ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Sep
1

The Reserve Bank of Australia Is Content to Wait for the U.S. Federal Reserve

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on September 1, 2015. Click here to read the entire piece.)

The Reserve Bank of Australia (RBA) delivered another plain vanilla decision on monetary policy. The RBA barely even acknowledged the stomach-churning volatility of the past two weeks or so.

{snip}

Markets did not expect the RBA to cut rates in this meeting. The odds had fallen all the way to 6%.


The market stayed the course for very low odds of a rate cut from the Reserve Bank of Australia

The market stayed the course for very low odds of a rate cut from the Reserve Bank of Australia


Source: The ASX RBA Rate Indicator

Indeed, in this latest decision, the RBA sounds relatively unfazed by global developments. The RBA does not sound like it will respond at all. {snip}…I am pretty sure the RBA will be disappointed in waiting until December for a hike as markets currently project.

Understandably, the Australian dollar barely budged in response to the RBA’s announcement. Still, the currency is skirting along the edge of a fresh breakdown against the U.S. dollar.


The Australian dollar (FXA) is flirting with a fresh breakdown against the U.S. dollar

The Australian dollar (FXA) is flirting with a fresh breakdown against the U.S. dollar


Source: FreeStockCharts.com

As a quick sidenote, the weakening Australian dollar is at least having the intended impact on commodity producers within Australia. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on September 1, 2015. Click here to read the entire piece.)

Full disclosure: short the Australian dollar, long GLD

Aug
31

T2108 Update (August 31, 2015) – The S&P 500 Ends A Tough August With A Mix of Signals

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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 19.1% (briefly exited oversold period with a high of 20.3%)
T2107 Status: 23.7%
VIX Status: 28.4
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #7 below 20% (oversold), Day #8 under 30%, Day #31 under 40%, Day #71 under 50%, Day #88 under 60%, Day #286 under 70%

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

Commentary
T2108 made an effort to end the oversold period at six days, but my favorite technical indicator could not quite close the deal. After reaching a high of 20.3%, T2108 fell back to close at 19.1%.


T2108 briefly peaks over the oversold horizon

T2108 briefly peaks over the oversold horizon


It was a strange day for T2108 to make a run at ending the oversold period. The S&P 500 (SPY) was never up for the day and closed down 0.8%. Ditto for the NASDAQ (QQQ).


The S&P 500 runs out of gas and leaves behind a topping "small body" doji. Buyers will need to step up quickly.

The S&P 500 runs out of gas and leaves behind a topping “small body” doji. Buyers will need to step up quickly.



This monthly view puts August's sell-off into proper perspective. The month now looks like the "natural" conclusion to a year of waning momentum.

This monthly view puts August’s sell-off into proper perspective. The month now looks like the “natural” conclusion to a year of waning momentum.



The NASDAQ (QQQ) suffered the same kind of pullback as the S&P 500.

The NASDAQ (QQQ) suffered the same kind of pullback as the S&P 500.


The volatility index, the VIX, gained a healthy 9.1% that seemed well in excess of the small downtick on the S&P 500. The close at 28.4 puts the VIX back into the dangerzone and primed for more upside. Following the T2108 trading strategy I have discussed in several earlier posts, less aggressive traders/investors should stand down here and wait out the action. Aggressive traders following the T2108 trading strategy should get primed for another round of trades if the VIX manages to challenge the high printed last week. I will get extremely aggressive if the VIX somehow breaks through that high. I know a double from here seems impossible, but last week’s massive sell-off and subsequent massive bounce also seemed impossible just two weeks ago.


The volatility index is back in the dangerzone. Buckle up!

The volatility index is back in the dangerzone. Buckle up!


So how did T2108 manage to rally with BOTH major indices taking notable breathers? It had to be the commodity complex led by another surge in oil. The United States Oil ETF (USO) gained an impressive 6.8% for a third straight day of massive gains. The Energy Select Sector SPDR ETF (XLE) has enjoyed the ride. XLE gained 1.0% on the day.


United States Oil (USO) rallies strongly for a third straight day - resistance at the 50DMA looms overhead.

United States Oil (USO) rallies strongly for a third straight day – resistance at the 50DMA looms overhead.



Energy Select Sector SPDR ETF (XLE) has rallied right into it 20DMA....a critical downtrend line that has served s stiff resistance for the entire sell-off from May.

Energy Select Sector SPDR ETF (XLE) has rallied right into it 20DMA….a critical downtrend line that has served s stiff resistance for the entire sell-off from May.


I am really disappointed I missed an opportunity to double up on my rangebound bet on USO before this rally. However, my opportunity may come again soon. Not only is USO bumping up against its 50DMA overhead resistance and downwtrend, but also the volatility measure for USO, the CBOE Crude Oil Volatility Index, or OVX, jumped another 5.4%. OVX has risen on each of USO’s rally days. I THINK this counter-intuitive action warns us to expect significant downside in USO right around the corner. I am watching this one extra-closely now. Assuming USO backs down again, I am targeting about a 50% retracement of the current three days of gains.


OVX is rallying right alongside USO and oil prices.

OVX is rallying right alongside USO and oil prices.


Not even the bounceback in the U.S. dollar has slowed USO down.


The U.S. dollar index has bounced back from a brief breakdown. The 50DMA looms as the next level of resistance.

The U.S. dollar index has bounced back from a brief breakdown. The 50DMA looms as the next level of resistance.


From here, the countdown to the Federal Reserve’s highly anticipated September meeting begins in earnest…with a stop along the way at the vista point of the jobs report this Friday. Traders should not expect the market to make any progress up or down until the Fed has its say. The resulting churn and chop should frustrated bears and bulls but provide some choice trading opportunities for alert traders. Today’s strange action between the major indices, the VIX, and T2108 is probably an early sign of what is to become commonplace for the next two weeks.

Today was a relatively calm day for my own trades given the lack of definitive signals. Here are the two most notable: 1) I accumulated more Direxion Daily Russia Bear 3X ETF (RUSS) even as I was disappointed by the wide swing from a healthy gain to a healthy loss on the day; 2) a lowball limit order on Netflix (NFLX) call options triggered as the stock took a dip to a 3% loss late in the day.


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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

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 SVXY shares, long SSO shares and call options, long RUSS, long NFLX call options, short USO call spread, short USO put options, long and short various currencies against the U.S. dollar

Aug
31

How to Buy Twitter’s Stock for Less Than $20/Share

written by Dr. Duru
Bookmark and Share

The big correction of August 24, 2015 (flash crash?) indiscriminately plunged stocks across the board. Twitter (TWTR) went as low as $21.01 before bouncing back and closing at $26.23. TWTR has steadily climbed along with the rest of the wobbly, recovering stock market. The lowest CLOSE for TWTR during this period, and its all-time low, is $24.38.


Twitter (TWTR) has suffered mightily after a brief spate of optimism prior to April earnings

Twitter (TWTR) has suffered mightily after a brief spate of optimism prior to April earnings


Source: FreeStockCharts.com

For reference, TWTR priced 70 million shares at $26 per share for its IPO on November 7, 2013. The stock opened for trading at $45.10.


Twitter's glory the night before its big IPO

Twitter’s glory the night before its big IPO


Source: Forbes

So, if you have been patient all this time, you can finally grab Twitter for around its IPO price. However, perhaps you really wanted the kind of discount (and buffer) that the all-time intraday low of $21.01 offered. It is still possible to get the discount by selling put options. At current options pricing, you can effectively buy TWTR for less than $20.

Put options provide the buyer the right, but not the obligation, to sell a stock at a given price called the strike price. The seller of the put option is on the hook for that right. That is, the put-seller has the OBLIGATION to buy the stock at the strike price if the put buyer decides to exercise the right. Options also have expiration dates, so the buyer’s decision to exercise or sell outright must occur before that expiration date. A seller may also chose to close out the option (buy to cover) before expiration. The closer the put gets to expiration the less valuable it becomes (aka time decay) for a given underlying stock price and “implied volatility” – good for the seller, bad for the buyer.

The put option for TWTR expiring on January 20, 2017 at the strike price of $25 sells for $540/$595 (bid/ask). Let’s split the difference and call it $565. TWTR closed Friday’s trading at $26.83 per share. If TWTR stays at the current price, the January 2017 $25 put option expires worthless. The put-seller makes money until TWTR falls below $19.35 per share (not including commissions) which equals $25 minus $5.65. This math means that for each put option the seller has potentially bought 100 TWTR shares for a net $19.35 per share. If TWTR falls below $19.35 at expiration, the put buyer will happily sell stock at $25 as s/he makes money from that point and lower. If TWTR closes on January 20, 2017 at $25 or above, the seller keeps the entire $565 premium. In between $25 and $19.35 the seller keeps a portion of the premium.

I came up with this idea very late in the week. As I was sorting through my trades and strategies for the market’s sell-off, it suddenly occurred to me that I was not taking full advantage of the surge in volatility by selling now expensive put options. In case you missed it, volatility surged a massive amount at the end of the market sell-off. This chart is from Thursday, August 27th’s close. The volatility index, the VIX, closed Friday at essentially the same spot.


The volatility index, the VIX, has now lost half its value from the intraday high just three days ago.

The volatility index, the VIX, has now lost half its value from the intraday high just three days ago.


Source: FreeStockCharts.com

According to ETrade, TWTR’s January 2017 $25 put reached as high as $7.44 during this period. As I noted after Monday’s sell-off, market makers seemed unwilling to offer up options for trading until the dust settled a bit after Monday’s open. I was unable to get ANY options traded (I was scrambling for call options) until around 30 minutes or so post-open. Market makers were waiting for good reason! The VIX quickly fell from a high of 52.3 to close the day at 40.7 – representing a massive change (reduction) in option values for a given stock price.

TWTR is attractive for put-selling for at least two related reasons. Most importantly, I think TWTR has SOME value at least around its IPO price. I am betting that TWTR’s business model can stabilize and achieve success within the next 16 months. Anything can happen of course, but I am a lot more willing to take the risk at $19.35 than $26.86. Selling a put expiring way out in January, 2017 allows me to relax through whatever swings are ahead and gives me the option to profit (potentially) well ahead of expiration if TWTR goes on another run in this time.

Secondly, TWTR’s premium is very high, so it makes for a very attractive sell (and a poor buy) at far out dates. At $19.35, I effectively got TWTR for a 28% discount. I doubt this kind of discount will last as the market settles down over time. For comparison, Google (GOOG) currently trades at $630 per share. The January 2017 $630 put option on GOOG is roughly similar to the January 2017 $25 TWTR put option (the strike price closest to the current trading price). The GOOG put option sells for $77.90/$79.40 – let’s say $78.20. Yes, that is a VERY healthy premium, but it only delivers a 12% discount on Google’s shares. In other words, TWTR holds roughly double the premium GOOG holds. This expense is of course for very good reason: TWTR is trading near all-time lows while GOOG is trading near all-time highs. The market has a LOT more confidence in GOOG’s ability to avoid another deep sell-off than TWTR.

So what is the catch? I have already discussed the possibility of losing money on the put option. The other catch is that the upside for the put-seller is capped by the premium collected at the time of sale. If TWTR is trading back to $50 by the time of expiration, the put-seller still only collects $565. This is a scenario I am willing to tolerate, and I would consider such a rally a “good problem” to have given the risks inherent in a speculative stock like Twitter.

Finally, market sentiment is not as bad as I was expecting against Twitter. “Only” 6.7% of its float is sold short according to Yahoo! Finance. However, short interest has soared in recent weeks as Twitter has mightily struggled. It takes a serious contrarian to look at the chart below and project out a positive outcome!


Twitter (TWTR) bears are pressing their bets again

Twitter (TWTR) bears are pressing their bets again


Source: NASDAQ.com

At least my favorite herd, the stock fanatics on StockTwits, are still very bullish on TWTR…


At least the StockTwits "herd" is staunchly bullish on TWTR at these low prices.

At least the StockTwits “herd” is staunchly bullish on TWTR at these low prices.


Source: StockTwits.com

(Incredibly, James B. Stewart, a columnist at The New York Times, a staff writer at The New Yorker, and a professor at the Columbia University School of Journalism, recently reported that value investor William Miller is currently kicking the tires on Twitter. More on Stewart’s column in another post…)

For an example of a long-term CALL buying strategy, see my recent piece on Disney called “Disney’s Bearish Breakdown: A Case Study of Risk Management for Long-Term Investors.”

Be careful out there!

Full disclosure: short TWTR put option

Aug
30

A Time to Buy Housing Stocks: iShares US Home Construction

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on August 27, 2015. Click here to read the entire piece.)

When I wrote “A Time To Sell Some Housing Stocks,” I could not have come close to imagining its timeliness. The current market sell-off since then has been so deep and rapid that I have accelerated my plans to put cash back to work.

The first candidate is iShares US Home Construction (ITB). I missed the big plunge on Monday, August 24th as I was busy chasing down other opportunities. I did not hesitate to start loading up the next day when ITB fell to a new low for the current selling cycle.


iShares US Home Construction (ITB) attempts to hold onto support at its 200-day moving average (DMA)

iShares US Home Construction (ITB) attempts to hold onto support at its 200-day moving average (DMA)


Source: FreeStockCharts.com

{snip}

I found some level of comfort in my earlier than anticipated repurchase of ITB from the new home sales data. {snip}


Sales of new single-family homes have remained strong in 2015 but have yet to resume the uptrend in place since the 2010/2011 trough

Sales of new single-family homes have remained strong in 2015 but have yet to resume the uptrend in place since the 2010/2011 trough


Source: US. Bureau of the Census, New One Family Houses Sold: United States [HSN1F], retrieved from FRED, Federal Reserve Bank of St. Louis, August 27, 2015.

Year-over-year and monthly sales were strong across three out of four regions. {snip}

The most interesting part of the report came from the distribution of sales across price ranges. The June report showed a surprising relative surge of sales in the $200,000 to $299,000 range to 40% of all homes. This share dropped all the way to 32% in the July report which puts the share back within the 30 to 35% range that has held for quite some time. {snip}

Note well that I did not buy ITB here because I am certain a final bottom is now in the rear view mirror. The stock market seems sure to exhibit a lot more volatility in coming weeks and perhaps months. {snip}

Be careful out there!

Full disclosure: long call options on ITB

(This is an excerpt from an article I originally published on Seeking Alpha on August 27, 2015. Click here to read the entire piece.)

Aug
30

Century Communities Earnings: All About Atlanta Now

written by Dr. Duru
Bookmark and Share

(This is an excerpt from an article I originally published on Seeking Alpha on August 17, 2015. Click here to read the entire piece.)

After regional homebuilder LGI Homes (LGIH) produced stellar earnings results earlier this month, I had high hopes for Century Communities (CCS) as well. CCS’s results for its second quarter were good, but not LGIH-level good. The performance in Texas delivered the most stark contrast. Whereas LGIH demonstrated outstanding sales strength in its core Texas market, CCS was more subdued on its Texas business. {snip}

{snip}

The big surprise (for me) in the results from CCS is the increasing concentration of the company’s business in Atlanta. {snip}


Unemployment in Atlanta has rapidly improved but is still not back to pre-recession highs

Unemployment in Atlanta has rapidly improved but is still not back to pre-recession highs


Source: US. Bureau of Labor Statistics, Unemployment Rate in Atlanta-Sandy Springs-Marietta, GA (MSA) [ATLA013UR], retrieved from FRED, Federal Reserve Bank of St. Louis, August 16, 2015.

The concentration of building in Atlanta means CCS is all about Atlanta now in addition to its (original) core business in Colorado. For comparison and reference, here is the unemployment rate for the state of Colorado:


Unemployment may have reached a trough for the state of Colorado, but once again it is well below the national average

Unemployment may have reached a trough for the state of Colorado, but once again it is well below the national average


Source: US. Bureau of Labor Statistics, Unemployment Rate in Colorado [COUR], retrieved from FRED, Federal Reserve Bank of St. Louis, August 17, 2015.

In other words, from the lens of upside potential, Atlanta probably has more room for improvement than Colorado. {snip}

Increased guidance was the best news coming from CCS. {snip}

This guidance of course includes very bullish expectations for the Atlanta market. The guidance also builds upon second quarter results with impressive year-over-year growth (bolstered by acquisition activity):

{snip}


So far so good in the market's reaction to the latest earnings from Century Communities, Inc. (CCS)

So far so good in the market’s reaction to the latest earnings from Century Communities, Inc. (CCS)


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: Long CCS

(This is an excerpt from an article I originally published on Seeking Alpha on August 17, 2015. Click here to read the entire piece.)

Aug
30

T2108 Update (August 28, 2015) – The Stock Market Remains Oversold, But It’s Almost Like Nothing Happened

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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 18.5%
T2107 Status: 24.1%
VIX Status: 26.1
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #6 below 20% (oversold), Day #7 under 30%, Day #30 under 40%, Day #70 under 50%, Day #87 under 60%, Day #285 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
Did the S&P 500 (SPY) really close the week with a 0.9% gain? If you were not paying any attention to the market, you might mistakenly think all is well and normal, just another sleepy week of summer.


The S&P 500 (SPY) makes a major swing: it lost as much as 5.2% for the week and ended the week with a 0.9% gain.

The S&P 500 (SPY) makes a major swing: it lost as much as 5.2% for the week and ended the week with a 0.9% gain.


T2108 also made a complete recovery with a close at 18.5%, right in line with last week’s 18.1% close. T2108 even made a run at ending the oversold period when it got as high as 19.4%.

The volatility index, the VIX, stayed essentially flat from Thursday’s close and closed below the previous week’s close. The VIX remains in a position for less aggressive traders to make T2108 oversold buys with the caveats I mentioned in the last T2108 Update.


The volatility index is in retreat but remains elevated.

The volatility index is in retreat but remains elevated.


Strangely, the ProShares Short VIX Short-Term Futures (SVXY) lost a sizable 4.9% despite the flat close of the VIX. Once again, the 51 level provided modest support for SVXY. This time I decided to dive in with another short-term trade (meaning this supplements the SVXY shares I have accumulated as a part of the T2108 oversold aggressive trading strategy).


Despite the S&P 500's roaring comeback off its 10-month low, ProShares Short VIX Short-Term Futures (SVXY) is still struggling with its 2015 low. A buying opportunity or a warning?

Despite the S&P 500’s roaring comeback off its 10-month low, ProShares Short VIX Short-Term Futures (SVXY) is still struggling with its 2015 low. A buying opportunity or a warning?


Order is far from restored in the world of currencies. Reversals of last week’s chaos are still underway. My best tell, the Australian dollar (FXA) versus the Japanese yen (FXY), aka AUD/JPY, closed the week on a strong note after early weakness on Friday. It still has a ways to go return to the previous week’s close around 89.33.


The bounce from lows for the Australian dollar versus the Japanese yen supports the rebound in the stock market

The bounce from lows for the Australian dollar versus the Japanese yen supports the rebound in the stock market


The gap that remains for AUD/JPY to the previous week’s close likely represents the upside opportunity for the S&P 500 in the coming week. The coming week will end with the last jobs report before the much anticipated September 16-17 Federal Reserve meeting. The Fed collectively in the past few days has done its best to both reassure markets and add no new net information. In case you were wondering, the odds for a September hike remain extremely low by the market’s estimation. The market is just barely willing to believe there will be ANY rate hike this year.


The odds for the first rate hike are barely priced for a December, 2015 lift-off.

The odds for the first rate hike are barely priced for a December, 2015 lift-off.


Source: CME Group FedWatch
(Note for the previous day’s odds, I had to use numbers I recorded the previous day. The CME still has issues properly updating its table. Also nte that I have been told these values are updated at 8am Eastern and NOT at the close of trading).

Volatility should remain elevated at least through the September jobs report if not all the way through to the September Fed meeting. As such, I am prepared for T2108 to exit the current oversold period only to return, say, after Labor Day when the really big money supposedly returns to the market (and probably ready to sell after getting spooked by the severe trading action of this oversold period!).

If the VIX is STILL elevated ahead of the Fed meeting, I will likely put on a pretty substantial bet to fade volatility. Stay tuned on that one as the nature of the bet will strongly depend on T2108 conditions; oversold conditions would be an ideal context for fading volatility ahead of the Fed meeting.

The strength of the market’s leaders has become one the most important features of the rally off oversold lows. The big tech giants for the most part stepped up and helped lead the way higher. While the S&P 500 is underwater year-to-date by 3.4%, these leaders are all still sitting on gains for the year. In most cases, these stocks have very comfortable year-to-date gains along with good technical positions. All but one has COMPLETELY reversed its losses from the oversold period which began with the previous Friday’s close. I think these charts speak for themselves: Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Google (GOOG). There is a near poetic symmetry in the positioning of these stocks that you just could not make up even if you tried. For all these stocks it is almost like nothing happened last week. Investors and traders clearly rushed for the relative “safety” of these names almost on reflex.


Apple (AAPL) started the rally early as it reversed all its losses from the oversold period within 2 days but faded hard on that second day. As it fights with its 20DMA, AAPL finds itself back to its price BEFORE the oversold period began.

Apple (AAPL) started the rally early as it reversed all its losses from the oversold period within 2 days but faded hard on that second day. As it fights with its 20DMA, AAPL finds itself back to its price BEFORE the oversold period began.

Amazon.com (AMZN) is trading comfortably well above its 50DMA again. Like AAPL, AMZN is trading where it sat BEFORE the oversold period began and is arguing for space around its 20DMA.

Amazon.com (AMZN) is trading comfortably well above its 50DMA again. Like AAPL, AMZN is trading where it sat BEFORE the oversold period began and is arguing for space around its 20DMA.

Like AMZN, Google (GOOG) is also comfortably above its 50DMA. Like AAPL, it is now struggling with its 20DMA. Losses from the oversold period are a fading memory.

Like AMZN, Google (GOOG) is also comfortably above its 50DMA. Like AAPL, it is now struggling with its 20DMA. Losses from the oversold period are a fading memory.

Netflix (NFLX) is comfortably above its 50DMA, has put its losses from the oversold period in the rearview mirror, and has almost reversed ALL its losses from the breakdown associated with the correction. Like the other big boys, it is currently struggling at its 20DMA

Netflix (NFLX) is comfortably above its 50DMA, has put its losses from the oversold period in the rearview mirror, and has almost reversed ALL its losses from the breakdown associated with the correction. Like the other big boys, it is currently struggling at its 20DMA


As an on-going feature for this oversold period, I am providing a quick summary of my key trades. I hope this helps those of you who are new to the T2108 trading strategy understand my approach and trigger some ideas for trades as the market churns through this chaotic period. These are also great notes for me and have served me very well to stay grounded.

  • Sold SanDisk (SNDK) reluctantly. After hitting a new high for the bounce off lows, SNDK faded enough to take out my trailing stop. This was a high risk trade bought with shares. I was fortunate not to let myself get stopped out for a loss earlier in the week!
  • Bought shares in Direxion Daily Russia Bear 3X ETF (RUSS). This is a bit of a hedge that is also a play on RUSS’s rising uptrend. See chart below.
  • Sold a put option short in Twitter (TWTR). I will explain this trade in another post.
  • As explained earlier, bought a new tranche of short-term shares in SVXY.
  • Sold call options on Facebook (FB). FB is back to 50DMA resistance so this is a good spot to lock in the profits.
  • Bought call options on Solar City (SCTY). I thought I had missed the trade I mapped out earlier. A fade into the close gave me a much better entry point.
  • While I was able to flip a good number of positions for substantial profits in the oversold period (as chronicled in earlier posts), I did have to wave goodbye to a few positions that expired worthless. Some of htese were in names that delivered profits with better timed positioning. Call options on ProShares Ultra S&P500 (SSO), Disney (DIS) {I never did get in on the January, 2017 $110 call option as part of a strategy I outlined earlier. It is top of my list for the next sell-off if it comes}, iShares Nasdaq Biotechnology (IBB), Workday (WDAY); put options on ProShares Ultra VIX Short-Term Futures (UVXY).


The 50DMA has guided Direxion Daily Russia Bear 3X ETF (RUSS) on a near consistent ride higher. Even if Monday was a blow-off top, RUSS probably has at least one more rendezvous with 200DMA resistance ahead.

The 50DMA has guided Direxion Daily Russia Bear 3X ETF (RUSS) on a near consistent ride higher. Even if Monday was a blow-off top, RUSS probably has at least one more rendezvous with 200DMA resistance ahead.


Finally, just so we are all on the same page that something major DID happen, here is a very handy chart from Bloomberg that outlines the major events surrounding the implosion of the Shanghai Composite (SSEC). The Chinese government finally stopped defending the 200DMA last week. Perhaps it was NO coincidence that the 200DMA breakdown for the SSEC on Friday, August 21 happened ahead of the S&P 500’s plunge into oversold conditions. The S&P 500 broke down below its 200DMA the day before.

Click for a larger image…


A timeline for the bursting of a major bubble in the Shanghai Composite Index

A timeline for the bursting of a major bubble in the Shanghai Composite Index


Source: Bloomberg


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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

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 SVXY shares, long SSO shares and call options, short AUD/JPY, long RUSS, long AAPL put spread, short TWTR put option and long call spread, short FB, long SCTY call option, long DIS call options, long UVXY put options

Aug
28

Portfolio Manager Stays Firmly Bullish On Memorial Production Partners

written by Dr. Duru
Bookmark and Share


The S&P 500 (SPY) has lost 4.2% since these picks.

The S&P 500 (SPY) has lost 4.2% since these picks.


Source: Nightly Business Report

Portfolio manager Gregg Abella of Investment Partners Asset Management was placed in the uncomfortable position of having to explain these picks he recommended almost nine months ago. His over-weighting in oil really hurt. Abella is also the analyst who brought Memorial Production Partners (MEMP) to my attention. It was a pick that worked wonderfully for my first trade and then very poorly on my second and current trip. I was hoping Nightly Business Report would bring Abella back for an update, so this segment was quite timely.

A little to my surprise, Abella is STILL recommending MEMP. Sometimes these money managers get on the show and say they already exited a major loser. Unfortunately, Abella was not given much time to explain himself. He only had the following to say:

“The price target from analysts is still roughly at the same level as the last time I was on. It trades in line with oil, but it is one of the most rigorously hedged master limited partnerships [MLPs] in this space, and it pays a really nice cash distribution. That distribution is currently at 17%. [Price target is $13.31].”

This rationale is almost an exact repeat from last time. I wanted to hear Abella say more about MEMP’s decline beyond the tie to oil prices. He did not acknowledge the dividend cut or what has to be current fears of more cuts to come. That juicy 17% is probably too big to last. Finally, Abella needed to explain why a “rigorously hedged” MLP would drop so much.

On the positive side, at least Abella is sticking with MEMP as any good value investor would who is convinced of the fundamentals.

MEMP has probably made a major low alongside oil. MEMP opened at $5 to start the week and ended the week at $7.21. That is a near 50% gain from end-to-end! Oil gained 12% on the week for its first weekly gain in about two months. I was not thinking to buy my third (and final) tranche in the middle of this churn. I was actually profiting from other opportunities this past week.


Memorial Production Partners has experienced a brutal two month slide.

Memorial Production Partners has experienced a brutal two month slide.


Source: FreeStockCharts.com

With oil seemingly in a bottoming process, I am now looking for my final entry on MEMP…preferably a dip from current levels. However, I now see MEMP as a much more speculative play. So, I will likely be inclined to exit the entire position if MEMP breaks the major low of $5. After that, I would wait for more positive catalysts before reconsidering an entry.

Be careful out there!



(video starts at 17:56 with Abella)

Full disclosure: long MEMP

Aug
27

Solar City’s 2014 Low Has Behaved Like A Critical Pivot Point

written by Dr. Duru
Bookmark and Share

The solar industry has taken an extra hard beating in the wake of the market’s general sell-off. Solar City (SCTY) has caught my interest because the stock has exhibited a clear pattern during this sell-off: a pivot around the 2014 low.


The recent market sell-off sent Solar City (SCTY) through the lower support of a long-standing trading range

The recent market sell-off sent Solar City (SCTY) through the lower support of a long-standing trading range


Solar City’s primary trading range extended back to late 2014. If I could extend the chart backward in a neat way, I could also show how SCTY experienced what now looks like two brief spurts above this same trading range. Under this looser definition, SCTY’s trading range goes all the way back to late 2013. The duration and durability of this trading range heightens the importance of the current breakdown.

The chart below shows a close-up of this breakdown.


This close-up of Solar City shows how well the 2014 low has served as a pivot.

This close-up of Solar City shows how well the 2014 low has served as a pivot.


Source for charts: FreeStockCharts.com

Note well how the 2014 low has served well as a pivot. On August 12, SCTY made a very neat bounce directly off the 2014 low. At the time, the move looked like a promising bottom in the making. The warning began the very next day as SCTY failed to print any buying follow-through. The stock drifted lower for 6 trading days as the downward channel defined by the two lower-Bollinger Bands (BB) guided SCTY. As a result, last Friday’s major market sell-off found SCTY extremely vulnerable. SCTY made a clean break below the trading range for the first time since November, 2013. Selling volume had not been that high since November, 2014. This was a serious technical breakdown.

The good news for SCTY is that the stock has not CLOSED any lower since that day. The bad news for SCTY is that two attempts to close above the 2014 low were effectively faded by sellers.

This trading action turns the 2014 low into a very important pivot line. IF SCTY makes a new closing low in this cycle, traders should assume a lot more downside lies ahead. IF SCTY can manage to close above the pivot line AND next show at least one more higher close, preferably on strong buying volume, then traders should assume SCTY has primed itself to rally. The first upside target rests at overhead resistance from the downward sloping 50 and 200-day moving averages (DMA). The very bullish target rests at the top of the former trading range.

Adding to the intrigue was a well-reasoned buy rating from Morgan Stanley analyst Stephen Boyd. Boyd set a $93 rice target which is WELL above SCTY’s trading range. He even defended SCTY against short-seller Jim Chanos who recommended shorting SCTY on August 21st on CNBC. Chanos has a LOT of company: 44% of SCTY’s float is sold short! Talk about a potential powder keg…



Be careful out there!

Full disclosure: no positions

Aug
27

T2108 Update (August 27, 2015) – The Volatility Index Hits A New Milestone On Follow-Through Stock Buying

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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 15.9%
T2107 Status: 23.0%
VIX Status: 26.1
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #5 below 20% (oversold), Day #6 under 30%, Day #29 under 40%, Day #69 under 50%, Day #86 under 60%, Day #284 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
Buyers managed to stage follow-through buying to yesterday’s notable end to a long losing streak. Incredibly, the S&P 500 (SPY) is now ABOVE where it closed on Friday and so is UP for the week. Such is the power of a bounce from oversold conditions.


The S&P 500 (SPY) has gained a whopping 6.2% as its bounce from oversold conditions gets underway

The S&P 500 (SPY) has gained a whopping 6.2% as its bounce from oversold conditions gets underway


This chart is Exhibit A of why sellers and bears should NEVER chase a market down when it is oversold: such trading is a recipe for whiplash or major losses. Anyone who sold into that panic selling at the close on Tuesday is experiencing seller’s regret right now. So the pressure turns to the sellers to decide whether to cover and/or jump back into the market before “it gets away.” Note well, I am NOT saying the market has found its ultimate bottom. Instead, I am speaking from the standpoint of properly managing risks relative to potential gains.

T2108 is still oversold at a close of 15.9%. T2108 lags the S&P 500 given it has not yet recovered to Friday’s close. At the current pace, T2108 could easily exit oversold conditions by Friday’s close. Friday should represent an interesting battle between short-term traders who want to lock in profits before the uncertainty of the weekend versus bears and sellers who might rush to cover/buy fearing that “world peace” over the weekend could send the market gapping up on Monday. At 5 days and running in the oversold period, T2108 is right at the average duration for an oversold period. So, time SHOULD indeed be running out for the oversold period.

Even more importantly, the volatility index, the VIX, hit its next milestone on the downside. The VIX closed below the low of the last major surge; it now sits below the intraday high from 2012.


The volatility index, the VIX, has now lost half its value from the intraday high just three days ago.

The volatility index, the VIX, has now lost half its value from the intraday high just three days ago.


This milestone gives the green light to less aggressive traders/investors to do some buying. However, the current setup is a great reminder of why I prefer the more aggressive strategy. Being aggressive can deliver better risk/reward setups. By buying on volatility spikes to new highs, I very quickly nailed an extremely high profit opportunity on this upswing. Traders and investors buying here face the very real risk of a natural pullback. The S&P 500 is up 6.2% in just two days – even a 3% pullback over a few days would be quite normal.

This pullback risk increases for traders/investors who follow the “conservative” strategy of waiting until the oversold period ends to do some buying. Granted, my early analysis of drawdowns for different strategies showed that the less aggressive strategies effectively limited big drawdowns. This cap on losses comes at the “cost” of more limited upside as well.

I am going to call Friday a “toss-up” day, so no individual stock charts (I will reload chart this weekend! There are many good ones). Here is a quick summary of the trades I did: added to Caterpillar (CAT) put options as a SMALL hedge, locked in more profits on ProShares Ultra S&P500 (SSO) call options, sold AAPL call options for a nice profit, sold NFLX call options for an even better profit, and restarted a “strangle” on iShares MSCI Emerging Markets (EEM) which features out of the money put and call options. I have discussed the strategy on EEM in several earlier posts. I have yet to capture gains on both sides of the trade, but I have consistently been able to log large enough gains on one side (mainly the put side!) to more than pay for the losing side. I fully expect more major moves ahead for EEM.

The iShares Nasdaq Biotechnology ETF (IBB) made its own important milestone: it closed above its 200DMA. This technically makes it a screaming buy. IBB is one of my biggest misses during the panic earlier this week. I did buy a call option last Friday, but it will likely expire tomorrow (August 28th) worthless. (When I finalaly get my short-term timing right on IBB, it will be huge!).


The healing for iShares Nasdaq Biotechnology (IBB) has arrived in the form of a solid close above the 200DMA upward trendline.

The healing for iShares Nasdaq Biotechnology (IBB) has arrived in the form of a solid close above the 200DMA upward trendline.


Finally, I want to demonstrate why it is important to follow currency markets during times of stress like this one.

euro recovering and $AUDJPY looks topped out. Likely signals $SPY rally has or is topping out for the day. #forex

— Duru A (@DrDuru) Aug. 27 at 11:03 AM


As I have noted earlier, I am keeping a close watch on the Australian dollar (FXA) versus the Japanese yen (FXY) as a market tell. It worked like a charm today although I did not act on a trade. The move on ProShares Short VIX Short-Term Futures (SVXY) was simply too fast for my non-computer brain. At least I knew that buying near that top was a very poor risk/reward proposition.

Third day in a row around $51 has held on $SVXY. Today's support was touched just for a hot minute!

— Duru A (@DrDuru) Aug. 27 at 12:29 PM


Anyway, check out the very tight correlation between AUD/JPY and the S&P 500. I included an overlay (blue) of EUR/USD for comparison. While the euro is behaving inversely to the S&P 500, it is not as tightly related as AUD/JPY. The euro’s inverse relationship will only last as long as traders are closing out carry trades; I have to believe they are almost finished at this point.


The Australian dollar versus the Japanese yen (AUD/JPY) topped out ahead of the S&P 500 - it was only a matter of time before the index topped as well. The subsequent plunge was supported by the sudden drop in AUD/JPY.

The Australian dollar versus the Japanese yen (AUD/JPY) topped out ahead of the S&P 500 – it was only a matter of time before the index topped as well. The subsequent plunge was supported by the sudden drop in AUD/JPY.



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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

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 SVXY shares, long SSO shares and call options, long WDAY call options, long UVXY put options, short USO puts, short USO call spread, long CAT put options, long IBB call option

Aug
26

T2108 Update (August 26, 2015) – The VIX Remains Rangebound As Stock Buyers Finally Close Strongly

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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 9.7% (a 59% increase and first after six straight days of declines)
T2107 Status: 19.4%
VIX Status: 30.3
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #4 below 20% (oversold), Day #5 under 30%, Day #28 under 40%, Day #68 under 50%, Day #85 under 60%, Day #284 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 buyers finally showed up and stood victorious at the close. T2108 rushed upward to 9.7% from 6.1%. (I forgot to note yesterday that T2108 just missed the intra-day low of 5.9% from the historic March, 2009 low!). The S&P 500 (SPY) ended a 6-day losing streak and FINALLY closed above its lower-Bollinger Band (BB) for the first time in 5 days. This produced a 3.9% gain on the index.


Buyers finally take the baton from the persistent sellers on the S&P 500 (SPY)

Buyers finally take the baton from the persistent sellers on the S&P 500 (SPY)


Surprisingly, the volatility index, the VIX, failed to close below the low of the last major upward surge. This bear/bull line just happens to coincide with the intraday high from 2012’s market sell-off.


The volatility index remains above the old 2012 intraday high and thus stays in the "dangerzone"

The volatility index remains above the old 2012 intraday high and thus stays in the “dangerzone”


Why do I think the VIX is still in the dangerzone? Check out these stats from VIX expert Bill Luby:


So, I had to ask…is the term structure of the VIX in contango (futures at a higher level than current (spot) levels) or in backwardation (futures at a lower level than current (spot) levels)?


Typically, people have more fear about the future than the present because the future is unknown. The current backwardation means there is a LOT more fear about the current day than the future. I culled Bill Luby’s blog The VIX and More for a good post on backwardation. A post from October 21, 2012 titled “The 2012 VIX Futures Term Structure as an Outlier” includes a graph that I reprint below showing the “typical” contango pattern for the VIX. The year 2008 is the only year in the sample at that time to produce significant backwardation.


Normalized VIX Futures Term Structure from 2004 to 2012

Normalized VIX Futures Term Structure from 2004 to 2012


Source: VIX and More

You should read the article for more background. The bottom-line is that while fear about the present is running so much higher than the future, we should expect wild swings in the market as over-sensitized traders and investors react and over-react and respond to every signal. Special reports like the ones CNBC runs every night like an emergency response center likely add an extra element of anxiety. The GOOD news for those with strong stomachs and good risk management: betting AGAINST the current high levels of the VIX will most likely pay off (and pay off well in these particularly extreme days) if you plan out a strategy that you can sustain over the course of weeks (or months if the current panic REALLY gets extreme).

I forgot to note on Monday that the CBOE Crude Oil Volatility Index (OVX) broke out. The rangebound trade I made a month ago on United States Oil (USO) is of course not working out well with volatility soaring like this. However, I am getting ready to make a fresh bet if volatility reaches the earlier highs. My first trade was like dipping my toe in the water. The next one will be the serious bet. Stay tuned.


Volatility on USO, aka OVX, breaks out. Will it reach earlier highs?

Volatility on USO, aka OVX, breaks out. Will it reach earlier highs?


The Australian dollar (FXA) and Japanese yen (FXY) combination, aka AUD/JPY, threw the market a bone by holding the previous day’s low and making a comeback. This was a small positive, but only a renewed rise gets the market out the dangerzone. A break of the major low from Monday would mark a disastrous breakdown and fresh wave of bearishness. I hope to write another piece soon explaining again why I think of AUD/JPY as such an important tell.


The Australian dollar versus the Japanese yen holds the line for now.

The Australian dollar versus the Japanese yen holds the line for now.


I was watching AUD/JPY when I was asked a question about buying ProShares Short VIX Short-Term Futures (SVXY) on StockTwits.


An important question on SVXY

An important question on SVXY


I was hesitant because I sold yesterday’s fortuitous grab of SVXY shares right at the open. SVXY faded from there and even traded under $50 for a spell. It SEEMED like a great moment to get back in. However, my trading rules were ringing in my head, so I left it alone and instead placed a low-ball limit order close to Monday’s low.

As time wore on (I am talking minutes!), I noticed that the Japanese yen was continuing to weaken. I decided to speculate that the strengthening indicated buying returning to the market (in-line with my trading rule on AUD/JPY), so I bought a single put option on ProShares Ultra VIX Short-Term Futures (UVXY). These options are VERY expensive right now, so I do not want to load up on them as I normally would do. As a reminder, I prefer to speculate with options because they automatically limit my downside to a small amount.

Sure enough, the yen continued to weaken, AUD/JPY rose strongly into the close, and I sold the put for a tidy gain. The buying on the market was strong enough for me to lock in a double on my ProShares Ultra S&P500 (SSO) call options that triggered near yesterday’s close.

Going back to the standard T2108 rules, the rangebound VIX did not trigger any fresh trades. I have chosen the aggressive path, so I load up again on T2108 trades if the VIX breaks the high for the current cycle. If this happens, I will try to wait for an additional 5 to 10% rise above recent highs. Less aggressive traders/investors should keep waiting for the low of the last major surge to break. Again, the intraday 2012 high conveniently marks this dividing line.

For good measure, I got back into a (small) hedge using Caterpillar (CAT) put options. This move is VERY early. However, with this oversold period now in its fourth day and T2108 still in single digits, I do not want to stay as “naked” as I have been since closing out most of my remaining short positions on Tuesday (August 25th). The relative weakness in copper miner Freeport-McMoRan Inc. (FCX) triggered my interest in CAT puts. FCX closed right at its historic low from late 2008 – a level that was last since in late 2002. Yikes.


Someone forgot to tell Freeport-McMoRan Inc. (FCX) about the day's rally!

Someone forgot to tell Freeport-McMoRan Inc. (FCX) about the day’s rally!


Buckle up and brace for more drama!

(In after hours news, Workday (WDAY) managed to disappoint and closed down about 7%. That ruins one of the call options I bought during Friday’s sell-off into oversold conditions.)


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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

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 SVXY shares, long SSO shares and call options, long WDAY call options, long UVXY put options, short USO puts, short USO call spread, long CAT put options, long FCX

 Subscribe Subscribe Subscribe by Email Follow DrDuru on Twitter
Follow DrDuru
OLD ARCHIVES

Recent Archives

Great Links

Tag Cloud

Join In

Disclaimer