ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Oct
29

Oil Has Been A Poor Leading Indicator for (Recent) Recessions

written by Dr. Duru
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Every time oil drops these days, I notice hand-wringing about whether the fall indicates a recession is somewhere close on the horizon. There is an intuitive appeal to this assumption. Oil is still an engine of economic activity, so declining prices must indicate falling demand. What seems to be “different” this time is a true supply glut that has now been exacerbated by Saudi Arabia’s refusal to cut supply to put a floor under prices. No matter what dynamics are underway now, the recent history shows that changes in oil prices are a very poor leading indicator for recent recessions. In fact, if anything, a period of sharply RISING prices seems to be a better alarm bell for a recession.


Oil is falling but remains at relatively "elevated" levels from the post-recession recovery

Oil is falling but remains at relatively “elevated” levels from the post-recession recovery


Source: St. Louis Federal Reserve

Year-over-year changes in oil's price do not provide a discernible pattern relative to recent recessions

Year-over-year changes in oil’s price do not provide a discernible pattern relative to recent recessions


Source: St. Louis Federal Reserve

So, enjoy this early Christmas present of lower oil and gasoline prices. The average consumer is.


Is it almost time to BUY PowerShares DB Oil ETF (DBO) as it approaches a major point of support?!

Is it almost time to BUY PowerShares DB Oil ETF (DBO) as it approaches a major point of support?!


Source: FreeStockCharts.com

Full disclosure: no positions

Oct
29

T2108 Update (October 28, 2014) – An S&P 500 Breakout to the Upside Target – Now What?

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: 55.3%
T2107 Status: 48.9%
VIX Status: 14.4 (falls 10%, uptrend breaks, and VIX goes below 15.35 pivot)
General (Short-term) Trading Call: Aggressive bears should have stopped out of shorts, bulls take a few profits, otherwise hold. 50DMA breakout puts bulls back in control.
Active T2108 periods: Day #8 over 20%, Day #6 over 30%, Day #3 over 40%, Day #1 over 50% (ending 31 days under 50%), Day #36 under 60%, Day #78 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 bears failed the test…miserably. As I anticipated from my last T2108 Update, the major indices were indeed setup for a major breakout above their 50DMAs. The S&P 500 (SPY), the NASDAQ (QQQ), and even iShares Russell 2000 (IWM) ALL broke out decisively above their respective 50-day moving averages (DMAs).


The S&P 500 makes a very convincing breakout above 50DMA resistance

The S&P 500 makes a very convincing breakout above 50DMA resistance

The NASDAQ CONFIRMS its 50DMA breakout with an exclamation point

The NASDAQ CONFIRMS its 50DMA breakout with an exclamation point


Despite the doubts, iShares Russell 2000 (IWM) also managed to print a major 50DMA breakout.

Even iShares Russell 2000 (IWM)  manages to make a major 50DMA breakout that reaches as far as its 200DMA

Even iShares Russell 2000 (IWM) manages to make a major 50DMA breakout that reaches as far as its 200DMA


Speaking of Caterpillar (CAT), it has (surprisingly) managed to reconquer the psychologically important $100 level. It is now directly under converging 50 and 200DMA resistance. This position now makes CAT a more perfect hedge on long positions than ever. HOWEVER, experience has taught me that these converging forms of resistance rarely hold, especially without some direct and related catalyst to provide the selling pressure.


CAT bottomed with the stock market and is now providing the rallies next critical (proxy) test at converged 50 and 200DMA resistance

CAT bottomed with the stock market and is now providing the rallies next critical (proxy) test at converged 50 and 200DMA resistance


The strong rally in the stock market helped to escort the volatility index on a rapidly descending escalator that sent ProShares Ultra VIX Short-Term Futures (UVXY) right back to very familiar territory.


The volatility index collapses again - seemingly ending what I thought would be a longer lasting uptrend bias

The volatility index collapses again – seemingly ending what I thought would be a longer lasting uptrend bias

In a flash, ProShares Ultra VIX Short-Term Futures (UVXY) is right back to a very familiar position

In a flash, ProShares Ultra VIX Short-Term Futures (UVXY) is right back to a very familiar position


The advantage clearly goes back to the bulls even with all-time or multi-year highs still looming above as resistance. Bulls can now buy FRESH positions with stops below the 50DMA. Bulls can hold positions and wait to see what happens when (if?) the highs get re-challenged. Bulls can especially take some more profits from hard-earned positions opened during the recent oversold periods.

T2108 closed at 55.3%, well-off a new overbought period, yet, the S&P 500 has already hit my 1985 target. In fact, almost on the nose! This means that if the S&P 500 continues higher into overbought conditions, it will produce a rare period where the 70% underperiod produces a positive gain for the S&P 500. That is, the drop from and return to overbought conditions would deliver a positive S&P 500 performance. Seeking consistency with the historical behavior in T2108, I am watching now for a period of significant churn that allows T2108 to increase much more slowly with overbought conditions conveniently triggering at the recent highs.

Given my bullishness going into this week, I bought ProShares Ultra S&P500 (SSO) call options into Monday’s dip. This was one of several positions in other stock setups. Tuesday delivered bigtime with the breakouts shown above, and I closed out the SSO call options with a cool double. I am still holding onto my SSO shares purchased during the oversold period. The breakout gives me renewed confidence, but it also now provides a clear stop for exiting the position if needed.

There are some traders who are just now getting bullish given the clearance of the technical hurdles. The waiting is understandable from a conservative risk/reward standpoint, but these traders now have to wait out a breakout to fresh highs for a big payoff. The real reward was in sticking to the trading rules during the oversold period. The latest big move only further validates my technical case for a bottom in the stock market. The breakout makes me a little more aggressive on buying dips as long as T2108 stays below overbought territory (70% or higher) and the S&P 500 above its 50DMA.

I continue to be bemused by the bears who are overly focused on the trees and forgetting the forest. The latest excited shouts of glee (on twitter anyway) offering “proof” of the bearish thesis have come from the 10% or so after hours post-earnings drop by Facebook (FB). While I continue to short FB as part of a hedged strategy I laid out a long while ago, I do not see FB’s stumble as proof of any over-arching bearish thesis. The forest is rapidly healing all around the few fallen (hyper-expensive) stocks. The oversold period was all about panic over everything under the sun that could possibly produce worry and concern. It was a technical breakdown and a violent one at that. The end of the oversold period and the subsequent buying on volume has been all about putting those fears to bed and in the rearview mirror. It is a technical recovery in that it has pressed reset on the prior technical breakdown. The poor reactions to a few over-valued stocks do not change the larger picture.

Moreover, it is so much better to follow the technicals here than to go through the extremely difficult exercise of staking a claim to a market top. Exhibit A is Alibaba Group Holding Limited (BABA).

Alibaba Group Holding Limited (BABA) is now sprinting higher...

Alibaba Group Holding Limited (BABA) is now sprinting higher…


Today (October 28th), BABA made a marginal new all-time high before closing right at its all-time intraday high. BABA has made four straight new closing all-time highs in a row now. This is NOT the behavior of a stock that has signaled a market top. As a technical signal, believers in an “Ali Blah Blah top” should now recognize the red flag on the thesis and ponder the possibilities for the stock market to soar right past the highs set in mid-September at the time of BABA’s IPO. Something tells me the introspection and re-examination will not happen.

Fortunately, the 50DMA breakout has made the trading call very simple and BABA-independent. Shorts placed in anticipation of of firm 50DMA resistance should have been stopped out. Traders following the T2108 rules are OK to take a few more profits here, especially to fund future purchases on the next dips and or to sit tight through any coming retest of 50DMA as (now) support.

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, short FB, long FB call options and spread

Oct
28

Finally Stepping In to Start Buying iShares MSCI Brazil Capped ETF

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on October 27, 2014. Click here to read the entire piece.)

The iShares MSCI Brazil Capped ETF (EWZ) has fallen rapidly from a 16-month high to a retest of 2014 lows in just seven weeks. The 27% loss over this timespan represents a remarkable collapse in sentiment, but the move is quite consistent with EWZ’s downward trek since its post-recession peak in 2010/2011.


EWZ has been stuck in a downward channel for the majority of this post-recession period

EWZ has been stuck in a downward channel for the majority of this post-recession period


Political drama from Brazil’s presidential election and subsequent run-off have generated extremes in volatility on the way to the plunge toward 2014’s low.


Election-related drama have created very volatile conditions for EWZ

Election-related drama have created very volatile conditions for EWZ


Source for charts: FreeStockCharts.com

When I visited EWZ almost a month ago, EWZ had almost triggered my rule to start buying EWZ on a 20% drop from the most recent high. I argued for putting that rule on hold given the risk of steeper losses. Another 10% drop later with an open near the 2014 low, I decided it was finally time to start buying.


There are all sorts of reasons to hate EWZ here. {snip}


The Brazilian real has plunged along with EWZ

The Brazilian real has plunged along with EWZ


Source: XE.com

What is there to like?

First of all, I like that the 2014 low actually held throughout the election drama and upon the victory of Rousseff. It is starting to look like a lot of post-election and future economic risks are getting priced into the market. I daresay (short-term?) pessimism has reached a near-climax.

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on October 27, 2014. Click here to read the entire piece.)

Full disclosure: long EWZ

Oct
26

T2108 Update (October 24, 2014) – A Critical Test for the Bears

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: 43.9%
T2107 Status: 45.1%
VIX Status: 16.1
General (Short-term) Trading Call: Aggressive bears can open NEW shorts with tight stops; hold long positions and/or buy on dips. Watch resistance levels at the 50DMA and support for the VIX.
Active T2108 periods: Day #6 over 20%, Day #4 over 30%, Day #1 over 40% (ending 29 days under 40%), Day #32 under 50%, Day #34 under 60%, Day #76 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 revenge of the bulls continues as the bears are now pressed into proving their mettle at critical resistance from several 50-day moving averages (DMAs). On Thursday, the major indices faded from 50DMA resistance, but it proved to be a temporary setback. Now, conditions seem aligned for a major breakout.


The S&P 500 makes a second visit to 50DMA resistance with a strong close at the day's high

The S&P 500 makes a second visit to 50DMA resistance with a strong close at the day’s high

The NASDAQ is already pushing through 50DMA resistance

The NASDAQ is already pushing through 50DMA resistance

Small caps gave the recent bottom some flare, but are a little behind on a test of 50DMA resistance

Small caps gave the recent bottom some flare, but are a little behind on a test of 50DMA resistance


These bounces have been very sharp and are begging for some kind of rest and pullback. On the other hand, the frantic buying can be considered the simple mirror image of the panicked, sharp selling that preceded it. From what I have casually seen in tweets and headlines, it seems to me bears are still clinging with nostalgia to that panicked selling without considering the possibility that the selling was the abnormal trading and not the current buying. After all, the selling included three oversold periods in rapid succession, T2108 falling as low as 13%, and T2107 (percentage of stocks trading above their 200DMA) falling as low as 25% which was a four-year low. THAT kind of selling will shake out a LOT of weak hands…and fool a lot of bears to over-pursue their prey.

T2108 is now at 43.9%, a very “comfortable” level. I now need to take a look at how long it might take for T2108 to return to overbought conditions. T2108 has traded below the overbought level, 70%, for 76 days. This is an extra-long time that has been prolonged by the “near miss” of overbought levels on the bounce from August lows. The chart below shows that the bulk of 70% underperiods end in about 50 trading days. The projected performance for the S&P 500 during this underperiod is essentially flat unless this underperiod turns into a historically long one. A flat performance produces a projection of the S&P 500 to return to 1985 where it sat at the end of the last overbought period (early July). This serves as a short-term upside target that is only 1% higher from current levels. This means that going forward in the short-term, bulls are much better served buying dips than chasing upside (from a risk/reward standpoint). I will save any further prognostication until the next overbought period actually starts. For example, if it happens BEFORE a fresh all-time high on the S&P 500, I might have to flip (short-term) bearish.


S&P 500 Price Change By Duration Below the T2108 70% Threshold

S&P 500 Price Change By Duration Below the T2108 70% Threshold


The volatility index has been crushed since the last flare-up, but it has stopped going down over the last 3 trading days.


Is volatility reaching support?

Is volatility reaching support?


I do not think I can consider the latest up-cycle in volatility to be over until/unless the VIX cracks below 14 or so. The VIX hovering over support presents one glimmer of hope for bears and acts as another counterpoint to my expectation for a major breakout above 50DMA resistance levels.

While we wait for the outcome of the 50DMA tests, here are some interesting chart reviews.

Netflix (NFLX) has had an impressive rebound from its post-earnings angst in what has become an excellent relief rally. I laid out the case for the trade a week ago. With the indices testing resistance and NFLX’s upward momentum waning a bit, I went ahead and locked in the profits on my call spread…well ahead of the time I thought I would have to wait for this trade to play out. I think NFLX goes back to being a short if it pulls back and closes below the lows of the previous two days.


NFLX has had a sharp rebound from post-earnings angst. Is momentum running out now?

NFLX has had a sharp rebound from post-earnings angst. Is momentum running out now?


Intercept Pharmaceuticals, Inc. (ICPT) is a trade I outlined way back in August. Credit to the buyers who kept this one aloft longer than I expected, but the building pressure of follow-through selling was just too much. Like many stocks, ICPT has benefited from the general stock market’s rebound. However, ICPT holders should not continue to count on that tailwind…


It took about a month, but ICPT followed through on August's cap and crap

It took about a month, but ICPT followed through on August’s cap and crap


Citrix Systems, Inc. (CTXS) is an example of how a breakdown fails to hold. It certainly caught me off-guard. I went after the stock with put options as the stock rallied from its lows and tagged the lower-Bollinger Band (BB). I was hoping to use it as a partial hedge on my overall bullishness. The very next day, the stock soared 2.8% to punch right through 200DMA resistance. And just like that, the stock looks like another good relief rally candidate to close the post-earnings gap down and even continue on up to the 50DMA.


CTXS has turned around an ominous post-earnings 200DMA breakdown into an impressive comeback

CTXS has turned around an ominous post-earnings 200DMA breakdown into an impressive comeback


CSX Corp. (CSX) is one of those “enough said” charts. Do NOT ignore the message of the transports! Even if in this case part of the lift is coming from M&A chatter.


Hard to get too bearish with a railroad stock soaring to new all-time highs

Hard to get too bearish with a railroad stock soaring to new all-time highs


I should have had airline stocks on my buy list during the oversold period. American Airlines Group Inc. (AAL) has put on quite a show as it bounces from its depths. With airline stocks like AAL more than tripling since the end of 2012, I can certainly understand the eagerness to sell in the oversold period with a scare like Ebola in the headlines. But the selling completely ignored the incredible tailwind of plunging oil prices (the bulk of airline costs) AND the determination of the health community to contain and resolve the contagion.


American Airlines bottomed 2 days ahead of the S&P 500 and is already up 39% from its low!

American Airlines bottomed 2 days ahead of the S&P 500 and is already up 39% from its low!


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 CTXS put options

Oct
21

T2108 Update (October 21, 2014) – Revenge of the Bulls As Oversold Conditions Quickly Fade Away

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: 36.6% (a 34% increase!)
T2107 Status: 42.9%
VIX Status: 16.1 (now 50% down from the recent peak!)
General (Short-term) Trading Call: Shorts should have minimal positions; hold long positions and/or buy on dips.
Active T2108 periods: Day #3 over 20%, Day #1 over 30% (ending 20 days under 30%), Day #27 under 40%, Day #29 under 50%, Day #31 under 60%, Day #73 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 the last T2108 Update, I wrote the technical case for a bottom. In the two trading days since, the bulls and buyers have delivered bigtime.

T2108 closed at 36.6% with its third sharp run-up in the last 4 days. It was last at this level on September 22nd. This ends a 20-day 30% underperiod. The S&P 500 (SPY) lost 2.1% over this time span, right along expectations for a 30% underperiod that lasts so long. The period ended “just in time” as the S&P 500’s expected performance declines almost linearly for every extra day!


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

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


T2107, the percentage of stocks trading above their 200DMAs, has jumped back to 42.9%. Its repair is not as impressive relative to T2108: T2107 was last at its current level on October 1st. This level also served as resistance for the next 6 trading days. In other words, there are still plenty of stocks to buy for betting on resumptions of uptrends.

The S&P 500 (SPY) is now firmly above its 200DMA in a very bullish recovery from the last oversold period. The move through this critical trendline was nearly picture perfect. The index closed just below the 200DMA on Monday, gapped up to open Tuesday, and soared relentlessly from there – leaving shorts crying bloody murder and buyers rushing to catch the train. It is hard to get a more convincing revenge of the bulls and buyers than THIS kind of move!


The S&P 500 makes a resounding return to bullish territory with a 2.0% gain

The S&P 500 makes a resounding return to bullish territory with a 2.0% gain


The S&P 500 has reclaimed the August low and now all eyes will be on the 50DMA as resistance. From there it is the all-time high which was carved with an evening star topping pattern.

The NASDAQ is asking the S&P 500 what took so long as its 2.4% rally confirms a breakout that happened the day before.


The NASDAQ confirms its breakout above its 200DMA

The NASDAQ confirms its breakout above its 200DMA


The sharp rally has crushed volatility. The VIX has amazingly already fallen 50% off its peak which now sits conveniently just above the 2012 high. I daresay the double failure to hold those highs was a bright red warning flag to bears to stand down and a bright green flag for buyers to bet on a bounce from oversold conditions. I covered the first warning in the T2108 Update at that time titled “Buyers FINALLY Draw A Line in the Sand.” The plunge in the VIX of course crushed ProShares Ultra VIX Short-Term Futures (UVXY). I also warned earlier that the momentum in UVXY had likely ended.


Volatility has been crushed and now hovers just above the 15.35 pivot point

Volatility has been crushed and now hovers just above the 15.35 pivot point

The failure of UVXY to hold the 200DMA breakout two days in a row was the last bright red warning flag for bears to stand down

The failure of UVXY to hold the 200DMA breakout two days in a row was the last bright red warning flag for bears to stand down


The trading call follows the rules I outlined earlier. Bears should have already covered most of their positions during the oversold period and/or upon the 200DMA breakout of the NASDAQ and/or the S&P 500. This is a very dangerous period for bears because the inclination is to cling to the palpable fear and the visual of the rush for the exits that we just witnessed last week. However the rapidly improving technical outlook suggests those dark days are already becoming a distant memory and a patch of bearish nostalgia. That is, a NEW and FRESH negative must emerge on the horizon to get the sell-off to resume. Bears may still have some fun trying to fade on 50DMA resistance. Without overbought conditions at that point, I think 50DMA resistance will melt away. Bears will have to move quickly again.

Conservative traders just got their buy signal. They can stop out if the indices manage to close below the 200DMA again. Otherwise, it is back to riding the trend.

Aggressive traders are OK to take some hard-earned profits from making the bold, yet rule-based, buys during the oversold period. Consider it a reward for courage well-done. I myself sold my UVXY puts..wishing I had bought a whole lot more! I am holding my ProShares Ultra S&P500 (SSO) shares for what I hope will be the entire duration of what i traditionally a strong season for stocks (November to April).

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

Oct
20

The Apple Pre-Earnings Trade: October, 2014 Edition

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

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


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

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


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

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


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

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

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


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

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


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

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

Click image to see larger view…


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

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


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


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

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


Source: FreeStockCharts.com

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

Click image to see larger view…


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

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


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

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

Click image to see larger view…


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

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


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

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

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


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

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


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

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

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


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

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

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

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

Be careful out there!

Full disclosure: long AAPL puts and AAPL call spread

Oct
18

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

written by Dr. Duru
Bookmark and Share

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

T2108 Status: 21.3% (ends 6-day oversold period, the 3rd oversold period in 12 trading days)
T2107 Status: 34.2%
VIX Status: 22.0 (gap down from failed attempt to hold 2012 highs, 21 is the buy signal)
General (Short-term) Trading Call: Shorts should exit when/if 200DMA resistance gives way (should have already taken profits during the oversold period!); aggressive traders OK to take some profits on longs bought during oversold period; conservative traders can continue to wait for 200DMA resistance to fail, not worth the risk to enter upon end of oversold period. See below for details.
Active T2108 periods: Day #1 over 20% (ends 6-day oversold period), Day #19 under 30%, Day #25 under 40%, Day #27 under 50%, Day #29 under 60%, Day #71 under 70%

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

Commentary
Sometimes, good technical fundamentals are exactly what you need to maximize your trading…


I responded but to the wrong tweet…


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


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

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

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


The last of three oversold periods finally ends at 6 days

The last of three oversold periods finally ends at 6 days


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

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


T2107 is also attempting to bottom

T2107 is also attempting to bottom


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


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

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

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

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


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

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


The VIX fails to hold 2012 highs - a bullish sign

The VIX fails to hold 2012 highs – a bullish sign

Similarly, UVXY fails to hold 200DMA support

Similarly, UVXY fails to hold 200DMA support


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

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


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

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


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

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

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


AAPL clings to the bottom of its recent trading range

AAPL clings to the bottom of its recent trading range


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


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

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


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


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

Caterpillar tries to show signs of life.


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


Netflix collapses BUT it still holds 2014 lows

Netflix collapses BUT it still holds 2014 lows


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

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

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


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

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

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

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

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

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

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

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



Daily T2108 vs the S&P 500

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


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

Be careful out there!

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

Oct
16

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

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

T2108 Status: 17.2% (5th day of 3rd oversold period in last 11 trading days)
T2107 Status: 30.1% (low was 25.4%!)
VIX Status: 26.3 (intraday high was 31.1, surpassing the 2012 high!)
General (Short-term) Trading Call: Continue reducing shorts – although aggressive traders can hold remaining shorts until S&P 500 recovers and closes above its 200DMA again; aggressive traders could have added to or started positions when VIX cracked the 2012 high although, per earlier advice, waiting until the VIX confirms the end of momentum makes a LOT of sense now; conservative traders can continue to wait until T2108 exits oversold conditions OR the S&P 500 closes above its 200DMA. See below for more details and explanations
Active T2108 periods: Day #5 under 20% (5th day of oversold period), Day #17 under 30%, Day #23 under 40%, Day #25 under 50%, Day #27 under 60%, Day #69 under 70%

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

Commentary
The bulls and buyers FINALLY drew a line in the sand today. It was a dramatic day of sell-off and recovery. The advance had to reach so far and so long though, I will not be surprised to see a lot of churn back and forth instead of a moonshot back to overhead resistance. Pictures tell this story well, so let’s dive right in.

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


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

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

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

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

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

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

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

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


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

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


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

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


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


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

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


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


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

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


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


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

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


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


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

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


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


T2108 may be adding to the signs of bottoming

T2108 may be adding to the signs of bottoming


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


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

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


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

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

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

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

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


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

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


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

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

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

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

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


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

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


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

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

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

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

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

Daily T2108 vs the S&P 500

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


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

Be careful out there!

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

Oct
14

An Unusual View of Timing Panic (Regarding Oil Prices)

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

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

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

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


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

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


Source: FreeStockCharts.com

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

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

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

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

Be careful out there!

Full disclosure: no positions

Oct
13

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

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

T2108 Status: 13.5% (3rd day of 3rd oversold period in last 9 trading days, a new 38-month closing low)
T2107 Status: 30.1% (a fresh 34-month low)
VIX Status: 21.2 (intraday high was a 22-month high)
General (Short-term) Trading Call: Continue reducing shorts – although aggressive traders can hold remaining shorts until S&P 500 recovers closes above its 200DMA again; aggressive traders should have added to positions when VIX cracked the new high (yes, yet again!); conservative traders can continue to wait until T2108 exits oversold conditions OR closes above its 200DMA. There are several important caveats and nuances here, so please read below for more details.
Active T2108 periods: Day #3 under 20% (3nd day of oversold period), Day #15 under 30%, Day #21 under 40%, Day #23 under 50%, Day #25 under 60%, Day #67 under 70%

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

Commentary
Suddenly, it has become MUCH easier to get bearish and stay bearish.

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


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

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

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

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

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

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


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

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


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

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

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

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


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

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

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

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


Analysts still cannot keep Splunk lifted

Analysts still cannot keep Splunk lifted


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

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


Mean and Median Duration Below Given T2108 Threshold

Mean and Median Duration Below Given T2108 Threshold

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

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


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

Be careful out there!

Daily T2108 vs the S&P 500

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


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

Be careful out there!

Full disclosure: long SSO call options and shares, long UVXY puts, net short the Australian dollar, short FB

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