T2108 Update (May 22, 2013) – Overbought Period Ends With Blow-Off Tops And Sell Signals

(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 highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 67.2% (ending a 13-day overbought period)
VIX Status: 13.8
General (Short-term) Trading Call: SHORT with tight stop at new all-time highs on S&P 500

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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

Commentary
You aggressive bulls who bought the breakout above 1600 should seriously consider taking profits now. The burden of proof suddenly shifted back to the bulls as the S&P 500 printed a major reversal pattern. Follow-through selling tomorrow or Friday will confirm a topping pattern. I think overall the sell signals are strong enough to warrant getting into SSO puts starting tomorrow even though the index has not yet crossed the bear/bull dividing line (see below). Shorts should feel comfortable initiating positions with a tight stop at new all-time highs (intraday, not closing).

S&P 500 prints a major reversal pattern

The pattern shown above is essentially a shooting star. The S&P 500 shot up to new all-time highs, only to reverse course and close below the previous day’s low. It found some support at the last (minor) consolidation point around 1650. Volume was higher than average, adding to the significance of this move. Note well that this topping pattern says nothing about how long shorts will get to make hay.

Today’s selling took T2108 out of overbought territory (the 70% overperiod). Overbought conditions lasted 13 days. The projection for the S&P 500 return over a 13-day overbought period is essentially flat. The S&P 500 printed a very bullish 2.5% return for the overbought period, placing it at the very top of the historical range. Now things get complicated.

The 70% underperiod is biased to the upside for the next 50 trading days. This makes sense. The market trend remains firmly up. If T2108 bounces back into overbought territory, the S&P 500 should follow along. This move would produce a positive return. So, this underperiod is not very interesting until around 50 trading days where the projections turns negative. So, let’s put that analysis aside for now and return to the primary messages from the 40% overperiod which began back on April 19th.

This is day number 24 of the 40% overperiod. The S&P 500 has returned a whopping 6.4% since then. This is coming at a time of maximum risk for the 40% overperiod. Historically, some of the worst performances of the S&P 500 have occurred just as a 40% overperiod ended around the 25-day mark. The average 40% overperiod lasts about 40 trading days (the median is 10 days), and the projection for the average overperiod is an essentially flat S&P 500 performance. Thus, a short on the S&P 500 here has an anticipated 6% return in three trading weeks. The shooting star gives a sense of a firm (short-term) cap on the index while this trade plays out (as well as providing a very clear, sensible, tight stop). Combined, all these characteristics provide excellent risk/reward and my confidence in finally loading up on SSO puts ahead of a violation of the bull/bear dividing line. If I had been watching near the close, I would have seen T2108 fall below 70%. I would have loaded up on SSO puts then.

A recent article tweeted by the CME called “Why QE, low interest rates and volatility are an explosive mix for the markets” also primed me to move as quickly as possible to a bearish stance. I had never thought of the implications of low interest rates quite this way before. Essentially, persistently low rates not only encourage investors and traders to take on too much risk and to misprice risk, but they also make investors and trades over-react to new information. The future has almost zero discount, so new information about a potential future can have a very immediate impact. it helps explain the market’s jitters with the whispers of “bond tapering” and hanging on every undertone and word from Federal Reserve Chair Ben Bernanke in his testimony to Congress today. (The release of the minutes from the last monetary policy meeting were icing on the cake for market jitters).

T2108 has given me plenty of reason for new bearishness. The recent behavior of very speculative stocks has provided bonus bearishness. As I pointed out in my T2108 Update from a week ago, it seemed to me highly shorted stocks were getting targeted as easy bait to goose prices high and fast. When this gambit works, it can certainly help traders (hedge funds?) who are underperforming the market catch up in a hurry. However, once the shorts stop covering (or the last one is finally flogged and beaten to death), the music stops and no one is likely left to keep buying these stocks at such lofty levels. Enter a correction. And what better time for a pullback than a topping pattern in the major indices. Even more interesting to have a top printed just as the performance of the most-shorted stocks on the S&P 500 outperform the index for the first time since July, 2012 (see “The most-shorted stocks are outperforming the S&P 500” – thanks to a friend of mine!).

Some of the stocks I noted has printed very notable topping patterns. Here is a list of the most convincing and why (the links take you to a close-up of the chart):

ANGI: Double-top. Bollinger squeeze suggest a big move is ahead.
APOL: Perfect resistance at the 200DMA confirmed with 4% picture-perfect rejection.
FSLR: Blow-off top. Accentuated by fade yesterday on high volume above the upper Bollinger Band.
GMCR: “Exhaustion” after six trading days failing to break through to a new 20-month high after numerous attempts.
NFLX: Confirmation of bearish engulfing pattern from last week at 21-month highs.

SCTY, SODA, and TSLA are down but not necessarily out yet from a technical perspective. Note well that the games may not yet be over, so trying to chase these lower could be fraught with risk. These stocks could easily move independently of the major indices if traders still sense they can squeeze more shorts into covering.

Herbalife (HLF) is in a special category of highly shorted stocks since I have written this one before and chose to stay long to ride what seemed like a tactical and strategic blunder by heavily short hedge fund manager Bill Ackman. It did happen, and I seemed to get out just near the peak of that run (I tweeted my trade). The stock has also printed a classic blow-off top. I will have to write a (final?) post on this experience because it took major patience and conviction.

Finally, currency signals continue to flash red. For example, the dollar index (UUP) has managed to continue pushing higher above its QE2 price.

Perhaps more importantly, the Australian dollar continues to trade even weaker than the Japanese yen (AUD/JPY). The yen itself is finally looking it is ready for an old-fashioned counter-trend correction against all major currencies. I keep my eye on AUD/JPY because my original thesis of traders and investors fleeing from the yen to buy high-yielding currencies has simply not panned out. In fact, AUD/JPY PEAKED four days later. The Reserve Bank of Australia’s mystifying rate cut seems to have sealed the deal for now. AUD/JPY broke down below its 50DMA in what looks like the beginning of a sustained move given the multiple failures over the past week to break that resistance. I am compelled to be bearish if traders and investors are actually moving into zero-yielding yen over the relatively high-yielding Australian dollar, especially as the yen was still weakening against other major currencies. (Note that I have a small long position on AUD/JPY as a partial hedge on long yen positions and other short Aussie positions).

A very bearish downward slope from a peak continues with a convincing break of 50DMA support

(Late breaking update – after posting this piece, I learned that the Nikkei lost 7.3%!!! This is its largest loss in over two years – back to the tsunami. No wonder the yen is gaining so much strength right now. Looks like my entry for SSO puts will be from an uncomfortably lower point. Perhaps the S&P 500 even gaps below the bull/bear dividing line at the open on Thursday!)

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

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short Australian dollar, net long Japanese yen, long TSLA call (NEW call – last week’s trade was quite successful!), net long U.S. dollar,

(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 highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 73.3% (11th straight overbought day)
VIX Status: 12.5
General (Short-term) Trading Call: Hold

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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

Commentary
One of the best features of this sustained overbought period is that I am not fighting it. The recent overhaul of the T2108 Trading Model (TTM) allows me to respect the potential for the continued momentum that can come from overbought periods, especially in recent years. THe current bullrush is as strong as any of the others we have seen; it comes withthe added bonus of setting fresh all-time highs with each new high. Friday was not only the 11th straight overbought day (the 70% overperiod), but it is also the 21st straight day above the 40% threshold (the 40% overperiod 0 the first threshold crossed when the current rally began).

Based on TTM, the projected performance for the S&P 500 (SPY) after the overperiods end is starting to improve. The projected performance for the 40% overperiod is moving up from its low point around 20 days.

The T2108 40% “over-period”

Note well that the 40% overperiod must last for at least 50 days before the projected performance reaches 0%. The S&P 500 has returned 7.2% since the 40% overperiod began on April 19th with the index bouncing off its 50DMA. In other words, shorting the index here should return at least 7.2% at some point. However, the mean duration for the 40% overperiod is close to 50 days (the median is only about 10 days). A trader could be waiting quite a long time to realize this return and in the meantime experience significant upside risk. To mitigate this risk, I have established a requirement that the index must break some important support level before shorting, whereas before I was OK taking an aggressive, proactive stance with overbought periods.

I have revised the bear/bull dividing line to 1623.19. This line is directly below the last period of consolidation during this rally. A close below that line will trigger SSO puts with a (first) downside target to the 50DMA.

The surge continues for the S&P 500

You aggressive bulls that bought the breakout above 1600 are doing just fine…and yes, I am getting jealous!

So what about the overbought period, the 70% overperiod? The S&P 500 has gained 3.3% since the overbought period began on May 3rd. This performance is already beyond the expected performance for any 70% overperiod lasting less than 25 days or so. So, again, theoretically, shorting here should eventually return positive gains. The index is also right around where I expect it to be for a maximum return after 11 days. In other words, making fresh bullish bets at this point carry a high risk, but there is still no trigger yet for making a good risk/reward short bet. So, I continue to wait. As a reminder, I only focus on bullish bets on the S&P 500 after the overbought period lasts over 25 days.

In the meantime, I have no problem betting on individual stocks with proper setups. These are good bets as long as they have the tailwind of a very bullish market.

Case in point for this point is Advanced Micro Devices (AMD). I missed a nice breakout on May 1st. AMD delivered the double whammy of a breakout from an extended consolidation period. This consolidation occurred after a sharp bounce from lows which retested AMD’s 2009 lows. Buying volume has been very robust every since the breakout. This is a very strong chart where dips can and should be bought. Note how quickly buyers jumped on the dip from Thursday’s gap down, leaving a long tail on Thursday’s candlestick and solid follow-through for the comeback on Friday. I am putting AMD on the active radar. I may never buy into it, but it is hard to imagine the stock market getting bearish until speculative bottom-fishing in stocks like AMD comes to an end.

AMD breaks out from what now looks like a solid bottom

AMD’s wild and large swings over the years: from a double top to a triple-bottom?!?

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

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short euro; long CAT shares and puts; long AAPL shares, calls, and puts; long TSLA calls (PURE speculation!), ANGI calls,

(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 highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 73.5% (8th overbought day)
VIX Status: 12.8
General (Short-term) Trading Call: Hold

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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

Commentary
So much for a boring week. The last 4-days of lackluster trading had finally convinced me that this week would not provide the expected fireworks.

The S&P 500 (SPY) surged higher 1.0%. This ended my hope that a “do nothing” prediction from the T2108 Trading Model could represent an opportunity to fade the initial, opening direction of the S&P 500. On the positive side, at least the model did not scream “sell.” May’s month-to-date gain of 3.3% after two calendar weeks makes it all the more likely that May-sellers will be full of regret come June. As a reminder, I expected May to be just fine but offered up some “just-in-case” hedges; Caterpillar (CAT) triggered. The euro (FXE) also triggered with a break below its 50DMA.

You bulls who bought the breakout above 1600 (my advice to the particularly bullish out there) to new all-time highs are doing well. Keep holding but move the stops up to 1620. This level is just below the brief 4-day consolidation that preceded today’s rally. A close below this level finally gets me buying SSO puts as a play to fade the overbought period. My window for getting bearish is rapidly closing. As a reminder, after this week, I will be more focused on buying dips than on following a breakdown.

I do not have time to post charts, but I do want to note how heavily-shorted stocks have soared over the past month and in many cases all year. It seems that these stocks are getting targeted and providing fertile ground for traders playing catch-up with the overall stock market. You can click the links of these stocks for their 6-month charts on StockCharts.com. The percentages next to the stock ticker represent the shares shorts as a percentage of float:

ANGI: 21.9%
target=”_blank”>APOL: 20.8% (a relative latecomer to the campaign of short squeezes. The stock is lifting off a recent bottom and was up 9.1% today)
FSLR: 33.4%
GMCR: 37.9%
NFLX: 24.4%
SCTY: 16.6%
SODA: 43.7%
TSLA: 44.1% (stock went exponential post-earnings – this is a classic chart for the ages!)

All these stocks have gone “nuts” recently. This is clearly NOT a market for shorting, further validating my approach to avoid SSO puts until the market “proves” it is time to load them up.

Seeing this list makes Apple’s (AAPL) relative under-performance to the general stock market stick out even more. Today, AAPL dropped 2.4% “out of nowhere.” The $470 level turned out to be the stiff resistance I was afraid of. I had hoped that AAPL’s post-earnings momentum could soon enough break the March high and take AAPL to $500, but it seems that day will remain very elusive.

Finally, note that Worden has FINALLY introduced intraday quotes for T2108 (and other T2* indicators). This is a great advance because it now allows me to know when T2108 is flipping any thresholds BEFORE the closing bell. Once there are enough data, I will change the T2108 charts I post from line charts to candlestick.

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

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net short euro; long CAT shares and puts; long AAPL shares, calls, and puts; long TSLA calls (PURE speculation!), ANGI calls,

(This is an excerpt from an article I originally published on Seeking Alpha on April 21, 2013. Click here to read the entire piece.)

On April 14th, I wrote my reasons for believing that a bottom for gold would prove elusive. At the time, I was thinking gold (GLD) could experience a new extended phase of weakness. I definitely did not anticipate a collapse in prices on the very next trading day (April 15th).

The collapse in GLD

Source: FreeStockCharts.com

{snip}

Adding to the case for a bottom (or “close enough” to one) is the surge in my stylized “Gold Enthusiasm Index.” {snip}

A new Google Trends high for 'buy gold'

A new Google Trend high for 'buy gold'

Source: Google Trends

{snip}

Gold enthusiasm suddenly wakes up

{snip}

Perhaps one interesting and confirming twist is the Google Trend view on silver (SLV) search terms. It turns out that “buy silver” and “sell silver” follow similar patterns to gold. {snip}

Interest in 'buy silver' reaches a Google Trends high

Source: Google Trends

{snip}

Interest in silver searches since 2004 shows a familiar pattern...

Source: Google Trends

{snip}

SLV's breakdown has now erased 90% of the gains from 2010 breakout

Source: FreeStockCharts.com

{snip}

In the meantime, I will continue to be amazed by the amount of chatter suggesting that gold’s collapse is a harbinger of deflation. {snip} Perhaps inflation will become a palpable threat once after enough people finally conclude the global economy will never see real inflation again…

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on April 21, 2013. Click here to read the entire piece.)

Full disclosure: long GLD, GG, SLV, PAAS

(This is an excerpt from an article I originally published on Seeking Alpha on April 14, 2013. Click here to read the entire piece.)

During the height of the banking crisis in Cyprus, I figured gold (GLD) would be a good trade. That lasted for all of a few days. {snip}

GLD finally breaks down

I have seen some articles try to explain this breakdown as a reaction to the potential of Cyprus selling gold reserves to help fund its banking bailout. {snip} If there is anything the rolling panics over the eurozone have taught us, it is that sell-offs generate buying opportunities. Gold is no different. Serious gold investors know that these acts of desperation of forced selling will literally be golden opportunities, the long awaited big dip to provide a chance to add to holdings at much better prices.

{snip}

While the relation between USD/JPY and GLD periodically changes, the divergence since Oct, 2012 is very clear

Source for charts: FreeStockCharts.com

Seeing this chart suggests that the gold sell-off has little to do with deflation fears and a lot more to do with relative shifting of preferences in currencies. {snip}

A third and final reason a bottom for gold will likely prove elusive is seen in my old “gold enthusiasm index.” {snip}

The Gold Enthusiasm Index continues to bounce along its all-time lows

Source: Yahoo!Finance for GLD prices, Google Trends for “buy gold”

Combine the lackluster sentiment toward gold with the search index for “buy gold” and “sell gold”, and I sense a general disinterest in gold either way.

Google trends shows no spike of interest in "buy gold" or "sell gold" since gold's peak in 2011

Source: Google Trends

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on April 14, 2013. Click here to read the entire piece.)

Full disclosure: long GLD, GG, and SLV

(This is an excerpt from an article I originally published on Seeking Alpha on April 25, 2013. Click here to read the entire piece.)

The Swiss franc (FXF) has started another weakening phase, putting an exclamation point on the currency market’s refusal to go along with the shrill, recent headlines claiming another deflation cycle has begun.

The franc is starting another weakening cycle

{snip}

Ever since China reported GDP growth that missed expectations at “only” 7.7% two weeks ago, everything that goes down has somehow indicated deflationary pressures. {snip}

iShares Barclays TIPS Bond (TIP) has churned a lot lately....

...yet TIP remains light-years away from the last deflation scare in 2008-2009

The only reason why last week’s drop was even notable was that it came three days after traders and investors puked up gold and silver in a historic sell-off that capped weakness that was accelerating recently (see “Gold And Silver Enthusiasm Soar To Historic Levels In The Wake Of Collapsing Prices” for my description of the buying opportunity in the sell-off).

The nervousness is understandable. Most commodities put in tops in 2011 and have been trending lower ever since. The sell-offs have alternated in speed and timing from commodity to commodity. {snip}

FCX is bouncing nicely so far off 4-year lows. However, it remains a broken stock based on previous support levels.

Copper adds to deflation fears as it trades near 2011 lows

Source: StockCharts.com

While copper is moribund, iron ore has also weakened again. {snip}

Australian dollar maintains downtrend from 2011 but still trades above parity and 2010/2011 closing levels

The resilience is seen most keenly in trade against the Japanese yen (FXY), the typical preferred currency for “safety” from deflation.

A dip, but far from deflation against the Japanese yen

{snip}

Trademark of trend trading: higher lows. Rest after the pattern breaks and then try again on next swift sell-off...

Source for charts unless otherwise stated: FreeStockCharts.com

Having said all this, it remains very possible that the headlines of deflation could get loud enough to create a self-reinforcing loop. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on April 25, 2013. Click here to read the entire piece.)

Full disclosure: long FCX shares calls, GLD, SLV, net short Japanese yen

(This is an excerpt from an article I originally published on Seeking Alpha on April 15, 2013. Click here to read the entire piece.)

When it comes to the Australian dollar (FXA), traders have to stay nimble and on their toes. Just two days ago in “Poor Employment Report Only Slows Australian Dollar’s Breakout,” I noted how easily the Australian dollar recovered after weaker than expected jobs numbers triggered rapid selling in the currency. I concluded that “the currency is much more likely to respond to changes in commodity prices and by extension economic conditions in China.” Sure enough, proof positive came in the form of Q1 GDP growth of 7.7% in China. Industrial production also disappointed by “only” growing 8.9% in March year-over-year. As Bloomberg notes: “That compared with the 10.1 percent median forecast of 37 economists and a 9.9 percent gain in the first two months of the year.”

So suddenly after two Chinese economic series each register one new discouraging data point, China’s growth (really the rate of growth) is slowing. {snip}

The technical damage in the wake of the Chinese economic data is clear. {snip}

The Australian dollar plunges in the wake of disappointing Chinese economic data

The technical damage for yen crosses could just be getting started. {snip}

The yen receives follow-through interest in the wake of disappointing Chinese economic data

{snip}

One interesting backdrop to the sudden re-emergence of fear is a surge in call buying on the VIX, the volatility index. {snip}

The implication is that once traders lose their hedges with the VIX call options, they might be more inclined to sell out of S&P 500 positions if the market is weak going into expiration. {snip}

As of Friday, April 12, the VIX was still dropping toward fresh 7-year lows....

Source for charts: FreeStockCharts.com

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on April 15, 2013. Click here to read the entire piece.)

Full disclosure: net long Australian dollar, net short Japanese yen, long SSO calls

(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 highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 70.9% (7th overbought day)
VIX Status: 12.6
General (Short-term) Trading Call: Hold

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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

Commentary
Looks like Friday’s prediction for today’s trading action may have been worth something after all. The T2108 Trading Model (TTM) predicted a 46% chance of a down day and a 54% chance of an up day. Given the high error rate, this prediction was not worth trading. The S&P 500 seemed to agree with the stalemate by closing exactly flat on the day. T2108 declined again today (and has almost fallen from overbought territory), producing a new 2-day decline for creating a new prediction. However, the parameters are little changed from Friday, and the TTM produces the exact same prediction for Tuesday as it did for Monday. This lackluster prediction seems to defy my typical (anecdotal!) expectation from such bearish divergence between T2108 and the S&P 500.

If the S&P 500 (SPY) has another lackluster close, suddenly I get much more interested in “stalemate” predictions. Like the fortuitous find of quasi-oversold conditions, finding a reliable prediction of a do-nothing day could form the basis for a fade trade that assumes the day will close opposite to a large open.

My assumption going into this week was that stocks would finally inherit the volatility exhibited by currency markets last week. Instead, the currency market has smoothed out a bit. There was little to no follow-through in Japanese yen or Australian dollar weakness. So now it seems the odds of a lackluster Tuesday have increased. Such a day will also force me to significantly ramp down my expectations for a volatile week.

Stay tuned!

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

*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: short Australian dollar, net long Japanese yen (marginally)

(This is an excerpt from an article I originally published on Seeking Alpha on May 7, 2013. Click here to read the entire piece.)

Tonight (morning of May 7th in Australia), the Reserve Bank of Australia cut its interest rate to 2.75% whereas the consensus assumed that rates would stay steady at 3.0%. While the market has priced in rate cuts for later this year, I find myself mystified by the timing and context of this latest rate cut. The RBA’s latest statement on monetary policy says almost nothing new and does not point to a single locus of economic danger to justify another cut.

{snip}

Adding to my mild bewilderment is that the RBA has mostly positive things to say about economic conditions overall. {snip}

In other words, almost everything the RBA cites looks pretty good or is at least pointing in the right direction. A casual reader of this statement should be hard-pressed to understand the urgency for cutting rates to new record lows. Australia has some very high class problems!

The closest real justification for the rate cut comes via the stubbornly high exchange rate and low credit demand:

{snip}

The RBA makes a point this time to note how long the exchange rate has remained stubbornly high. I have to assume this slight rephrasing means that the RBA’s patience could finally be wearing thin. If so, the Australian dollar lands right back in bearish territory for me. {snip}

…Whatever the true problem, the RBA weakens its case by not directly and overtly making a strong case for these rate cuts. Is it the exchange rate? Is it a lack of confidence in China’s growth potential? Is it a forecast of a crash in consumer spending or in housing if rates do not drop ever closer to zero? These monetary policy statements lack the substance that other central banks provide when they chart a course for historically low interest rates.

{snip}

What a stubbornly high exchange rate looks like...

Source: FreeStockCharts.com

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on May 7, 2013. Click here to read the entire piece.)

Full disclosure: newly short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on April 12, 2013. Click here to read the entire piece.)

Next week on May 6th (May 7th in Australia), the Reserve Bank of Australia (RBA) will make its next monetary policy decision. The Australian dollar has shown marked weakness going into this decision. This behavior has forced me to shift into neutral on the Australian dollar just one month after finally becoming bullish again.

I have been particularly disappointed in the performance of the Australian dollar given the context of a rapidly devaluing yen (FXY). One part of my fundamental assumption was that the on-going stubborn strength of the Australian dollar would make the currency very attractive to carry traders and others selling/borrowing yen to purchase higher-yielding assets abroad.

{snip}

The Australian dollar is breaking down against the Japanese yen

Australian dollar is again falling fast against the U.S. dollar

Source: FreeStockCharts.com

{snip}

Two things are likely weighing on the Australian dollar now: 1) a growing expectation for a rate cut, and 2) relatively weak iron ore prices (iron ore is Australia’s biggest export by far).

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In other words, expect continued volatility. An all-out crash similar to the one in August, of last year does not seem likely, but the current weakness likely has traders a bit more nervous than usual.

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on April 12, 2013. Click here to read the entire piece.)

Full disclosure: long VALE, long Australian dollar