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

How to Trade Growing Pressures On Herbalife’s Stock

written by Dr. Duru
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Here are the follow-up details on this tweet from Wednesday, November 26th, 2014.

Herbalife (HLF) has experienced a strong rally from recent lows. The stock has risen 9 out of the last 10 days on good trading volume. It is now resting just under resistance at the downward trending 50-day moving average (DMA).


Herbalife's bounce runs into its first critical test: potential resistance at the 50DMA

Herbalife’s bounce runs into its first critical test: potential resistance at the 50DMA


Source: FreeStockCharts.com

Adding to the intrigue in the stock is the decision of the Chairman/CEO to hold all the stock he acquired from exercising expiring stock options granted to him 10 years ago. This is essentially free money for him so the statement is not as significant as it could be. Still, it should be duly noted as a potentially positive catalyst…or at least the CEO recognized the potentially NEGATIVE press he and the company would receive from converting all this stock into cold, hard cash. From the press release on Tuesday, November 25 titled “Herbalife Chairman and CEO Increases His Personal Share Holding in the Company“:

“Global nutrition company, Herbalife (NYSE: HLF), today announced that Michael Johnson, Herbalife’s chairman and CEO, has engaged in a net exercise transaction involving 750,000 stock options that were granted to him in December 2004 and were due to expire in December 2014. Because of his complete confidence in the continued and future success of the company, Mr. Johnson has decided that he will hold all the shares issued on exercise of the option, which will be the total amount, net of those necessary to cover the exercise price and any taxes related to the transaction.”

Making this PR play more interesting and more important is the building negative sentiment aligning against the stock: it has suffered two big post-earnings gap downs and a -46% year-to-date performance.

Shares short have risen all year against HLF as bears press their bets. Shares short have returned to levels last seen in September, 2013 and represent a whopping 49% of the float!


Bears have nailed HLF this year as they press shorts into a declining stock

Bears have nailed HLF this year as they press shorts into a declining stock


Source: Schaeffer’s Investment Research

Options players have also been pressing their bets against HLF…


The put/call open itnerest ratio on HLF has soared this year in two major spurts. It is now at 2-year highs

The put/call open itnerest ratio on HLF has soared this year in two major spurts. It is now at 2-year highs


Source: Schaeffer’s Investment Research

Despite the growing anticipation that HLF will continue to decline, collapse even, implied volatility is well off its highs. This means the market is not pricing in a big move in HLF in the near-term.


Post-earnings, implied volatility is settling back to 2014 norms - indicative of a market that does not expect a big move in the short-term

Post-earnings, implied volatility is settling back to 2014 norms – indicative of a market that does not expect a big move in the short-term


Source: Schaeffer’s Investment Research

A very simple trading strategy can be constructed from all this information. It can even be conditioned on whether you are inclined to bias bearish or bullish.

If you are bearish on HLF, this is a GREAT place to put in an aggressive short (if you can find the shares!) or better yet, buy options. The implied volatility suggests options are relatively “cheap,” and options automatically cap your potential loss…unlike a short. Bearish positions should stop out with a close above the 50DMA resistance that gets follow-through buying. More cautions and measured bears or otherwise agnostic traders can wait for HLF to confirm renewed weakness with a pullback from 50DMA resistance that provides a close BELOW Wednesday’s low of $42.

As bears are stopping out (or should be) above the 50DMA, bulls or otherwise agnostic traders can step in with buys assuming the stock should maintain its momentum off the lows. A good short-term upside target is the 200DMA resistance or a fill of the last post-earnings gap down.

However, HLF resolves the tensions at 50DMA resistance, I strongly suspect the move will be sustained given the massively negative sentiment on the stock. Either an unwind of this negative sentiment will provide a powerful upward catalyst or a sustained increase in negative sentiment will turn the stock southward all over again. The tame volatility numbers suggest that the move may not be dramatic, but it could very easily be sustained.

Be careful out there!

Full disclosure: no positions (yet!)

Nov
26

The Squeeze On Renters And Implications for the Housing Market

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on September 7, 2014. Click here to read the entire piece.)

I tracked down an article posted in Boston.com called “Renters Suffer as Evictions Surge in U.S.” after hearing the topic referenced in a recent Slate Money podcast. One of the guests quoted a dire statistic that 1 in 6 renters in New Jersey has been served eviction notices. I had to track down the article because it is an alarming statistic yet the guest was surprisingly vague on details and overall context. Unfortunately, the article did not provide enough details to understand the scope, scale, and significance of this situation. In a typical style that emphasizes storytelling over definitive proof, the article scattered its facts and stats around very compelling anecdotes and tragic tales of individual hardship. {snip}

The lack of comprehensive stats suggests that the increasing eviction notices are more local than national in scope. {snip} The article even acknowledges that eviction rates can depend on the legal and regulatory environment in a city or state.

{snip}

The rising demand for, and tight supply of, apartments means landlords can now afford to be more exacting in their standards, if not outright aggressive in replacing renters with those who can pay more. {snip}


Multi-family housing starts have returned to highs last seen in the last housing boom.

Multi-family housing starts have returned to highs last seen in the last housing boom.


Source: St. Louis Federal Reserve

The evidence on (aggregate) landlord behavior under these conditions of tight inventory must be mixed. For example, RealPage (RP) claimed in an earnings report near the beginning of the year that landlords surprised their in-house economist by choosing to secure lease renewals rather than go after the higher rents enabled by extremely low vacancy rates.

{snip}

Click link for larger view…


The affordability squeeze on renters

The affordability squeeze on renters


Source: The Joint Center for Housing Studies of Harvard University

This point was further emphasized by an August 20th report from Zillow (Z) titled “July Data: Buying Is a Bargain, But Renting Remains Expensive“:

{snip}


A stark divergence in income necessary for owning versus renting

A stark divergence in income necessary for owning versus renting


Source: Zillow

{snip}

The resulting lack of entry-level inventory throws otherwise qualified households into an already crowded rental market where in an a different time, they would have instead been home owners.

{snip}

Be careful out there!

Full disclosure: long DHI, KBH

(This is an excerpt from an article I originally published on Seeking Alpha on September 7, 2014. Click here to read the entire piece.)

Nov
26

Million-Dollar Plus Homes and A Race for Affordability In California

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on August 11, 2014. Click here to read the entire piece.)

Last month, I wrote about the strong sales activity in million dollar plus homes in Canada that are occurring despite poor jobs growth in the country. It was an interesting study in the growing dilemma facing major central banks who have robust housing markets heating up in slow-growth economies. This dilemma is not surfacing in the U.S. as various combinations of deflationary psychology, a cooling in housing sales, and overall housing activity that has still barely lifted off the post-recession bottom exist across many of America’s housing markets. However, the U.S. does have some strong housing markets and home builders are generally trying to focus their businesses on these areas. In at least one of these regions, the greater San Francisco (SF) Bay Area (and the state of California overall), million-dollar plus homes tell a particularly poignant story of how the scales are tipped toward the higher-end of the economic scale.

{snip}

The very high-end of the market is enjoying sales records across the board:

{snip}

Record high-end sales and soaring rents in the SF Bay Area

{snip}

For example, last month, the San Jose Mercury News reported on the “relentless rise” in Bay Area apartment rents. {snip}

Rent pressures across the country

{snip}


Prices of Apartment Properties Versus Prices of Single-Family Homes

Prices of Apartment Properties Versus Prices of Single-Family Homes


Source: “The State of the Nation’s Housing 2014“, The Joint Center for Housing Studies (JCHS) of Harvard University

Additions to the rental supply have focused on those most able to pay:

{snip}

These disparities have created a situation where affordability in the U.S. as a whole has improved for home buyers but not renters. {snip}

SF Bay Area dislocations

For the SF Bay Area these dynamics mean that those workers not enjoying the benefits of the tech-driven boom are making the time-honored trek to move further and further outside the core to find affordable housing and/or find ways to save for a down payment for an eventual home purchase. {snip}

Well-positioned home builders

The upshot of all these housing dynamics is that home builders like KB Home (KBH), Lennar (LEN), and Tri Point Homes (TPH) who have high concentrations of their business in California should continue to see good business in the state, and the SF Bay Area in particular. {snip}

{snip}

Be careful out there!

Full disclosure: no positions

(This is an excerpt from an article I originally published on Seeking Alpha on August 11, 2014. Click here to read the entire piece.)

Nov
26

T2108 Update (November 26, 2014) – FINALLY Overbought, Essentially (including Chart Reviews of DE and INTC)

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

T2108 Status: 69.99%
T2107 Status: 54.6%
VIX Status: 12.1
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #28 over 20%, Day #26 over 30%, Day #23 over 40%, Day #21 over 50%, Day #16 over 60% (overperiod), Day #98 under 70% (underperiod)

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

Commentary
So tantalizing part 2.

Hard to believe, but, yes, T2108 closed at 69.99% today.


T2108 continues to tease along the overbought threshold

T2108 continues to tease along the overbought threshold


This is a rounding away from 70% and so essentially represents overbought, especially after T2108 first crossed the 70% threshold 3 days ago and scraped along it since. Because my code that calculates historical relationships defines overbought strictly as 70.0% and above, I am not starting the counter just yet. For trading purposes, this milestone of 69.99% is definitely good enough to trade as if T2108 is overbought. Refer to the last T2108 Update for related trading rules.

The S&P 500 closed strong at its high of the day and a new closing all-time high. It did not beat out the intraday high though.


Looks like yet more room to run for the S&P 500

Looks like yet more room to run for the S&P 500


The VIX is continuing its downtrend as it hit 12.1%. Since a major fade from the 15.35 pivot last week, the VIX has been going down in a straight line by steady and nearly equal increments. There is still a short runway to go lower still. I have not shown the destructive impact on ProShares Ultra VIX Short-Term Futures (UVXY) in a while. Too bad I have not focused on put options on UVXY over the past week…


UVXY still knows no bottom

UVXY still knows no bottom


Or maybe I should have just stayed long ProShares Short VIX Short-Term Futures (SVXY):


The "right" way to play volatility...although it is very likely to print a lower high soon

The “right” way to play volatility…although it is very likely to print a lower high soon


Even the Australian dollar (FXA) versus the Japanese yen (JPY) has turned sharply upward. AUD/JPY bounced nicely off the psychologically important 100 level in what is starting to look like a hammer bottom that signals an end to the downward pressure. Good thing I used the opportunity to buy and did not jump on the bearish warning right away.


Keeping a close eye on developments with AUD/JPy as it could provide THE key signal for whether the overbought period is short-lived and bearish or long-lived and bullish

Keeping a close eye on developments with AUD/JPy as it could provide THE key signal for whether the overbought period is short-lived and bearish or long-lived and bullish


Charts of the day go to post-earnings Deere & Company (DE) and post analyst day Intel (INTC).

Deere & Company (DE) remains perfectly trapped between its 50DMA on the low side and its 200DMA on the high side. Earnings did not resolve the stalemate. In fact, it highlighted the stalemate by touching BOTH ends of the range on the day. DE now has my attention, and I am assuming a breakout, whether up or down, will likely be the start of a strong and sustained move in the given direction. Advantage is likely with the bulls given the 50DMA is now sloping upward.


Deere & Company (DE) is on the edge of what could (should) be a major breakout or breakdown

Deere & Company (DE) is on the edge of what could (should) be a major breakout or breakdown


Almost nothing says “bullish stock market” better than Intel (INTC) at or around 14 year highs. Absolutely amazing. ‘Nuff said.


A very bullish run from a post-earnings gap down

A very bullish run from a post-earnings gap down

It's a different Intel this time

It’s a different Intel this time


My strategy to trade INTC between earnings continues to work very well…except this time I bailed far too early!

Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO shares, long NFLX put spread

Nov
26

T2108 Update (November 25, 2014) – Scratching At Overbought Levels As Currency Markets Fire A Warning Shot

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

T2108 Status: 69.1%
T2107 Status: 53.8%
VIX Status: 12.3
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #27 over 20%, Day #25 over 30%, Day #22 over 40%, Day #20 over 50%, Day #15 over 60% (overperiod), Day #97 under 70% (underperiod)

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

Commentary
So tantalizing.

After crossing overbought territory on Friday, T2108 has inched higher the last two days…and yet has STILL failed to close at or above the 70% threshold that marks overbought conditions.


A tease at the overbought threshold

A tease at the overbought threshold


The S&P 500 (SPY) closed down marginally but overall it is maintaining a bullish bias and perspective.


The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off

The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off


As the suspense extends, volatility continues to plunge, seemingly “guaranteeing” that T2108 WILL close in overbought territory at some point soon.


The fear has dissipated almost as quickly as it flared

The fear has dissipated almost as quickly as it flared


I discussed the trading strategy in the last T2108 Update and repeat it here for reference:

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

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

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

I mention this because ONE new wrinkle has appeared in the form of the Australian dollar (FXA) versus the Japanese yen (FXY). AUD/JPY has suddenly turned down sharply. This currency pair has been a trusty indicator all year either as a leader or a confirmation. So, I sat up VERY straight when I took a look at this chart…


A familiar warning sign from AUD/JPY? The crack of the 100 level serves as a good psychological marker of potential trouble

A familiar warning sign from AUD/JPY? The crack of the 100 level serves as a good psychological marker of potential trouble


For now, I remain net long the Australian dollar and used this dip in AUD/JPY as a buying opportunity given warranted bearishness on the Japanese yen. I am prepared to greatly increase my short of AUD/USD if the Aussie continues to lose altitude.

So hold onto your seats. In the U.S., Thanksgiving is coming followed by one of the most important shopping days of the year. It is treated as a major retail and financial milestone. In the currency markets, I am guessing it is a time of low volume and a chance for tricky traders to play tricky games. Under these circumstances it is more important than ever to stay focused on the fundamental, underlying message from T2108: stay bullish until proven otherwise. In the currency markets, I translate the conviction to the trend is our friend until it ends.

I conclude with more Netflix (NFLX) drama. Finally some palapble news! From Seeking Alpha:

“Citing the recent slowdown in the U.S. streaming sub growth (as shown by the company’s Q3 numbers), Stifel’s Scott Devitt has downgraded Netflix to Hold. Devitt: “We view risk / reward as balanced at current prices. We also view shares as more attractive in the low-$300 range until we gain more clarity on domestic subscriber growth trajectory, all else being equal.” He maintains a positive long-term stance on Netflix due to expectations for international success, but thinks U.S. growth concerns will remain a near-term overhang.

Separately, Reed Hastings stated in Mexico City yesterday Netflix’s Latin American ops now have ~5M subs (out of a global base of 53M), and aren’t yet profitable. Hastings also admitted pirated content remains a challenge for Netflix in the region.”

NFLX gapped down at the open on the heels of this news, and I kicked myself for not being positioned short. I chased the stock down with a single put option and sold it as soon as selling momentum took it into a decent profit (almost 50%). I also put in a limit order for a put spread in case NFLX would produce another fading opportunity. Much to my surprise, it triggered at a lower stock level than I expected as NFLX’s bounce just barely breached the high on the day.

This trade is perhaps the most risky of the many bearish trades I have put on NFLX since its recent top. The stock printed a hammer below its lower-Bollinger Band (BB) on high selling volume. Now that there is finally news to serve as a beacon for selling and fear, it could also serve as selling catharsis. That is, this news could (ironically enough) wring out the final sellers who waited to bail until some kind of news came out to give them a reason to get out the way. I can easily see NFLX bouncing again out of these over-extended conditions. After all, the Mexican news is relatively minor on the scale of NFLX’s business. Moreover, the analyst downgrade was more an aspirationl trading call hoping for a low 300s entry point to play a HIGHER price target at $380. As usual, stay tuned!


Has the selling finally reached a climax for NFLX or is a downgrade just the beginning of more to come?

Has the selling finally reached a climax for NFLX or is a downgrade just the beginning of more to come?


Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO shares, long NFLX put spread

Nov
25

There Is Nothing Unusual About the Latest (Sharp) Rally

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on August 28, 2014. Click here to read the entire piece.)

The S&P 500 (SPY) has been one stubborn index. Despite so many possible catalysts to deliver for the bears, the index has bounced back from every concern. This is of course what it means to trade at all-time highs.

I can understand the angst because THIS was supposed to be the year of a 10% correction, long overdue following an incredible 2013. {snip}

One piece I noticed that made rounds related to the supposed remarkable “speed” of the current gains came from the Wall Street Journal’s MoneyBeat. In an article amply titled “A Timeline of S&P 500 Milestones,” the WSJ noted:

{snip}

I have become accustomed to people talking about points on the Dow Jones Industrial Average (DIA) without considering percentage moves, but this piece was one of those rare moments the S&P 500 was made to suffer for points over percentages. It turns out that the recent move is not unusual at all when observed with the proper lens of percentages…even after greatly shortening the timeframe for the recent gains.

The bulk of the S&P 500’s 100-point gain since the first finish above 1900 in May has come in just 13 trading days. On August 7, 2014, the S&P 500 closed at 1909.57. On August 26, 2014, the index closed at 2002.02. Over the 13 trading-day rally, the S&P 500 gained 92.45 points for a 4.7% gain. Since 1950 and through August 1, 2014, there have been a total of 1,148 trading days where the 13-day gain was at least 4.7%. This is out of a total 16,237 trading days – a non-trivial 7.1% of the time. The highest 13-day gains occurred in 2008 and 2009 with gains ranging from 18.1% to 23.1%. There have been 79 trading days with double-digit 13-day gains.

{snip}


And the beat goes on for the SPDR S&P 500 (SPY)

And the beat goes on for the SPDR S&P 500 (SPY)


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: no positions

(This is an excerpt from an article I originally published on Seeking Alpha on August 28, 2014. Click here to read the entire piece.)

Nov
24

Australian Dollar Loses Steam from Surprise China Rate Cut

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on November 24, 2014. Click here to read the entire piece.)

One thing about a trading range is that it gives both bulls and bears a lot of trading opportunities.

The latest disturbance of equilibrium in the Australian dollar (FXA) was the surprise rate cut from China’s central bank. At the time it helped the Australian dollar surge against all major currencies. At the time of writing, the currency has already given up most or all its gains against those same currencies, particularly the U.S. dollar. The chart below shows that FXA continues to pivot around the previous 2014 low as the current trading range extends.


The celebration from the surprise rate cut from China's central bank is already fading for the Australian dollar

The celebration from the surprise rate cut from China’s central bank is already fading for the Australian dollar


Source: FreeStockCharts.com

{snip}


Odds of a rate cut in December are back to levels just about as low as they can go

Odds of a rate cut in December are back to levels just about as low as they can go


Source: RBA Rate Indicator

{snip}

Be careful out there!

Full disclosure: net long the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on November 24, 2014. Click here to read the entire piece.)

Nov
23

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

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

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

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

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

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

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

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


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

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


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


The dramatic turn-around in sentiment continues

The dramatic turn-around in sentiment continues


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

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


Caterpillar leaps into a major, bullish breakout.

Caterpillar leaps into a major, bullish breakout.


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

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


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

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


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

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


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

KING is trying to prove critics and skeptics wrong…


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


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

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


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


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

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


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


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

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


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


A bottoming underway for TEX?

A bottoming underway for TEX?


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

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


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

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


Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO shares, log EEM put and call options,

Nov
19

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

written by Dr. Duru
Bookmark and Share

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

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

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

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


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

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


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

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


Has BABA finally found support at its 20DMA uptrend?

Has BABA finally found support at its 20DMA uptrend?


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

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


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

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


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

Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO shares, long NFLX put spread

Nov
18

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

written by Dr. Duru
Bookmark and Share

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

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

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

Commentary


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

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

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

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


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

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


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

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

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

Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO shares

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