fed last week for closer evidence of resistance holding firm.

A reversal in oil should complete the failure of the Energy Select Sector SPDR ETF (XLE) to make a convincing breakout from 50DMA resistance. Even though Direxion Daily Energy Bear 3X ETF (ERY) continues to make lower highs, I nibbled on some shares to play XLE’s likely failure at resistance. I do not plan to hold this position for long.


The Energy Select Sector SPDR ETF (XLE) is struggling with its 50DMA resistance

The Energy Select Sector SPDR ETF (XLE) is struggling with its 50DMA resistance


The chopfest has made me take profits a little faster than usual on winning trades. I have learned the hard way as I assumed momentum had finally taken root only to find a reversal awaiting me instead in the blink of an eye. Keep that in mind when reviewing my remaining charts!

I have not looked at Apple (AAPL) in a while – the technicals are looking poorer and poorer (short-term of course). I appreciate the spirited and nearly predictable bounce from 50DMA support. However, downward momentum from all-time highs and the Apple Watch announcement are just too persistent overall. As an excellent example, I provide a 15-minute chart to show how buyers quickly carried AAPL into a complete recovery from last Friday’s quadruple-witching inspired take down…and then sellers quickly took over again to set-up the 50DMA test. A break of 50DMA support puts a near reversal of post-earnings gains into play.


An intraday view shows how sellers are taking a hold of AAPL this week

An intraday view shows how sellers are taking a hold of AAPL this week

Apple continue to flounder after its watch announcement: now, the stock is fighting with a 50DMA retest and a downtrending 20DMA

Apple continue to flounder after its watch announcement: now, the stock is fighting with a 50DMA retest and a downtrending 20DMA


Baidu (BIDU) could not hold its breakout in this chopfest. It is right back to the bottom of its downward channel. I finally bought some call options on the assumption that the stock will eventually (and soon) find its way right back to the top of the channel.


Baidu (BIDU) turned a potential breakout into a fakeout...and a resumption/confirmation of the on-going down-trending channel

Baidu (BIDU) turned a potential breakout into a fakeout…and a resumption/confirmation of the on-going down-trending channel


My trade on Coach (COH) was looking like genius until it all fell apart today. Now, COH looks like it has reached the end of its recovery momentum…leaving me high and dry.


The recovery in Coach (COH) comes to a screeching halt with a reversal of a week of hard-earned gains in just one high-volume selling day

The recovery in Coach (COH) comes to a screeching halt with a reversal of a week of hard-earned gains in just one high-volume selling day


The iShares MSCI Emerging Markets (EEM) reversed so badly that my put options are back in play. Given the chopfest, I wasted no time in reloading on call options to re-establish my favorite hedged trade.


iShares MSCI Emerging Markets (EEM) quickly reverses in what now looks like a failed breakout above 50DMA resistance

iShares MSCI Emerging Markets (EEM) quickly reverses in what now looks like a failed breakout above 50DMA resistance


Transports are getting into trouble. CSX Corp. (CSX) is at a VERY critical juncture. I have played CSX long on dips, but this time I am going to be patient and wait for CSX’s next move. The current 200DMA breakdown looks ominous.


CSX Corp. (CSX) confirms its slow downtrend from recent highs with a marginal 200DMA breakdown

CSX Corp. (CSX) confirms its slow downtrend from recent highs with a marginal 200DMA breakdown



Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long AAPL call and put options, long COH calls, long EEM calls and puts, long GLD, long USO puts, long BIDU calls, net long the U.S. dollar, long ERY

Mar
25

Internet Stock Valuation Update: Did Twitter Blow Off A Top?

written by Dr. Duru
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Yesterday, March 24th, Twitter (TWTR) made an impressive breakout above the $50 battle line which defines the TWTR’s intraday high on its first day trading. Seeing the bullish move, it occurred to me I had not updated my comparison chart of internet stock valuations in a very long time. As luck would have it, I am posting this after TWTR nearly reversed all of its breakout gains. Overnight, TWTR has gone from breakout to fake-out in a move that has the appearances of a blow-off top.


Twitter breaks out and then reverses in a topping pattern

Twitter breaks out and then reverses in a topping pattern


Source: FreeStockCharts.com

Twitter is a key company and stock because it remains the poster child for the high premiums some companies can still command in the internet-related sector. The chart below arranges a select group of these stocks from left-to-right in ascending order of valuation based on the price/sales ratio. As a reminder, I use P/S because of the prevalence of money-losing companies in this space. The P/S ratios come from Yahoo!Finance. Also note that some of the companies have non-internet businesses, and this list is not a comprehensive collection of internet-related companies.

Click for a larger image…


Twitter remains comfortably on top of the valuation stack of this select group of internet-related stocks

Twitter remains comfortably on top of the valuation stack of this select group of internet-related stocks


I added two new companies, Rocket Fuel (FUEL) and Tube Mogul (TUBE), both recent IPOs. Dropping off the list are Open Table, Trulia, and Velt. The first two have been acquired. Velt is now a penny stock hardly worth following.

Note that many of these companies have experienced declining valuations through revenue growth and/or price declines on the stock. Twitter’s valuation has declined rapidly. This move has greatly compressed the valuation gap with Zillow (Z) and Facebook (FB) which are essentially equivalent. Valuations fall off rapidly from there to around a 5 P/S ratio. This “premium” group is an interesting mix of companies which have experienced valuation compression and expansion. In other words, traders cannot treat these higher/high-priced stocks as the same monolithic beast.

I like to look at how shorts and options traders are reacting to stocks. Unfortunately, the picture is a bit mixed for Twitter right now. Options traders have responded to Twitter’s huge post-earnings gap up by rushing for put options over call options. They have been largely disappointed. Their timing was similarly poor through much of 2014.


The open interest put/call ratio has soared recently although it has been much higher earlier in Twitter's life

The open interest put/call ratio has soared recently although it has been much higher earlier in Twitter’s life


Source: Schaeffer’s Investment Research

Short interest has been on the decline and is reaching lows from late last year. Lately, shorts have absolutely nailed their timing. Shorts ramped up into TWTR’s late 2014 decline as the stock suffered a post-October earnings hangover. As the stock hit rock bottom, shorts began locking in profits. I strongly suspect that today’s topping action is going to re-attract a lot of short activity. Shorts are only 4.8% of TWTR’s float, so there is a LOT of room left on the Twitter bear-wagon.


Twitter shorts have shown some good timing recently (shares short is the blue line)

Twitter shorts have shown some good timing recently (shares short is the blue line)


Source: Schaeffer’s Investment Research

The reversal today provides an easy and clear stop for any shorts. For those interested in going long, waiting for this reversal to play out some more will likely be time well spent. Twitter may not be good for much longer than a quick swing trade for the foreseeable future.

For the rest of the internet-related bunch, traders should note that, in general, valuations have actually come down. It is also not enough to sweep all these stocks with a broad brush given the different variations in valuation trends. This situation tells me that pairs trades may offer particularly attractive, low risk trades. Stay tuned!

Be careful out there!

Full disclosure: long and short a mix of the stocks in the chart but no position in TWTR

Mar
24

T2108 Update (March 23, 2015) – Countdown (Again) to Overbought Market Conditions

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

T2108 Status: 59.1%
T2107 Status: 53.4%
VIX Status: 13.4
General (Short-term) Trading Call: Neutral. No longer fading rallies. The S&P 500 is”close enough” to fresh all-time highs even as T2108 is still 10 percentage points away from overbought.
Active T2108 periods: Day #106 over 20%, Day #65 above 30%, Day #9 above 40%, Day #4 over 50% (overperiod), Day #12 under 60%, Day #176 under 70%

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

Commentary
T2108 closed the day at 59.1%. Looking back, T2108 looks like it has nearly steadily marched higher since the last closing low on March 10th. The uptrend is even more clear on the S&P 500 (SPY) although it diverged slightly from T2108 with a marginally lower close. Incredibly, the index has neatly alternated between up and down days on this march higher.


The S&P 500 is stair-stepping back to all-time highs

The S&P 500 is stair-stepping back to all-time highs


The volatility index, the VIX, managed a minor gain as it now struggles to hold its 2015 low.


The VIX is on the defensive again

The VIX is on the defensive again


Finally, the Australian dollar (FXA) has conquered 50DMA resistance against the Japanese yen (FXY). At the time of writing AUD/JPY is toying with 2-month highs.


Is the Australian dollar in the early stages of a major relief rally?

Is the Australian dollar in the early stages of a major relief rally?


Put it all together and the writing on the wall is giving bulls and buyers plenty of reason to continue exhaling sighs of relief from the technical dangers I started noting earlier this month. As a result, I have switched the trading call from bearish to neutral. The S&P 500 is “close enough” to fresh all-time highs. Moreover, T2108 is still 10 percentage points away from overbought; this setup gives the market plenty of room to keep motoring higher. However, I am too cautious to flip to bullish on the overall market here. The neutral rating frees me up to give equal weight to bullish and bearish setups on individual stocks.

Also giving T2108 room to run is the duration over which it has failed to enter overbought territory. T2108 has now gone 176 trading days without going overbought. This is rarefied territory from the historical record (going back to 1986). The chart below shows we can count on one hand the number of times T2108 has avoided overbought territory for a longer duration. The chart also suggests that the S&P 500 should deliver about 8% in gains by the time T2108 flips to overbought territory. The last overbought day was July 3, 2104. The S&P 500 is up 6.0% since then.


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

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


T2108 has also spent 106 days above oversold territory. The historical record suggests T2108 and the S&P 500 are at a critical juncture here. The projections below show a steady ramp in expected performance from here to the time T2108 ends the 20% overperiod. The S&P 500 was last oversold on October 16, 2014. The S&P 500 is up 11.5% since then. To hold onto this gain by the next oversold period, T2108 will need to stay above oversold territory for around 100 more trading days. Such an achievement will require a healthy extension of the current rally. T2108 can also align with historic behavior by trading all the way back to oversold territory over the next few weeks. Not likely…


S&P 500 Price Change By Duration ABOVE T2108 Threshold 20%

S&P 500 Price Change By Duration ABOVE T2108 Threshold 20%


Here are some charts to occupy the time until T2108 reaches its next milestone.

Intercept Pharmaceuticals, Inc. (ICPT)

Buy the rumor, sell the news? That seems to be the case for Intercept Pharmaceuticals, Inc. (ICPT). Buyers of the secondary stock offering have made surprisingly easy money. Perhaps they are finally locking in profits after the company announced results of a drug trial. Note the consistency of the post-news selling in ICPT (I may have missed a few other important news evets).


Time for ICPT to cool off?

Time for ICPT to cool off?


iShares Nasdaq Biotechnology (IBB)

It is very possible that ICPT is suffering more from a general industry pullback than anything company-specific. The biotech ETF, iShares Nasdaq Biotechnology (IBB), has been on an absolute tear. IBB is up about 500% since the March, 2009 lows. It is up about 243% since the end of 2011. It is already up 18% year-to-date. On Friday, IBB “gapped and crapped” along with ICPT. It also followed-through with high-volume selling on Monday, just like ICPT. The bio-tech sector now has a lot more of my attention!


A VERY consistent and very strong uptrend may be taking a pause here...

A VERY consistent and very strong uptrend may be taking a pause here…


Coach (COH)
In an earlier post, I promised to buy Coach (COH) when I was felling more bullish. I think flipping from bearish to neutral is close enough. Last week, I bought the dip that seems to have conveniently found support at the lower part of the first Bollinger Band (BB).


Coach (COH) continues to maintain an uptrend from its recent lows that is following the 50DMA with multiple dip-buying opportunities along the way

Coach (COH) continues to maintain an uptrend from its recent lows that is following the 50DMA with multiple dip-buying opportunities along the way


Facebook (FB)
Last week, Venture capitalist Bill Gurley made a lot of noise about Facebook (FB) and the risk it faces in the new fearless Silicon Valley. He is particularly worried about a “risk bubble” expressed in the rapid growth of mobile app install ads. So of course, in response, FB bounced neatly off 50DMA support and soared to new all-time highs. FB has now invalidated what looked like a triple top.


Facebook achieves new all-time highs

Facebook achieves new all-time highs


iShares MSCI Germany (EWG)
The breakout for iShares MSCI Germany (EWG) above its 200DMA continues, albeit in choppy form. I continue to like EWG as the best play on an eventual comeback for Europe. Regardless, I am trying to get more disciplined about buying 200DMA breakouts as they tend to usher sustained and extended rallies.


The breakout continues for iShares MSCI Germany (EWG). It is now at 8-month highs.

The breakout continues for iShares MSCI Germany (EWG). It is now at 8-month highs.


Baidu, Inc. (BIDU)
I expressed hestinacy last week about buying back into the Baidu, Inc. (BIDU) move. The stock is already working to reassure me with a fresh post-earnings closing high and a push above 50 and 200DMA resistance.


Baidu is still trying to repair the damage from earnings over a month ago

Baidu is still trying to repair the damage from earnings over a month ago



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 EWG call options; short FB shares, long put spread, and long call options; short ICPT, long call options; long COH call options; net short the Australian dollar; net long Japanese yen

Mar
18

T2108 Update (March 18, 2015) – From Market Calm to Relief

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

T2108 Status: 53.8%
T2107 Status: 51.3%
VIX Status: 14.0
General (Short-term) Trading Call: Staying bearish until new all-time high or oversold. Fading rallies
Active T2108 periods: Day #103 over 20%, Day #62 above 30%, Day #6 above 40%, Day #1 over 50% (overperiod)(ending 8 days under 50%), Day #9 under 60%, Day #173 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
In my last T2108 Update I wrote about a surprising calm that seemed to have settled over the market. I expected that calm to get upset post-Fed; a reversal of my usual expectations of the Fed acting as a soothing, anti-volatility force of nature. The irony is not lost on me that this time around, the typical post-Fed fade volatility plan would have worked almost better than ever today. The “plan” went awry as soon as the market slid a bit after the open (I was looking for more calm), and the S&P 500 just barely kissed 50DMA support. What unfolded next was a tremendous display of market relief as bears once again lost their grip on market sentiment. The rally sent the S&P 500 (SPY) higher 1.2%, the VIX plunged 11%, and T2108 soared from 45.4% to 53.8%.


The S&P 500 surges in picture-perfect form off its 50-day moving average (DMA)

The S&P 500 surges in picture-perfect form off its 50-day moving average (DMA)


The rally was stoked by a master stroke of genius from the Federal Reserve that let it have its cake and eat it too. I sure did not even think about the possibility of the Fed pulling off rally-inspiring suggestions while at the same time threatening the market with a rate cut at anytime starting June. The key was a series of reduced forecasts for GDP, inflation, and the unemployment rate at which the economy starts to feel inflationary pressures. The Fed also adjusted its “dot plot” that pushed out rate hikes for the year. This Yahoo!Finance article – “Fed opens door wider for rate hike but downgrades economic outlook” – provides a pretty good summary.

Even if it was inadvertent, the Fed’s performance was sheer genius. The forecasts allow the market to interpret dovish implications for policy, bullish ones for bonds, and bearish ones for the U.S. dollar. However, I do see a reality check: most of the rest of the developed world is currently turning the dial higher on monetary policy. Sweeden was the latest monetary zone to fall into negative rate policy. The PATH of U.S. monetary policy remains divergent from almost everyone else, so the U.S. dollar should eventually recover its former momentum. Even as the stock market seems poised to rally further on the good news that the economy is too weak to support imminent rate hikes, the U.S. dollar is likely to start rallying again. I am undecided on where bonds go next, but the technicals are bullish again. My position in iShares 20+ Year Treasury Bond (TLT) call options is actually almost flat now…much to my surprise!


Back to rally mode for bonds as iShares 20+ Year Treasury Bond (TLT) surges

Back to rally mode for bonds as iShares 20+ Year Treasury Bond (TLT) surges


The action in the currency market was even more dramatic. The U.S. dollar weakened against all major currencies. There was an additional burst of weakness right after the close of trading in the U.S. that had all the markings of some kind of squeeze. Perhaps some big traders got hit by margin calls from over-extending themselves on dollar bullish bets. The quick reversal of that last surge makes me think it was a squeeze. These charts of the euro (FXE) versus the U.S. dollar show an example of what happened.


The euro was a focal point for U.S. dollar weakness in response to the Fed's linguistic dance

The euro was a focal point for U.S. dollar weakness in response to the Fed’s linguistic dance

A second stage surge happened right after the market closed - it was quickly reversed

A second stage surge happened right after the market closed – it was quickly reversed


I used this rally as an opportune time to short the euro at much better prices and a much better technical position. As I have written earlier, I am OK being short the euro until it closes above the bottom of the previous channel (shown above). It is no surprise to me that a sudden squeeze/surge stopped short of that resistance level.

I also used the rally to restart into put options on Caterpillar (CAT). For now, I consider this position a bet that the selling will resume. It could develop into a hedge if the S&P 500 and T2108 manage to flip my overall market trading call to bullish.

My biggest disappointment of a plan gone awry was watching iShares MSCI Emerging Markets (EEM) surge a whopping 2.5%. I left a LOT of profit on the table closing out that long side of my EEM hedged position. It would have paid for my put options with plenty of profit to spare. My biggest win was the rally in Google (GOOG) off its 200DMA. As I have explained before, the current technicals on GOOG make me OK trading the stock aggressively on the bullish side no matter what the general market is doing. So, I just happened to have a fistful of call options that paid off very well in today’s rally. I dared not try to stay greedy and hold another day. After all, the market often delivers fades of the Fed before moving on to its “true”, sustained reaction.


Google (GOOG) is finding (sloppy) support at its 200DMA

Google (GOOG) is finding (sloppy) support at its 200DMA


Fellow internet and search player Baidu (BIDU) also rallied today, but its technical position remains precarious. I really wanted to buy again, but I am forcing myself to wait until the stock proves itself with a breakout above overhead resistance from converged 50 and 200DMAs AND a downward trending trading channel.


Baidu (BIDU) rallied with the market but is still trapped within a downward channel

Baidu (BIDU) rallied with the market but is still trapped within a downward channel


Finally, the weakness in the dollar helped out commodities. In particular, the United States Oil ETF (USO) experienced a nice jump off all-time lows. It now looks like it finally wants to print a sustainable bottom with a bullish engulfing surge. Please see “A Race Against Volatility And Bearish Sentiment For The United States Oil ETF” for my latest thoughts on trading USO.


United States Oil ETF (USO) prints an impressive bullish engulfing pattern that could form the beginning of a bottom

United States Oil ETF (USO) prints an impressive bullish engulfing pattern that could form the beginning of a bottom


The Energy Select Sector SPDR ETF (XLE) also rallied, but it stopped cold at 50DMA resistance. Note that XLE has now made a third higher low. A likely bottom is very subtly unfolding. This development officially takes Direxion Daily Energy Bear 3X ETF (ERY) off my buying list for now.


Energy Select Sector SPDR ETF (XLE)  rallies right to its 50DMA resistance

Energy Select Sector SPDR ETF (XLE) rallies right to its 50DMA resistance



Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long TLT call options, net long U.S. dollar, short the euro, long UVXY call options, long SSO put options

Mar
17

T2108 Update (March 17, 2015) – A Surprising Calm

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

T2108 Status: 45.3%
T2107 Status: 47.2%
VIX Status: 15.7
General (Short-term) Trading Call: Staying bearish until new all-time high or oversold. Fading rallies
Active T2108 periods: Day #102 over 20%, Day #61 above 30%, Day #5 above 40% (overperiod), Day #8 under 50%, Day #8 under 60%, Day #172 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 stock market is ALMOST right where I left it after my last T2108 Update on March 12th. On the 13th, I seemed to nail the pre/post-Fed trade narrative when the S&P 500 (SPY) reversed its entire gain from the previous day. However, the index bounced from the lows, reversed half its loss, and it is now floating above its 50DMA all over again.


Suddenly, the S&P 500 appears to be welcoming the Fed meeting

Suddenly, the S&P 500 appears to be welcoming the Fed meeting


Interestingly, while the S&P 500 has made some progress, T2108 and the VIX are both still stuck where I last left them. This is not quite a bearish divergence, but it once again makes me suspicious of the S&P 500’s move higher. So, the trading call remains firmly bearish despite the index’s ability to trade above its 50DMA.

I made some changes to my T2108 trade. On Friday, I took advantage of the reversal and sold almost half my put options in ProShares Ultra S&P500 (SSO). Of course, I wish I had sold them all. I left a decent profit on the table in my last round of call options on ProShares Ultra VIX Short-Term Futures (UVXY). Only a BIG post-Fed disappointment can put these back into the green at this point. I also took profits on long side of my hedged play on iShares MSCI Emerging Markets (EEM). I am now sitting on completely unhedged EEM put options.

The surprising calm going into the Federal Reserve’s next decision on monetary policy has me thinking that the reverse of my expectations will play out. That is, instead of the Fed feeling a need to calm markets down and assure them as usual, the Fed might actually take this opportunity to make it abundantly clear that rates are about to go up. I fully expect the market to reverse under such a scenario. However, I highly doubt such a pullback will lead to sustained and major selling, so under such a scenario I will look to significantly reduce my bearish bets. T2108 is still just in the mid 40s anyway. (I am REALLY disappointed that the market is not set up for my favorite post-Fed fade volatility trade!).

If the market makes it through the Fed just fine, then I am back to neutral mode waiting to see what happens on the next retest or visit to overbought territory.

Now for some charts while we wait. My commentaries are in the captions of the charts. As always, I allow for some wiggle room when it comes to individual stocks versus my overall market trading call.


Caterpillar, Inc. (CAT) is confirming my need to stay bearish as it retests an intraday low from July, 2012

Caterpillar, Inc. (CAT) is confirming my need to stay bearish as it retests an intraday low from July, 2012

CyberArk Software, Ltd. (CYBR) has essentially tested its 50DMA and looks ready to resume its earlier momentum

CyberArk Software, Ltd. (CYBR) has essentially tested its 50DMA and looks ready to resume its earlier momentum

iShares MSCI Germany (EWG) has taken the bumpy ride to a 200DMA breakout

iShares MSCI Germany (EWG) has taken the bumpy ride to a 200DMA breakout

Netflix (NFLX) has suddenly lost its mojo - a gap fill underway?

Netflix (NFLX) has suddenly lost its mojo – a gap fill underway?

On Deck Capital, Inc. (ONDK) has swung wildly from a post-earnings pop, to fade and reversal and loss, to post-earnings closing high

On Deck Capital, Inc. (ONDK) has swung wildly from a post-earnings pop, to fade and reversal and loss, to post-earnings closing high



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 EWG call options, short NFLX and long NFLX calls, long EEM puts, long SSO puts, long UVXY calls

Mar
17

A Case for News Sensitivity and Unreliable Liquidity As Early Warning Signs from Markets

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 16, 2014. Click here to read the entire piece.)

{snip}

Central bankers continue to warn financial markets to properly price in risk. On March 13th, Chris Salmon, the Executive Director of Markets at the Bank of England (BoE) continued the parade when he delivered a related speech titled “Financial Market Volatility and Liquidity – a cautionary note” at the National Asset-Liability Management Europe symposium in London. {snip}

The charts below for iShares 20+ Year Treasury Bond (TLT) and CurrencyShares Swiss Franc ETF (FXF) provide reminders of the shocks that provided Salmon’s key examples:


At its peak, the one-day surge in TLT last October rivaled other one-day surges during the financial crisis (on a percentage basis)

At its peak, the one-day surge in TLT last October rivaled other one-day surges during the financial crisis (on a percentage basis)

FXF gaps upward as the Swiss National Bank loses control of its currency

FXF gaps upward as the Swiss National Bank loses control of its currency


Source: FreeStockCharts.com

In both cases, liquidity returned to the market very quickly and follow-on contagion did not occur. {snip} Salmon took comfort in this demonstration of robustness, but he was careful to note that markets should not overly rely on this amount of robustness:

{snip}

Salmon concludes that these episodes show markets are more sensitive to news and cites confirming statistical studies. He explains this extra sensitivity comes from the increased uncertainty regarding the outlook for global growth – thanks in large part to the collapse in oil prices. {snip}

The moment that markets decide holding cash makes more sense than paying governments to hold it could become yet another source of extra volatility for bond markets. {snip}

{snip}


Volatility has expanded rapidly from last year's levels - in some cases, like oil and UK long rates, option-implied volatility is at or approaching levels last seen during the crisis

Volatility has expanded rapidly from last year’s levels – in some cases, like oil and UK long rates, option-implied volatility is at or approaching levels last seen during the crisis


{snip}


The volatility index has experienced more frequent spikes since hitting 7 1/2 year lows last summer

The volatility index has experienced more frequent spikes since hitting 7 1/2 year lows last summer


Source: FreeStockCharts.com

Even though markets are getting more sensitive to news, this sensitivity does not explain the severity of the shocks in the Swiss franc and the bond market. For this Salmon turns to liquidity-related market structure:

{snip}

The most refreshing part of Salmon’s speech came near the beginning when he actually acknowledged the role central banks have played in artificially dampening volatility and incentivizing markets to under-price risk up to now… {snip}

The benefit for those of us listening to this drumbeat of warnings from central banks is that we have actually been given the luxury of time to prepare. {snip}

Be careful out there!

Full disclosure: net short the Swiss franc, net long the U.S. dollar and the British pound, long UVXY call options

(This is an excerpt from an article I originally published on Seeking Alpha on March 16, 2014. Click here to read the entire piece.)

Mar
17

Gold Is Unloved But Still Not Cheap

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 8, 2014. Click here to read the entire piece.)

Friday’s U.S. employment report delivered strong results yet again. It helped increase expectations of a Fed rate hike by June as iShares 20+ Year Treasury Bond (TLT) and SPDR Gold Shares (GLD) both traded sharply lower.


iShares 20+ Year Treasury Bond (TLT) kicks into a lower gear as the rally seems to be coming to an end

iShares 20+ Year Treasury Bond (TLT) kicks into a lower gear as the rally seems to be coming to an end

SPDR Gold Shares (GLD) looks headed for a retest of 5-year lows

SPDR Gold Shares (GLD) looks headed for a retest of 5-year lows


Source for charts: FreeStockCharts.com

{snip}

I continue to like using the relative changes in Google trends on the search terms “buy gold” and “sell gold” as one measure of market sentiment. {snip}



I interpret these data to mean that gold is relatively unloved and even uninteresting to the general public/market. {snip}

As a gold bug, I am highly intrigued by the possibilities of buying gold as a contrarian. After all, my stubborn holding of gold for so many years has been partially based on an assumption that by the time an inflation threat looms its ugly head, gold will already be very expensive, and I will not be smart and/or quick enough to buy just ahead of event. Yet, despite this apparent disdain for gold, gold is still not cheap on a relative basis. {snip}

{snip}


The S&P 500 price in gold has seen much better days

The S&P 500 price in gold has seen much better days


Source for data: Yahoo! Finance and The World Gold Council

So no wonder buyers are still not breaking down the doors to buy gold.

There are other good reasons as well. Fundamentally, inflation is simply not a concern for anyone in most developed economies. Central banks are still fighting disinflationary forces and deflationist psychology, both lingering from the financial crisis. {snip}

The balance sheets of major central banks continue growing and growing, and meanwhile we gold bugs are astounded that gold is not double or more its current price. {snip}


In total, these central bank balance sheets continue to grow linearly

In total, these central bank balance sheets continue to grow linearly


Source: “Low Inflation in a World of Monetary Stimulus” by Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe (March 5, 2015)

{snip}


Deflationary fears are so pervasive that across the globe, investors are willing to pay the government to hold their money

Deflationary fears are so pervasive that across the globe, investors are willing to pay the government to hold their money


Source: “Low Inflation in a World of Monetary Stimulus” by Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe (March 5, 2015)

Of course, the market is also demonstrating its disbelief in the ability of central banks to hit their inflation targets. Lowe also shows how across the globe headline inflation is below many inflation targets across the globe.

Again, it seems like a sound contrarian move to buy gold exactly when no one thinks inflation will be a problem, but the devil is in the details and the timing. {snip}

{snip}


In contrast to gold, the U.S. dollar is VERY loved right now

In contrast to gold, the U.S. dollar is VERY loved right now


Be careful out there!

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

(This is an excerpt from an article I originally published on Seeking Alpha on March 8, 2014. Click here to read the entire piece.)

Mar
12

T2108 Update (March 12, 2015) – Follow-Through On Bullish Divergence – But Can It Last?

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

T2108 Status: 46.6%
T2107 Status: 48.1%
VIX Status: 15.4 (down 8.6%)
General (Short-term) Trading Call: Staying bearish until new all-time high or oversold. Fading rallies
Active T2108 periods: Day #99 over 20%, Day #58 above 30%, Day #2 above 40% (overperiod), Day #5 under 50%, Day #5 under 60%, Day #169 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 did not want to believe it when I saw it Wednesday night, but there it was. A classic bullish divergence. I was startled to see that Wednesday’s close delivered a T2108 that surged strongly enough off its lows to close up over a point even as the S&P 500 (SPY) not only close down, but near its LOW for the day. I think this was one of the sharpest bullish divergences I have seen or at least that I can remember. The subsequent trading day delivered big-time.


While the S&P 500 closed near its lows on the prior day, T2108 made a strong comeback. The subsequent day delivered a near-reversal of Tuesday's plunge

While the S&P 500 closed near its lows on the prior day, T2108 made a strong comeback. The subsequent day delivered a near-reversal of Tuesday’s plunge

The S&P 500 surges right through 50DMA resistance, putting bears right back on their heels

The S&P 500 surges right through 50DMA resistance, putting bears right back on their heels


The rally today was so strong that the S&P 500 barely paused at 50DMA resistance and instead sliced right through it. This bullish behavior puts my T2108 call in a bind. Technically, this strong breakout should have me switching to full bullishness. However, the technical damage I was monitoring into the confirming selling was so convincing that I cannot easily change the trading call. As a compromise, I faded today’s rally as my last bearish move until/unless the S&P 500 breaks to a new low below 2040 or approaches overbought again. I faded by loading up on a second tranche of ProShares Ultra S&P500 (SSO) put options and restarting a tranche of call options on ProShares Ultra VIX Short-Term Futures (UVXY) as my play-the-Fed trade.

The UVXY put options could be particularly timely as the VIX fell back exactly to support at the 15.35 pivot (amazing how this line continues to act as a magnet). Even if the pivot fails to act as support, I am guessing the VIx will not crack the March lows. However, time is ticking. I am still expecting volatility to increase going into the Fed meeting next week.


The VIX dropped but closed right at the pivot point, giving bears one last glimmer of hope for a turn-around

The VIX dropped but closed right at the pivot point, giving bears one last glimmer of hope for a turn-around


I noticed that the mainstream media was at a loss to explain Thursday’s rally. It was truly one of those things that appeared to come out of nowhere. Not to mention that retail sales fell for the third month in a row. While I can refer to the bullish divergence between T2108 and the S&P 500, there was also a potential connection to the currency market…one that I happened to watch unfold in real time.

Right at midnight Eastern, the euro made a fresh 12-year low against the U.S. dollar. It was just a nick, but probably enough to knock out a bunch of stops for folks who are still trying to go long the euro (or short the U.S. dollar). The break lasted just five minutes and then a quick reversal. It took another hour or so before the action really took off. I am assuming it took some time for euro shorts to decide that the currency was not going any lower for now.


This 5-minute chart shows the anatomy of a bottom a whoosh as (likely) shorts rush for the exits

This 5-minute chart shows the anatomy of a bottom a whoosh as (likely) shorts rush for the exits


I saw this in real-time partially because I was on the lookout for something dramatic. The euro has been selling nearly non-stop for two weeks, and, as I showed in the last T2108 Update, the U.S. dollar (UUP) is starting to go parabolic. Parabolic moves are usually the beginning of the end of momentum. The EUR/USD pair had traded below its lower-Bollinger Band (BB) for days on end; on Wednesday it had extended even further. The time seemed ripe for some combustion with either a dramatic washout whoosh downward and/or a sharp reversal.


A sharp reversal for EUR/USD still ends in a fade

A sharp reversal for EUR/USD still ends in a fade


The current narrative in the market is that the U.S. dollar strength is bad for the market – nevermind that the dollar has been rallying for months without so much has harming a hair on the market’s head. So, this sudden dollar weakness could provide an easy excuse for shorts to run and buyers to buy. Moreover, the Australian dollar got new life in what could have been a delayed reaction to an employment report that did not look too bad. My favorite forex indicator, the Australian dollar (FXA) versus the Japanese yen (FXY), AUD/JPY, soared on the day and rallied right back to 50DMA resistance. I am now watching the trading action here like a hawk.


AUD/JPY attempts a comeback and provides sentimental fuel for the market's rally

AUD/JPY attempts a comeback and provides sentimental fuel for the market’s rally


All this fresh bullishness has me wary of the bearish trading bias, but I am sticking to it until I am forced to stand down. As I mentioned earlier, my compromise here is to avoid getting aggressive with bearish bets until fresh bearish signs emerge.

One bearish development is the breakdown of Intel (INTC). I found it truly amazing to see the market rally as well as it did despite this warning:

“Intel Corporation today announced that first-quarter revenue is expected to be below the company’s previous outlook. The company now expects first-quarter revenue to be $12.8 billion, plus or minus $300 million, compared to the previous expectation of $13.7 billion, plus or minus $500 million.

The change in revenue outlook is a result of weaker than expected demand for business desktop PCs and lower than expected inventory levels across the PC supply chain. The company believes the changes to demand and inventory patterns are caused by lower than expected Windows XP* refresh in small and medium business and increasingly challenging macroeconomic and currency conditions, particularly in Europe.

The data center business is meeting expectations.

The company is forecasting the mid-point of the gross margin range to remain at 60 percent, plus or minus a couple of percentage points, as lower PC unit volume is offset by higher platform average selling prices. Expectations for R&D and MG&A spending and depreciation in the first quarter remain unchanged.

All other expectations have been withdrawn and will be updated with the company’s first-quarter earnings report on April 14.”

…that resulted in a dramatic breakdown that confirms a bearish configuration for INTC.


Intel confirms 200DMA breakdown and 50DMA resistance

Intel confirms 200DMA breakdown and 50DMA resistance


Note that Intel’s description of challenging macroeconomic conditions in Europe did not stop the rally in the euro.

As I have mentioned earlier, I have bullish feelings for Google (GOOG) no matter what happens in the general market until a 50DMA breakdown. Today, the stock seemed to rest perfectly on 200DMA support. I added to my call options today. I like the convergence of the 20 and 200DMAs.


Google (GOOG) takes a pause from recent selling perched perfectly on top of its 200DMA

Google (GOOG) takes a pause from recent selling perched perfectly on top of its 200DMA


Finally, Zillow (Z) continues its bearish droop…and this despite a Goldman upgrade timed perfectly for the day after I pointed out Zillow’s bearish fade. Zillow gapped up that day but failed to pierce through 200DMA resistance. It has traded mostly downhill since then. Today, it broke through 50DMA support but bounced back. I am now in a hedged position; I added to the bullish side after seeing the recovery. I am looking for a relief bounce at least back to 200DMA resistance. Note how Zillow has completely reversed the bizarre surge that occurred after it closed its deal to acquire Trulia. I also like Zillow as a stock that has its own momentum independent of the market.


A classic roundtrip for Zillow (Z)

A classic roundtrip for Zillow (Z)

Short interest has soared against Zillow, likely at least related to arbitrage on the Trulia deal

Short interest has soared against Zillow, likely at least related to arbitrage on the Trulia deal


Source: Schaeffer’s Investment Research


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 put options, long UVXY call options, long Z shares and put options, long GOOG call options

Mar
10

T2108 Update (March 10, 2015) – Selling Intensifies With A Rush From Tech And A Parabolic Dollar

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

T2108 Status: 38.8%
T2107 Status: 45.2%
VIX Status: 16.7 (up 10.8%)
General (Short-term) Trading Call: Staying bearish until new all-time high or oversold. See caveat below. Looking for a bounce to fade.
Active T2108 periods: Day #97 over 20%, Day #56 above 30%, Day #1 under 40% (underperiod) (ending 35 days over 40%), Day #3 under 50%, Day #3 under 60%, Day #167 under 70%

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

Commentary
T2108 has proved its mettle once again. It is always more difficult to manage T2108’s overbought signals than its oversold signals, but with patience, the “close enough” rendezvous combined with strict technical levels on the S&P 500 (SPY) provided adequate warning of the current selling.


T2108 has fallen quick and fast after an extended period of waning momentum

T2108 has fallen quick and fast after an extended period of waning momentum


Now that the latest sell-off is underway, the general market is very aware of the risks. Managing short positions becomes a bit trickier. For example, T2108 has extended well below its lower-Bollinger Band (BB) and is subject to bounce sharply at any time. On Monday, the failure to mount a significant bounce from Friday’s selling demonstrated the new-found interest in selling. The chart of the S&P 500 is now well in-sync with T2108. On Tuesday, the index broke right through 50DMA support and extended below its lower-BB again.


Sellers keep up the pressure, but how long?

Sellers keep up the pressure, but how long?


I reacted to the selling by closing out my call options on ProShares Ultra VIX Short-Term Futures (UVXY). I think this could be timely given the volatility index has popped right into its 50DMA.


The volatility index, the VIX, has finally closed above the 15.35 pivot but now must contend with its 50DMA

The volatility index, the VIX, has finally closed above the 15.35 pivot but now must contend with its 50DMA


On Monday, I used the small rise in the S&P 500 to nibble on ProShares Ultra S&P500 (SSO) put options. Even with the 70% gain in one day’s work, I decided to hold onto this side of my T2108 bearish bet (and of course I wish I had been MUCH more aggressive!). If the index gaps down Wednesday morning (seems to never happen anymore as follow-through), I will close this position out. If the index bounces, I will start buying a fresh position of call options on UVXY.

After a twitter chat, I realized that the current short-term trading pivots around next week’s Fed meeting (March 16th and 17th). I expect volatility to trend upward into the Fed’s meeting and perhaps into the subsequent press conference. I then expect volatility to collapse, or at least the premium built into volatility between now and then should reverse. Regular readers likely recall that my favorite post-Fed trade is to fade volatility as the Fed typically does what it can to calm markets down. The Fed may feel particularly compelled to sooth fears given the strong run-up in the U.S. dollar and growing “fears” about rate hikes. (Nevermind, the Fed is unlikely to raise rates much even after it begins the tightening cycle). My SSO puts are targeting the Friday, March 27th expiration, the week following the Fed, so I am staying patient. Only a break through 2100 and definitely a new all-time high will end my bearish trading call before oversold conditions (or “close enough”).

On the forex side of things, the Australian dollar versus the Japanese yen (AUD/JPY) is confirming trouble ahead as it is falling from 50DMA resistance.


The Australian dollar versus the Japanese yen seems ready to retest recent lows...and lead the way lower for the stock market

The Australian dollar versus the Japanese yen seems ready to retest recent lows…and lead the way lower for the stock market


With the NASDAQ (QQQ) getting stopped cold at 5000 and just short of its all-time high, you can bet that investors and traders are looking at tech holdings a little more anxiously. No one of course wants to get caught holding the bag…especially again 15 years later!


The NASDAQ makes a 1-day stop above 5000 before turning south

The NASDAQ makes a 1-day stop above 5000 before turning south


You can see the rapid exit in tech stocks like Netflix (NFLX) and Google (GOOG)…


Google (GOOG) rushes head first into a test of 200DMA support. It remains one of the few stocks on which I will stay bullish for now

Google (GOOG) rushes head first into a test of 200DMA support. It remains one of the few stocks on which I will stay bullish for now

Netflix (NFLX) is accelerating so hard into a test of significant support at the converged 50 and 200DMAs that sellers were able to hold the stock below its lower-Bollinger Band

Netflix (NFLX) is accelerating so hard into a test of significant support at the converged 50 and 200DMAs that sellers were able to hold the stock below its lower-Bollinger Band


Oil-related stocks are facing renewed heat as well.


Energy Select Sector SPDR ETF (XLE)  is once again facing the wrath of sellers but trading volume is MUCH lower this time around

Energy Select Sector SPDR ETF (XLE) is once again facing the wrath of sellers but trading volume is MUCH lower this time around


Bearish bets on XLE provide a nice double-whammy because it can drop on either lower oil and/or a weaker stock market. However, I sold my latest accumulated position in Direxion Daily Energy Bear 3X ETF (ERY) as it stretched above the upper-BB for a third straight day. Not only does the low selling volume on XLE have me wary, but it also looks like ERY is making a series of lower highs.


A picture-perfect bounce off 200DMA support but ERY is vulnerable to a quick and sharp reversal with the extension above the upper-BB on low buying volume

A picture-perfect bounce off 200DMA support but ERY is vulnerable to a quick and sharp reversal with the extension above the upper-BB on low buying volume


I also closed out my put options on American Express (AXP). I was probably a bit early as a retest of recent lows is definitely in play here.


Follow-through selling to a classic short setup

Follow-through selling to a classic short setup


Somehow, I completely forgot to restart my hedged trading strategy on iShares MSCI Emerging Markets (EEM) before the sell-off. Options on EEM were again extremely cheap considering the potential for sharp and quick moves. I somewhat corrected my mistake by grabbing a large position today. I got put options expiring in April to give me sufficient runway to take advantage of what could eventually be a nasty tumble to or below 2014 lows almost no matter what the Fed does next week. I got call options expiring next week in case EEM rallies in spite of itself. Right now, EEM is WELL below the lower-BB and subject to a sharp reversal. I will sell the call options into such a reversal and hopefully those profits will pay for at least half of the put options.


iShares MSCI Emerging Markets (EEM) suffers a severe breakdown

iShares MSCI Emerging Markets (EEM) suffers a severe breakdown


And in case you are somehow not following the currency markets closely (shame on you if you are a trader!), I have to remind you that the dollar is soaring and the move is getting parabolic. Whatever fears are baked into the implications of a rising dollar could be reaching a crescendo right along with the Fed meeting.


The rush for the U.S. dollar is reaching a parabolic pitch

The rush for the U.S. dollar is reaching a parabolic pitch


Needless to say, March is shaping up to be a pivotal month for financial markets!


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 put options, net long the U.S. dollar, net short the Australian dollar, long EEM calls and options, short NFLX and long call options

Mar
10

Apple Trading Model – Post-Watch Technical Update

written by Dr. Duru
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Apple (APPL) has officially announced the launch of its latest product, the iWatch.


Apple CEO Tim Cook shows off the Apple Watch

Apple CEO Tim Cook shows off the Apple Watch


Source: Yahoo! Finance

The Apple Watch Sport Collection

The Apple Watch Sport Collection


Source: Apple.com

This makes a great juncture to provide a quick technical update on Apple and update the classification trees for the Apple Trading Model (ATM). For those of you who are new to the ATM, please read up on it here: The Apple Trading Model (Re)Explained.

Here are the links to the classification trees that define the day-to-day trading rules on Apple. They are updated through March 6, 2015, thus ushering in a new module for 2015.

Trade from the previous close – Closing Sub-Models
2010
2011
2012
2013
2014
2015

Trade from the open (intraday) – Opening Sub-Models
2010
2011
2012
2013
2014
2015

Unlike previous product announcements, AAPL did not rally into the big event. Instead, it sagged from the moment the rumors broke that AAPL would make the launch announcement in early March. The stock only showed some life on an intrady basis after the Watch event began. After an hour of excitement, AAPL sank to new lows and then ended the day right about where the event began – a perfect net non-event from a trading perspective. On the daily chart, AAPL looks like it has traded into a perfect stalemate.


Traders and investors were selling on the news ever since the Watch event was announced

Traders and investors were selling on the news ever since the Watch event was announced

Apple surges after the Watch event began, but made a complete roundtrip by the end of the event AND the close of trading

Apple surges after the Watch event began, but made a complete roundtrip by the end of the event AND the close of trading


Source: FreeStockCharts.com

With the Watch event out of the way, AAPL’s stock is actually in decent shape. The 20-day moving average (DMA) has held as approximate support for the last three days. A close over $130 could launch the next leg up. On the other hand, a close below the recent support would set up a potential 50DMA retest.

The optimism remains extremely high on AAPL and this is my main concern from a technical perspective.

The open interest put/call ratio is down at a 1-year rank of 28%. The ratio fell dramatically ahead of earnings, and has ever so slowly crept higher ever since.


Options traders in AAPL are very bullish

Options traders in AAPL are very bullish


Source: Schaeffer’s Investment Research

Short interest is at rock bottom levels although it stopped declining in December. Short interest is a paltry 1% of float. Note how in the last two years that brief increases in short interest have coincided with pullbacks in AAPL.


Apple bears have run as fast as possible from the steamroller that is AAPL's stock

Apple bears have run as fast as possible from the steamroller that is AAPL’s stock


Source: Schaeffer’s Investment Research

Finally, according to Schaeffer’s Investment Research, analysts are just about as giddy as possible about AAPL. Collectively, analysts currently have 19 strong buys, 4 buys, 6 neutrals, and no sell ratings on AAPL.

In other words, there is very little room overall for incremental optimism and enthusiasm for AAPL…even with the forward P/E still sitting at a reasonable 14. The Watch-related pullback still leaves AAPL with an incredible 15% year-to-date gain while the NASDAQ is up just 4% and the S&P 500 (SPY) is barely staying above water at 1%. Given Apple’s size (largest market cap in the world and roughly double the #2!), it is hard to imagine such large out-performance being sustainable. Something needs to “catch-up.” In the meantime, I am sticking to the day-to-day trades recommended from the ATM (still mostly bullish) and keeping an eye out on the bearish warnings looming over the general market.

Be careful out there!

Full disclosure: no positions

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