ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Dec
17

T2108 Update (December 17, 2014) – Relief from Fear

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: 37.4% (almost an 11 percentage point gain!)
T2107 Status: 43.0%
VIX Status: 19.4
General (Short-term) Trading Call: With S&P 500 closing above 50DMA, ALL bullish trades are OK with tight stops. More caveats below.
Active T2108 periods: Day #42 over 20%, Day #1 above 30% (overperiod ending 2 days under 30%), Day #4 under 40%, Day #6 under 50%, Day #10 under 60%, Day #112 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
“Relief from fear” is the best way I can describe the trading on Wednesday, December 17th. If you have been following along these past several days and weeks, hopefully you profited from the golden setup that the December Federal Reserve meeting provided.

I could not have asked for a better open to the day. I practically jumped out my seat when I saw the best news possible coming from Digital River (DRIV):

“On December 16, 2014, Digital River, Inc. (“Digital River”) and Microsoft Corporation (“Microsoft”) entered into the Seventh Omnibus Amendment to the Microsoft Operations Digital Distribution Agreement dated September 1, 2006 (the “Seventh Omnibus Amendment”). The Seventh Omnibus Amendment extends the term of Microsoft Operations Digital Distribution Agreement to March 31, 2017 (the “Expiration Date”). Additionally, Microsoft may extend the Expiration Date for up to four (4) separate six (6) month renewal terms.”

The reaction in the stock was immediate and left no time for those who bailed on DRIV to get back in at a good price. DRIV closed the day with a 43% gain that took it back to within 2 points of the $26 being offered for the company. I am hoping at least a few of my readers took the plunge with me on what I thought was a VERY rare example of an exceptionally good risk/reward trade. You can see more details in the December 14th T2108 Update.


A major relief from fear as Digital River and Microsoft work out a new deal

A major relief from fear as Digital River and Microsoft work out a new deal


Next up was the Federal Reserve. I will just summarize to say that the release of the statement contained just the soft-pedaling on higher rates that I was anticipating and targeting for trading. Relief from fear started there but did not get into full gear until the subsequent press conference ended. At that point, there were no more surprises possible, nothing left to fear, and every reason for volatility to come tumbling down.


Relief from fear sends the VIX plunging 18% - it remains elevated however

Relief from fear sends the VIX plunging 18% – it remains elevated however

Volatility was imploding going into the Fed release. The press conference appeared to cause some renewed angst before the implosion began anew.

Volatility was imploding going into the Fed release. The press conference appeared to cause some renewed angst before the implosion began anew.


I took this opportunity to close out my put options on ProShares Ultra VIX Short-Term Futures (UVXY) that expire next week. The put options that expire Friday are still a bit underwater (I bought the first tranche too early!), and I want to see whether they can benefit from further declines in volatility in the wake of the Fed. The best trades ended up coming from my multiple roundtrips in and out of ProShares Short VIX Short-Term Futures (SVXY). THIS time, I decided to just hold SVXY through the entire day. Depending on how events unfold, I strongly suspect I can hold it for many more days to come as volatility continues to ebb through the holiday period. The BIG caveat is that the market often attempts to fade the immediate post-Fed reaction. If I even see a hint of such a reversal, like the S&P 500 trading below its 50DMA again, I will likely lock in my remaining profits on SVXY and look to buy yet again at lower prices. Currency markets also present an on-going wildcard as fresh extreme moves in various currencies could trigger bad reactions in the stock market.

My biggest lesson going forward is that SVXY shares are likely the BEST way to play my “relief from fear” strategy (let’s call it RFF going forward).

The end result for T2108 was a tremendous surge of almost 11 percentage points to 37.5%. This move indicates a large number of stocks likely flipped from breakdowns to breakouts. Indeed, the S&P 500 (SPY) managed to close above its 50DMA even after sellers faded an earlier breakout.


The S&P 500 FINALLY holds onto a position above its 50DMA

The S&P 500 FINALLY holds onto a position above its 50DMA


This bullish close above the 50DMA AND the 2000 level clears the pathway for bullish trades again. Certainly, large surges of T2108 from these low levels are very encouraging as they can signal sustainable bottoms. On the S&P 500, this means trades are a green light with a tight stop below the low of the recent churn (around 1972). Assuming the index opens firmly on Thursday, I will make my first tentative trades in ProShares Ultra S&P500 (SSO) call options. I will hold off on shares until/unless T2108 hits oversold conditions. If the S&P 500 manages to disappoint despite the encouraging signals, more aggressive bulls should feel free to wait to see what happens at 200DMA support.

Bears should have already locked in some profits. Aggressive bears can wait to see whether the S&P 500 can continue through the definitive downward channel defined by the two lower-Bollinger Bands.

I am personally firmly bullish, HOWEVER I fully recognize the fresh technical damage done in the market. For now, I am assuming the recent top will continue to hold through this seasonally strong period in the second half of December. Overall, I am still trading as if the market has gone from topping to chopping.

One breakout I somehow managed to miss in all the excitement was from Alibaba (BABA). I have periodically checked on the stock for trading signals. My latest was a play on a bounce from “close enough” to the support at the nascent 50DMA. This support has held up very well, making the breakout from the short-term downtrend from all-time highs all the more important and bullish.


Alibaba (BABA) finally seems ready to resume its upward momentum on a break from the recent downtrend and bounce from 50DMA support

Alibaba (BABA) finally seems ready to resume its upward momentum on a break from the recent downtrend and bounce from 50DMA support


I randomly saw news about Starbucks (SBUX) and decided to check the chart. I saw a stock on its way to testing its 50DMA support. Given my bullish bias for the day, I did not hesitate to load up on some call options. I was well-rewarded. I am guessing SBUX should at least retest recent highs in short order.


Starbucks bounces from "close enough" to its 50DMA

Starbucks bounces from “close enough” to its 50DMA


Finally, Apple (AAPL) has provided a multitude of trading opportunities. My Apple Trading Model (ATM) has remained stubbornly bullish so I have continued to buy call options on dips and sell them on any subsequent rally. Tuesday’s swoon was an excellent opportunity to reload. I sold those call options near the close. The ATM is even MORE bullish for Thursday with a 100% historic frequency for upside based on the current setup. The odds for a positive gain from the open are even high at over 80%. As usual, I will load up if the market is kind enough to offer a discount on this projection.


Like the S&P 500, Apple (AAPL)  has struggled mightily at its 50DMA. Today's close was a marginal victory - a short-term downtrend remains well-intact

Like the S&P 500, Apple (AAPL) has struggled mightily at its 50DMA. Today’s close was a marginal victory – a short-term downtrend remains well-intact


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 UVXY put options, long AAPL call options, long SVXY shares, long GOOG call options, long AMZN put options

Dec
17

Parabolic Moves in the Ruble, Turkish Lira May Foreshadow the Same for the Australian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on December 17, 2014. Click here to read the entire piece.)

Currency markets have been rocked with increasingly extreme moves in risk-bearing currencies like the Russian ruble (USD/RUB). Last week, the Russian central bank hiked interest rates from 9.5% to 10.5%. This move proved insufficient to protect the currency and control inflation, forcing the Russian central bank to send rates surging to 17%. Despite this rate hike, the ruble STILL lost about 25% against the U.S. dollar before finally reversing from the extremes of what is an extremely parabolic move.


The U.S. dollar goes parabolic against the Russian ruble.

The U.S. dollar goes parabolic against the Russian ruble.


{snip} A parabolic move that started on December 1st and accelerated in recent days has punished the Turkish lira. Now the USD/TRY exchange rate is higher than the crisis levels back in January. The Turkish lira is now back to what looks like record lows against the U.S. dollar.


The U.S. dollar has gone parabolic against the Turkish lira in recent days

The U.S. dollar has gone parabolic against the Turkish lira in recent days

It took almost a year but the TUrkish central bank's attempt to protect the currency has now been completely eroded

It took almost a year but the TUrkish central bank’s attempt to protect the currency has now been completely eroded


Interestingly, the fresh plunge in the Turkish lira has not accompanied the kind of collapse seen in Russian stock indices. For example, here is a chart of iShares MSCI Turkey (TUR).


Turkish stocks are holding up relatively well given the October lows are still holding

Turkish stocks are holding up relatively well given the October lows are still holding


These extreme and parabolic moves in risk currencies bring the Australian dollar immediately to mind. The Reserve Bank of Australia (RBA) has repeatedly warned traders that the Australian dollar could essentially plunge at just about any time without warning given the currency remains very over-valued. {snip}


The sell-off in the Australian dollar continues at a steady pace - no parabolic moves yet

The sell-off in the Australian dollar continues at a steady pace – no parabolic moves yet


{snip} Over the past week, expectations for a rate cut in Australia have taken a sharp turn downward. Yet, the pacing of the slide in the Australian dollar has not changed.


Financial markets are sharply lowering expectations for a rate cut in Australia for February

Financial markets are sharply lowering expectations for a rate cut in Australia for February


Source: ASX RBA Rate Indicator – February 2015

This relative independence suggests to me that the weakness in the Australian dollar has taken on its own self-reinforcing momentum. {snip}

{snip} If so, it will be important to watch whether the U.S. dollar’s (UUP) rise takes a pause in response…or continues to power higher on its own momentum…and in turn taking risk currencies down another few notches.


The U.S. dollar takes a pause ahead of December's Federal Reserve meeting

The U.S. dollar takes a pause ahead of December’s Federal Reserve meeting


Source for currency and stock charts: FreeStockCharts.com

Be careful out there!

Full disclosure: net short the Australian dollar

(This is an excerpt from an article I originally published on Seeking Alpha on December 17, 2014. Click here to read the entire piece.)

Dec
16

T2108 Update (December 16, 2014) – A Rush to Panic Out of Russia, A Major Reversal In the Oil Patch, And More Breakdowns for U.S. Stocks

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: 26.9%
T2107 Status: 38.3%
VIX Status: 23.6 (only THREE higher closes since summer, 2012 – the other three were of course at the mid-October bottom)
General (Short-term) Trading Call: Fresh buys only on close above 50DMA or oversold conditions
Active T2108 periods: Day #41 over 20%, Day #2 under 30% (underperiod), Day #3 under 40%, Day #5 under 50%, Day #9 under 60%, Day #111 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
If only today’s trading action were reversed.

The S&P 500 opened down with the selling lasting only 5 minutes – almost the exact opposite of the previous day where 5 minutes of buying was met by selling until lunchtime on the East Coast. This time around, buyers jumped right into the fray and managed to take the S&P 500 (SPY) above its 50DMA. The peak came right before lunch, and it was all downhill from there. The end result was a -0.9% price performance, an S&P 500 further below its lower-Bollinger Band and further below the 50DMA, and a T2108 closing at 26.9%…creeping ever closer to oversold conditions.


The S&P 500 goes on a wild ride that ends badly

The S&P 500 goes on a wild ride that ends badly


Without oversold conditions, I still refrained from buying call options on ProShares Ultra S&P500 (SSO). The lack of a close above the 50DMA means that I will not buy into any strength on Wednesday either. Even with a Fed meeting coming in the middle of what is supposed to be a seasonally strong period, the S&P 500 looks all set to retest its 200DMA. At the current rate, such a retest SHOULD occur with oversold conditions. Such a combination would mark a great buying opportunity.

The days gyrations also meant volatility was all over the place. Given I missed out on buying back into ProShares Short VIX Short-Term Futures (SVXY) yesterday, I immediately pounced at the open. The subsequent rise surprised me, and I locked in profits (fortuitously near the peak) – I already have puts options on ProShares Ultra VIX Short-Term Futures (UVXY) in play. Just like yesterday I set a lower limit order after the sale. This time, it was filled…and eventually I lost two more points on the position. (I had a VERY similar experience trading Apple (AAPL) options today but I simply do not have time to get into the details!) The volatility index, the VIX, is now putting on an impressive show of resilience ahead of the Fed meeting.


The VIX is officially surging  toward previous glory

The VIX is officially surging toward previous glory


The narrative that has become embedded in media headlines is that the market is now declining because of or along with oil. Funny thing happened on the way down today…oil made a major reversal and closed UP in a rare display of strength.


A rare display of buying interest in PowerShares DB Oil ETF (DBO) as oil makes a major reversal on the day

A rare display of buying interest in PowerShares DB Oil ETF (DBO) as oil makes a major reversal on the day


The entire oil patch was hopping with large upward moves…of course just mirror images of prior large DOWNWARD moves. For example, here is Linn Energy, LLC (LINE), an oil company that I am watching closely only because an author on Seeking Alpha made a spirited defense of the company. Amazing how many articles I have seen throughout this sell-off arguing for bottoms and buys of a lifetime; it has made me think that a bottom is still very far off! For a great example, you can just check out the headlines for LINE articles.


Linn Energy, LLC (LINE) surges 28% off its gut-wrenching lows...and is STILL less than 50% of its value just 2 1/2 months ago!

Linn Energy, LLC (LINE) surges 28% off its gut-wrenching lows…and is STILL less than 50% of its value just 2 1/2 months ago!


Nothing says “collapse” better than a chart like this!

While oil was finally getting some buyer interest, Google (GOOG) experienced a MAJOR exit. The stock sliced right through $500 and closed with a 3.6% loss…on no fresh headlines I could discern. So not only has GOOG completed a post-earnings roundtrip but also is at a fresh 52-week low. The stock even looks ready to fill its major gap up from October, 2013 earnings!!!


GOOG suffers a MAJOR breakdown

GOOG suffers a MAJOR breakdown


Of all the non-commodity related breakdowns I have seen, this one is perhaps one of the most troubling. It will be VERY hard for GOOG to recover from this. I bought some speculative calls just on the likelihood for a deadcat bounce back to the lower-Bollinger Band.

Amazon.com (AMZN) also suffered a similar loss that confirms 50DMA resistance with an exclamation mark. Given GOOG’s major breakdown, I am doubting AMZN will find much support at its post-earnings low. Given the bearish outlook I noted last week, I came into this continuation selling prepared with put options.


Rejected from its 50DMA, Amazon.com (AMZN) seems headed for a retest, and eventual violation, of its post-earnings low

Rejected from its 50DMA, Amazon.com (AMZN) seems headed for a retest, and eventual violation, of its post-earnings low


Of any and all charts I saw today, Russia’s drama was the most spectacular. It looks like the country is headed for a second economic collapse in less than 20 years.


The U.S. dollar goes parabolic against the Russian ruble. Wowza!

The U.S. dollar goes parabolic against the Russian ruble. Wowza!


The Russian ruble lost as much as 25% against the dollar from Monday’s close of U.S. trading. This happened in the wake of a second massive rate hike that sent Russian rates to 17% from last week’s hike to 10.5%. The currency did eventually reverse off the extremes. The action was just as dramatic in Russian stock indices with Market Vectors Russia ETF (RSX) managing to cling to a rare gain on the day.


Will the major reversal in Market Vectors Russia ETF (RSX) stop the train wreck?

Will the major reversal in Market Vectors Russia ETF (RSX) stop the train wreck?


Talk about a panicked stampede from the exits!

It seems the ruble’s rapid move disrupted currency trading in nearby Turkey as well. In fact, Russia’s desperate attempt to protect the value of its currency reminds me of how we started the year with the Turkish central bank moving aggressively with a rate hike to protect the Turkish Lira. The BIG difference is that the rate hike in Turkey immediately sent the currency into recovery. The difference now is that the index of Turkish stocks is not completely collapsing along with the parabolic weakness in the currency.


The U.S. dollar has gone parabolic against the Turkish lira in recent days

The U.S. dollar has gone parabolic against the Turkish lira in recent days

It took almost a year but the TUrkish central bank's attempt to protect the currency has now been completely eroded

It took almost a year but the TUrkish central bank’s attempt to protect the currency has now been completely eroded

Turkish stocks are holding up relatively well given the October lows are still holding

Turkish stocks are holding up relatively well given the October lows are still holding


Putting all the pieces together, we should clearly understand that major risks abound, and they are making their voices heard in many places all at once. These kinds of extreme moves usually signal a run is closer to its end than its beginning. However, on the way to the end can still deliver some pain. Major trading models and investing plans are getting disrupted by these wild swings and extreme moves. Forced selling is going on. Stops are getting hit and causing trading whiplash. It is probably like near chaos at many trading desks as operations are holding on for dear life just to get through 2014.

For the little retail investor, you can be thankful that it is easy to simplify your routine and stick strictly to time-tested trading rules. More than ever, an indicator like T2108 is critical for navigating these choppy waters. My bottom-line remains that fresh buys on the S&P 500 should wait until 1) T2108 hits oversold, preferably on a retest of major support (like the 200DMA) and/or a large spike upward in volatility, and/or 2) the S&P 500 shows strength with a confirmed breakout above its 50DMA.

I conclude with the continued breakdown in Netflix (NFLX). Tuesday’s plunge close to the 2014 low closed out my latest short position on the stock (a put spread).


Netflix continues downward on a well-defined trend. The 2014 low is now in play.

Netflix continues downward on a well-defined trend. The 2014 low is now in play.


I also closed out of my Herbalife (HLF) puts as the stock failed to continue lower on 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
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 UVXY put options, long AAPL call options, long SVXY shares, long GOOG call options, long AMZN put options

Dec
15

T2108 Update (December 15, 2014) – Volatility Drops Even After Major Market Breakdowns

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: 29.7%
T2107 Status: 39.6%
VIX Status: 20.4 (actually DROPPED 3.1%)
General (Short-term) Trading Call: Fresh buys only on close above 50DMA or oversold conditions
Active T2108 periods: Day #40 over 20%, Day #38 over 30%, Day #2 under 40% (underperiod), Day #4 under 50%, Day #8 under 60%, Day #110 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 trading day had a promising start with the expected bounce coming right on schedule at the open. That push lasted all of five minutes or so before sellers went to work again.


The S&P 500 breaks down below its 50DMA

The S&P 500 breaks down below its 50DMA


This breakdown is of course a bearish development and highlights the warnings that have preceded this point. However, it is not likely a time to chase the market lower. T2108 is now closing in on oversold conditions (less than 20%) with a close at 29.7%. Shorts should already know what positions they want to start closing and locking in some profits. For bulls, the trigger to buy does not come until the S&P 500 manages to close above the 50DMA and continues higher and/or T2108 hits oversold conditions below 20%. Overall, the trading rules are pretty simple here.

Volatility was NOT simple. Despite the continued sell-off and 50DMA breakdown on the S&P 500, volatility managed to close LOWER on the day. This combination seemed to provide a ringing endorsement of my positioning on Friday to fade volatility but NOT to buy the S&P 500 (SPY) on the assumption that the 50DMA would hold as support.


Despite a continuation of selling and a major breakdown for the S&P 500, the VIX still manages to close down on the day

Despite a continuation of selling and a major breakdown for the S&P 500, the VIX still manages to close down on the day

ProShares Ultra VIX Short-Term Futures (UVXY) follows the VIX downward

ProShares Ultra VIX Short-Term Futures (UVXY) follows the VIX downward


The swings in the volatility products gave me a rare double trading opportunity. As soon as I saw ProShares Short VIX Short-Term Futures (SVXY) falter at its highs on the day, I sold. I had no need to hang on given I already have put options in play on ProShares Ultra VIX Short-Term Futures (UVXY). I set a limit order to buy at lower prices ($60) and eventually it got filled. After watching SVXY continue as low as $58.10, I was very ready to sell again when SVXY quickly rushed back to $62 for a brief moment. I put in yet another limit order (at $59 this time), but it did not get filled. I am hoping for at least one more shot at lower prices for SVXY ahead of Wednesday’s Fed meeting. Otherwise, I just ride the UVXY puts.

Two quick trading updates before some the final set of trading charts. I did buy some Digital River (DRIV) but had to buy a small number shares as the options proved too expensive (huge bid/ask spreads) to get a fair price on call options. I decided to leave Conns (CONN) alone; sure enough, the hammer bottom has already been violated by a strong resumption of selling.

On November 27, I laid out a trading plan for Herbalife (HLF). I was mainly focused on the bearish trading opportunity. Sure enough, HLF triggered just days afterward with a complete reversal of the continuation rally catalyzed apparently by the CEO’s decision to hold stock granted through exercised options. The market rewarded his kindness with pain. After hanging in there for a few more days, HLF has dropped nearly in a straight line since December 5th. The selling has accelerated in percentages lost but volume has not increased. I was close to selling my put options at the close but decided to hang on at least one more day to see whether support at November’s (18-month) low holds. The puts expire on Friday, so I have almost no more wiggle room (no way I want to short shares in this volatile and controversial stock…even if shares are available for shorting).


Herbalife gets rejected from 50DMA resistance and retests recent lows

Herbalife gets rejected from 50DMA resistance and retests recent lows


Apple (AAPL) made a critical breakdown today, joining the S&P 500 in a break of its 50DMA. Like the S&P 500, AAPL had a nice opening and my call options going into the typical Monday rally were looking good. In a blink, the tables were turned upside down, and I found myself with additional options a ta lower strike and lower price point. (Per the Apple Trading Model (ATM), I like buying positions at a discount to the projected close). My second tranche of call options were triggered as AAPL plunged as low as $106.35 and a 3.1% loss. AAPL now has a well-established downtrend from its last all-time high, and the break of the 50DMA confirms it. If buyers do not step up soon, I have to assume that Apple’s upward momentum has finally come to an end. For Tuesday’s trading, the ATM projects a gain from today’s close but a fade from the open. Recall that I put more weight on the projected move from the close. IF AAPL manages to gap up, I will certainly sell my call options, but I am not likely to execute the put option side of the trade given AAPL will have reclaimed the 50DMA.


A MAJOR breakdown for Apple (AAPL) as it experiences a 50DMA breakdown

A MAJOR breakdown for Apple (AAPL) as it experiences a 50DMA breakdown


Finally, emerging markets are looking as ugly as ever. I sold my latest round of put options on iShares MSCI Emerging Markets (EEM) on Friday. I thought EEM was extended and decided to just take the profits. EEM lost another 1.4% today, leaving me with another set of call options that are likely to expire (next month) worthless as the momentum is clearly still pointed to the downside. At least I was correct that one way or another EEM was due for a big move, making a straddle or a strangle options play potentially very lucrative for low risk. Note in the chart below that EEM is accelerating to the downside with emphasis from the increasing trading volume. A washout is likely on the horizon, so I am watching more closely than ever.


iShares MSCI Emerging Markets (EEM)  accelerates to the downside

iShares MSCI Emerging Markets (EEM) accelerates to the downside


Finally, I feel compelled to post the latest chart on oil. This downward slide is historic. It continues to remind me of the dotcom bubble blow-up. Having lived through that as a relative new investor and even newer (meaning GREEN!) trader, I can be so thankful that I did not buy into the shale oil boom. These lessons get learned over and over again. Perhaps a little ironically, the OPEC decision is now turning into an obvious selling/shorting point. Oil has accelerated to the downside ever since then. DBO is now down 25% just in these last two weeks!


PowerShares DB Oil ETF (DBO) approaches its most important line of support yet

PowerShares DB Oil ETF (DBO) approaches its most important line of support yet

United States Oil ETF (USO) has already cracked its 2009 low as the trading structure for USO proves even more damaging for the ETF than DBO

United States Oil ETF (USO) has already cracked its 2009 low as the trading structure for USO proves even more damaging for the ETF than DBO


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 UVXY put options, long AAPL call options, long HLF put options

Dec
14

T2108 Update (December 12, 2014) – High Stakes: Major Tests of Support

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: 35.8%
T2107 Status: 41.9%
VIX Status: 21.1 (5.0% increase after 8.4% and 24.5% increases on the previous two days)
General (Short-term) Trading Call: Hold. BIG caveats listed below.
Active T2108 periods: Day #39 over 20%, Day #37 over 30%, Day #1 under 40% (underperiod; ends 33 days over 40%), Day #3 under 50% (underperiod), Day #7 under 60%, Day #109 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
Thursday’s rare combination of a surging volatility index, the VIX, and a positive close for the S&P 500 (SPY) resolved into continuation selling on Friday. The 1.6% loss for the S&P 500 took the index right to its 50DMA. This plunge also happened to completely reverse the gains from the Oct 31st rally inspired by a QE-boost from the Bank of Japan.


The selling continues for the S&P 500

The selling continues for the S&P 500


Anyone reading my warnings since T2108 pulled away from “almost overbought” should not be surprised by this retest of the 50DMA even though I could not definitively say the retest was in play until Wednesday’s selling.

Now, we stay on the lookout for a bounce for several reasons. First of all, the S&P 500 is extended well below its lower-BB on the 50DMA retest. That alone produces a bounce candidate. Second, the VIX has surged again well above its upper-Bollinger Band (BB). As the VIX retested the bottom of the October gap, I immediately added to my latest put options on ProShares Ultra VIX Short-Term Futures (UVXY) and even added into the mix some shares in ProShares Short VIX Short-Term Futures (SVXY). I was encouraged to see the VIX pullback right on cue.


Another surge in the VIX. This one stops short after retesting the gap from October

Another surge in the VIX. This one stops short after retesting the gap from October

ProShares Ultra VIX Short-Term Futures (UVXY) teeters precariously on top of its 50DMA in an attempted breakout

ProShares Ultra VIX Short-Term Futures (UVXY) teeters precariously on top of its 50DMA in an attempted breakout


What I *cannot* project is a sustained bounce. I would do so if T2108 was deep in oversold territory (below 20%). Adding to the fireworks is the last Federal Reserve meeting of the year. Even if the S&P 500 does not put on an impressive bounce, I strongly expect volatility to implode (or at least decline significantly) as the Fed attempts to manage fear back down. And even if THAT is not enough, options expiration on Friday and the prospects of a Santa Claus rally still tip the balance toward a volatility implosion going into year-end.

While we wait for things to play out and the drama to unfold, there are of course plenty of charts offering interesting trades.

International Business Machines Corporation (IBM) has apparently started a fresh leg downward. This is VERY bearish and makes IBM a fade on rallies. It is of course dangerous to chase it downward while it is below the lower-BB. The plunge resolves the churn during the consolidation that followed an ugly post-earnings gap down. I have not written about IBM in a while; I should have officially taken it off the “buy list” after October’s monster post-earnings gap.


IBM makes a fresh 3 1/2 year low on a very ominous breakdown from an extended period of consolidation

IBM makes a fresh 3 1/2 year low on a very ominous breakdown from an extended period of consolidation


On October 23rd, Digital River (DRIV) announced a private investor group would acquire the company for $26/share. On December 8th, the company admitted in an SEC filling the following:

“Digital River, Inc. (the “Company”) today announced that it has granted Microsoft Corporation (“Microsoft”) an extension from December 1, 2014 to December 19, 2014 as the deadline by which Microsoft is required to provide prior notice to the Company of its decision as to whether to elect to extend the expiration date of the Microsoft Operations Digital Distribution Agreement between the Company and Microsoft, dated September 1, 2006, as amended to date.”

DRIV immediately fell 23% on the day. It managed to bounce off its 200DMA in a classic move with an over-extension below the lower-BB. The selling continued until a hammer pattern on Friday. This selling pushed the stock past the gap created by the M&A deal. I like this situation for a speculative buy, and I am hoping to get that opportunity on Monday. If DRIV resolves its issues with MSFT, suddenly, this should be a $26 stock again. If DRIV cannot resolve the issues, there must still be a chance that the investor group will still acquire DRIV. Perhaps the price of the deal drops to account for the loss of business, but that price should NOT be where the stock sat before the announcement. I like options for this trade of course so that losses are automatically capped.


Digital River Inc. (DRIV) prints a hammer just under its 200DMA as the market forgets about M&A and focuses on the potential loss of business from Microsoft (MSFT)

Digital River Inc. (DRIV) prints a hammer just under its 200DMA as the market forgets about M&A and focuses on the potential loss of business from Microsoft (MSFT)


Electronics retailer Conns Inc. (CONN) was on an incredible 3-year run going into 2014. This year has provided the proverbial brick wall. Months ago, CONN finished reversing all its gains from 2013. It is now working on 2012’s gains. The catalyst last week was another disastrous earnings announcement. I like CONN here as a deadcat bounce from the hammer pattern that finally showed up on Friday. The tail of the hammer provides a definitive point for a stop-loss. I like the prospects of the dead-cat bounce not just because of the hammer but also because the two previous gaps down marked the coming (short-term) end of selling pressure. I am expecting this episode to be more of the same. (I have not yet decided whether to take on the risky trade yet though!)


Conns Inc. (CONN) FINALLY prints a bottoming pattern with a hammer on its fourth day trading below the lower-Bollinger Band

Conns Inc. (CONN) FINALLY prints a bottoming pattern with a hammer on its fourth day trading below the lower-Bollinger Band

It looks like CONN's great run-up against the odds is coming to a dramatic end

It looks like CONN’s great run-up against the odds is coming to a dramatic end


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 UVXY put options, long SVXY shares

Dec
11

T2108 Update (December 11, 2014) – An Unusual Surge in Volatility As Sellers Score Another Victory

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: 44.6%
T2107 Status: 45.2%
VIX Status: 18.5 (8.4% increase after jumping 24.5% the day before)
General (Short-term) Trading Call: Hold. Caveats listed below.
Active T2108 periods: Day #38 over 20%, Day #36 over 30%, Day #33 over 40%, Day #2 under 50% (underperiod), Day #6 under 60%, Day #108 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
Since 1990 (as far back as the data from Yahoo!Finance goes), there have been just 197 trading days where the VIX increased by 3% or more and the S&P 500 maintained a positive gain on the day. The number of days drops to 79 for VIX increases of 5% or more. There are only 18 trading days since 1990 where the VIX increased by 8% or more and the S&P 500 still managed a gain.

It is very rare to observe a combination of a notable gain for the VIX along with a positive close for the S&P 500 (SPY). Yet, that is exactly what happened today with the VIX making a late day surge to gain 8.4% while the S&P 500 faded fast into the close but managed to hold onto a 0.5% gain. The last time the VIX gained at least 8% while the S&P 500 closed in the green was December 30, 2004. The VIX gained 8.1% while the S&P 500 barely eked out a positive gain of just .008%. The next to last time was May 5, 1997 when the VIX soared 15.0% even as the S&P 500 managed to gain 2.1%. This record is out of 6,276 trading days (January 3, 1990 to November 25, 2014)!

I am not yet sure what to make of this rare event (I am open to ideas!). It will take more time to run through a few possibilities and do some research. One possibility is that some big trader(s) rushed to make unhedged bets on future price levels for the S&P 500; that is, bets on options without simultaneous purchases or shorts on the S&P 500, or at least simultaneous trades that were not big enough to drive the S&P 500 into negative territory. This is pure speculation on my part. Even if my explanation has merit, I am not sure what larger implications could or should be drawn. Anyway, let’s look at the related charts.


The VIX makes a rapid comeback on the day and closes well above its upper-Bollinger Band again

The VIX makes a rapid comeback on the day and closes well above its upper-Bollinger Band again


Note that the VIX opened with a gap down from Wednesday’s close that took the VIX right to its upper-BB. The pullback continued right to the 50DMA and just above the 15.35 pivot. This was the perfect scenario for the put options on ProShares Ultra VIX Short-Term Futures (UVXY) that I purchased toward Wednesday’s close. After failing to see follow-through, I quickly closed out the position. It felt like the eventual pullback I wanted came much earlier than expected.

I was further surprised when near Thursday’s close I discovered that the VIX was surging again. My reflexes sent me to purchase a fresh tranche of put options on UVXY (recall that I am expecting volatility to implode right before or after next week’s Fed meeting). NEXT, I searched around for an explanation of the sharp turn-around. It was then I noticed that the S&P 500 was weakening fast into the close. It was a dramatic turn-around from what was looking like an equally dramatic reversal of Wednesday’s loss.


The S&P 500 fails to hold onto an impressive reversal of the previous day's loss

The S&P 500 fails to hold onto an impressive reversal of the previous day’s loss


What at first looked like a huge victory for the bulls now looks like another sign of the growing strength of the bears. Recall that with the lower-BB opening downward, traders should expect a downward bias to the S&P 500 in the immediate short-term. I still expect at some point sooner than later a retest of the 50DMA. That expectation is what has me staying opportunistic with the UVXY put options. While the depth of the reversal surprised me, the topping of the S&P 500 on the day did not.


Once again, the Australian dollar (FXA) versus the Japanese yen (FXY) delivered a powerful indicator for the general market. AUD/JPY is still below its 50DMA and flagging a bearish signal. However, U.S. trading started with a relatively bullish signal from AUD/JPY after a large swoosh downward was quickly reversed.


Here is the 15-minute intraday chart:


A big swoosh downward for AUD/JPY at first appeared to wash out sellers for the day

A big swoosh downward for AUD/JPY at first appeared to wash out sellers for the day


After I concluded that the S&P 500 had topped for the day, I looked around for some potentially highly profitable targets for put options. At the top of my list: Netflix (NFLX). At the time, NFLX was hitting its high for the day that happened to coincide with the top of its current downward channel – a great risk/reward opportunity for a fade. NFLX delivered very well by the close, and I took the profits (I am still sitting on my put spread).


NFLX continues its descent from a downward resolution of a BB-squeeze

NFLX continues its descent from a downward resolution of a BB-squeeze


I did not open any other bearish bets on the AUD/JPY signal although I was tempted by Baidu (BIDU). The stock is struggling mightily at 50DMA resistance as it stays trapped within its own downward channel defined by the two lower Bollinger Bands. It is getting more and more difficult for me to stay bullish on BIDU.


BIDU struggles to hold onto its 50DMA

BIDU struggles to hold onto its 50DMA


Amazon.com (AMZN) is a stock I should have considered. The stock is also struggling with a 50DMA that is acting as tough resistance. Today’s fade was particularly ominous for AMZN. So perhaps investors are getting weary with the AMZN profitless story after all. A friend recommended a recent Seeking Alpha piece on AMZN titled “Amazon’s Moment of Truth May Have Arrived.” This piece is probably one of the most convincing bearish pieces I have read on AMZN; perhaps because it presented an angle I had never seen before. The author noted that it seems likely that an end is soon coming to AMZN’s ability to borrow cheaply using the huge gap in time between the time it pays suppliers and the time it collects money for goods. With the lower-BB opening downward and four days in a row with failures at resistance, odds are increasing that AMZN will soon retest its post-earnings low.

Amazon.com (AMZN) seems to be losing the fight with 50DMA resistance

Amazon.com (AMZN) seems to be losing the fight with 50DMA resistance


A particularly good trade would have been Splunk (SPLK). I have written skeptically about the company in the past because of massive insider sales and a super-rich valuation. The stock gapped higher after its November earnigns report and proceeded to fade from there (a “gap and crap”). The stock has continued sliding, including a 50DMA breakdown and now a critical retest of 200DMA support.


Splunk (SPLK) flirts with a major breakdown of 200DMA support

Splunk (SPLK) flirts with a major breakdown of 200DMA support


I continue to expect a lot of chop for the market overall going into year-end. As a result, I am not holding fresh trades for long (like UVXY) if I quickly recognize a sizeable profit. Trading opportunities for bears and bulls, even for those who insist on being dogmatic about their positioning. The overall bias is downward given all the signals I pointed out in the last T2108 Update.

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 NFLX put spread, long BIDU call and put options, short AUD/JPY, short SPLK and long SPLK call options

Dec
10

T2108 Update (November 10, 2014) – The Baton Firmly Returns to the Sellers

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: 45.1%
T2107 Status: 45.3%
VIX Status: 18.5 (jumped 24.5%)
General (Short-term) Trading Call: Hold. Caveats listed below.
Active T2108 periods: Day #37 over 20%, Day #35 over 30%, Day #32 over 40%, Day #1 under 50% (underperiod, ending 29 days over 50%), Day #5 under 60%, Day #107 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 above tweet comes from an Australian economist whom I follow relatively closely as a check on my views about the Australian and global economy. The rates are on Australian bonds, but bond yields are falling all over the globe. I post it as just one example of a very palpable fear I feel is growing as commodity prices continue tumbling seemingly with no end. Such an extended collapse is simply not part of our normal (recent) experience, so assumptions and conclusions that demand is plummeting in places like China strike a very loud chord. Then again, commodity prices got to current levels after a run-up that had not been seen for a very long time either. Here is an example from Australia’s latest commodity price index.


Is THIS a bubble that is in the middle of an epic collapse?  Ten years and running without stabilization...

Is THIS a bubble that is in the middle of an epic collapse? Ten years and running without stabilization…


Source: Reserve Bank of Australia

Note very well that this collapse in commodity prices has unfolded for 3 1/2 years. Thus, it makes little sense to say “the market is going down because commodity prices are plunging.” Perhaps commodities finally reached a tipping point, like adding oil to the plunge, but clearly the story is more complex with the S&P 500 just a few percentage points off all-time highs.

Having said all that, traders must fully appreciate the havoc that can descend upon market sentiment when unusual events are happening with no end in sight. Until market participants think they have a sense for just how far oil might go, the oil-related “disaster” narrative will take a firm hold on minds and hearts. Bottom-line, the early warning from T2108 and then Caterpillar’s (CAT) reversal and now a confirmation from the Australian dollar/Japanese yen combination (AUD/JPY) should be assessed very seriously. The chop on the way to this point has been distracting from the fundamental message that some kind of top seems to have appeared.

Now, the charts.

T2108 plunged a massive 10 percentage points. This means a LOT of stocks are breaking critical technical levels all at once. As a reminder, T2108 was our earliest warning signal that “something” was not right with the stock market – its descent began on November 28th, Black Friday.


T2108 continues its fade away from the overbought threshold

T2108 continues its fade away from the overbought threshold


The S&P 500 (SPY) was unable to muster any buying interest off the lows today, unlike yesterday. Trading volume was very strong, and the index “punched” its lower-Bollinger Band (BB) hard enough to bend it downward…a classic warning sign of an imminent continuation move. A retest of the 50-day moving average (DMA) seems almost certain now…especially with it coinciding with the round number 2000. The index has failed to confirm the bullish hammer pattern from the day before. It has also invalidated the breakout from the surprise rate cut from China by filling the gap up and closing below the low before the gap.


The S&P 500 is on an apparent rendezvous with 50DMA and round number support

The S&P 500 is on an apparent rendezvous with 50DMA and round number support


The volatility index provides an emphatic confirmation of the selling pressure and sharp (relative) surge in fear.


The VIX propelled itself off the 15.35 pivot and is well above its upper-Bollinger Band

The VIX propelled itself off the 15.35 pivot and is well above its upper-Bollinger Band


ProShares Ultra VIX Short-Term Futures (UVXY) responded in kind with a 24% pop. I clearly was not expecting anything close to such a pop given I sold my UVXY call options yesterday. I have switched now to my more comfortable positioning of fading UVXY with some put options expiring next Friday. I am fully expecting next week’s Federal Reserve meeting to be another volatility killer.


UVXY springs to life yet again

UVXY springs to life yet again


Finally, AUD/JPY provided all the confirmation I needed of a refreshed bear. This important currency pair punched through 50DMA support as its breakdown from recent highs continues.


The Australian dollar crashes through its 50DMA against the Japanese yen, but is fighting to hold onto this critical line of support

The Australian dollar crashes through its 50DMA against the Japanese yen, but is fighting to hold onto this critical line of support


So now it seems my sale of my ProShares Ultra S&P500 (SSO) shares yesterday was timely even as my sale of UVXY call options was premature. As planned, I sold my Caterpillar (CAT) put spread given little remaining upside exists with the stock dropping well past the low point of the put spread (100/95). I closed out some short positions (like CSIQ – a play whose theme is explained in “Solar Stocks And Oil: A Potential Setup For A Solar Relief Rally In 2015“).

Overall, I am on alert. Given the chop since the November 21st breakout and my expectation for more chop, I will not be surprised by additional fake-out moves. The good news is that this chop provides almost daily trading opportunities to the upside and downside. The bad news is that it will continue to be easy to get distracted from the main storyline: a topping market whose longer-term uptrend remains well-intact – that is, consider bearish opportunities to be temporary opportunities and continue looking for good entries to buy the dip.

I feel freer to short individual stocks that meet strict technical criteria. I am not a bear, just a protective bull. With T2108 already at 45%, I know I need to pay close attention to the distant horizon where oversold conditions may await the market’s arrival. Ideal oversold conditions, T2108 less than 20%, would occur right as the S&P 500 is testing its 50DMA and even better if the volatility index is soaring at the same time to or past the previous high point. But I know how the market loves to ignore the specifics of my desires…

Finally, per my trading calls, bulls should have already taken some profits. Hopefully you feel comfortable with the leftovers on your plate. You should try to ride out those remaining positions through the coming storm and look forward to buying from your shopping list at a discount.

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: net short the Australian dollar; net long U.S. dollar; net short Japanese yen; long UVXY put options

Dec
10

T2108 Update (December 9, 2014) – Much Ado About Nothing: From Raucous Open to A Stalemate Close

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: 55.2%
T2107 Status: 49.7%
VIX Status: 14.9 (jumped above 15.35 pivot at one point)
General (Short-term) Trading Call: Hold.
Active T2108 periods: Day #36 over 20%, Day #34 over 30%, Day #31 over 40%, Day #29 over 50% (overperiod), Day #4 under 60% (underperiod), Day #106 under 70%

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

Commentary
The stock market threw me for another loop. After sounding a loud bearish alarm in the last T2108 Update, I was prepared for Tuesday’s bearish open. I was however NOT prepared for the rapid and convincing bounce back from the lows.

T2108 dropped as low as 47.5% while the S&P 500 plunged in the first hour of trading almost to its lower-Bollinger Band (BB). The volatility index soared above the 15.35 pivot point. It was all looking like convincing follow-through for the bears. However, I think the currency market helped throw the day for a loop.

The Japanese yen had been gaining strength throughout the Asian and European trading sessions. Perhaps it was a race to cover shorts, perhaps stops were getting taken out. Whatever it was, the strength in the yen accelerated in the first hour of U.S. trading. It led to a classic V-shaped bottom where the recovery was as swift as the bumrush to the bottom. The S&P 500 and the U.S. dollar (DXY0) versus the Japanese yen (FXY) (USD/JPY) bottomed together. Buyers never looked back as they ran stocks right back up the flagpole.

The S&P 500 managed to finish with a mere 1-point loss. The day ended up looking like much ado about nothing. It left behind a very long hammer pattern. If buyers manage to keep the index pushing to a higher close, suddenly the market will look like it just washed out another set of weak hands.


The S&P 500 prints a hammer as encouraging as the selling the day before was ominous!

The S&P 500 prints a hammer as encouraging as the selling the day before was ominous!

A perfectly synchronized bottom between the S&P 500 and the Japanese yen currency crosses

A perfectly synchronized bottom between the S&P 500 and the Japanese yen currency crosses



(In the chart above, the top line (red) is the S&P 500. The thick, middle, black line is AUD/JPY. The bottom, blue line is USD/JPY).

Encouragement from the currency market came in the form of the Australian dollar (FXA) versus the Japanese yen (AUD/JPY) stopping cold at 50DMA support. This is a bullish development that now awaits confirmation with follow-through.


Another encouraging sign: the Australian dollar versus the Japanese yen (AUD/JPY) stopped cold at 50DMA support

Another encouraging sign: the Australian dollar versus the Japanese yen (AUD/JPY) stopped cold at 50DMA support


As you can imagine with all the early commotion trading opportunities abounded. The following notes excluding EEM are all updates from my last T2108 Update.

First off, I immediately sold my put options on ProShares Ultra VIX Short-Term Futures (UVXY) into the early swoosh downward. UVXY was up another 10% or so at the time. As I mentioned earlier, I held onto the put options one more day given the ominous warnings from the market, but I also had little confidence UVXY could hold its value through the week. UVXY closed the day with just a 2% gain.

Next, I made the TOUGH decision to sell my ProShares Ultra S&P500 (SSO) shares. While I was supposed to wait for the close, I decided that the open looked ominous enough that it was not worth further risk to my profits to hold SSO longer. Again, my expectation through the balance of this month is for a lot of chop.

I stayed firm with the trading strategy from the Apple Trading Model (ATM). With odds favoring a positive close and a positive move from the open, I immediately bought call options. I sold them for a small gain into the first pop and put in another limit order. Fortuitously, the second order triggered, and I held on until just ahead of the close. While I was playing the odds from the ATM, I definitely did not expect such a healthy gain at the close after such an ugly open.

AAPL ALMOST pulled off a bullish engulfing move. I am tempted to call it “close enough.”


Apple Inc. (AAPL) not only makes a resounding comeback, but also the stock prints a gain producing very convincing relative strength

Apple Inc. (AAPL) not only makes a resounding comeback, but also the stock prints a gain producing very convincing relative strength


A stock that DID print a bullish engulfing pattern was Alibaba (BABA). And just like the UVXY trade the day before, I almost missed the trade while tweeting about it.


Soon after this tweet, I realized that this was a low risk (a tight and well-defined stop)/ high reward setup. I was a little late hopping aboard as I should have been ready right at the moment of the retest. BABA ended up closing with a bullish engulfing pattern that marks a likely bottom. I am now warily eyeing the downtrend line as potential resistance (meaning I could decide to take profits at anytime from here).


A picture-perfect bounce from the 50DMA which completed the reversal of all post-earnings gains

A picture-perfect bounce from the 50DMA which completed the reversal of all post-earnings gains


Finally, I initiated a fresh pairs trade on iShares MSCI Emerging Markets (EEM). The gap down was a perfect opportunity to buy more call options on EEM on the cheap. I bought a smaller contingent of put options as a hedge. I am looking for more big moves from EEM.


Another gap down for EEM confirms current bearishness

Another gap down for EEM confirms current bearishness


I changed the trading strategy back to hold for bulls and bears. Bears can hold onto fresh shorts until buyers can prove they have firepower to push through a notable, fresh all-time high. Bulls do not need to lock in profits on any other positions unless/until today’s low gets violated.

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: net short the Australian dollar; net long U.S. dollar; net short Japanese yen; long BABA; long EEM calls and puts

Dec
9

T2108 Update (December 8, 2014) – A Stubborn Bearishness Comes Knocking Again

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: 54.1%
T2107 Status: 48.2%
VIX Status: 14.2 (a 20% jump!)
General (Short-term) Trading Call: Start selling bullish positions. Aggressive bears can open fresh shorts.
Active T2108 periods: Day #35 over 20%, Day #33 over 30%, Day #30 over 40%, Day #28 over 50% (overperiod), Day #3 under 60% (underperiod), Day #105 under 70%

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

Commentary

“I am bullish yet even *I* am surprised to see the S&P 500 (SPY) already printing a fresh all-time high. Just two days ago, I was bracing for bearish follow-through selling to a topping pattern. Instead, sellers absolutely failed to capture the imagination of the market as buyers went right back to work snapping up early holiday season ‘bargains.'”

This is how I began the last T2108 Update. It turns out that the bears are not going away THAT easy after all. The stubborn bears have come a-knocking again – this time with even more convincing insistence.

Trading this week started with many more ominous signals than I saw last week. As a result, I am more wary than ever about the sustainability of the market’s current momentum. Let’s dive right in with the charts.

T2108 closed at 54.1%. This was a significant loss of 4.5 percentage points in a move that confirms T2108’s failure to sustain overbought levels. As a reminder, I consider such a rejection “good enough” to flag topping conditions in the market.


It's starting to look like September's topping conditions all over again

It’s starting to look like September’s topping conditions all over again


It is a good thing we have T2108 to give us the early warning signal. Without it, the current sagging and waning of momentum in the S&P 500 (SPY) may not appear ominous at all. The 20DMA still holds as an uptrend line, and the market has yet to follow through on its closure of the gap up from the surprise China rate cut. Moreover, the index only lost 0.7% and is similarly just that far away from a fresh closing all-time high.


The S&P 500 is losing momentum even as the 20DMA holds as an uptrend

The S&P 500 is losing momentum even as the 20DMA holds as an uptrend


A huge 20% jump in the volatility index is adding to the warning bells.


A major push off recent lows

A major push off recent lows


I sometimes pounce on these kinds of volatility spikes to start a fade when I am bullish. But I stopped short because of the accumulation of bearish signals. When the VIX was up 10% on the day, I made the following observation:


It suddenly occurred to me that this was one of those RARE moments where I observed an inefficiency before the market resolved it. I rushed to buy call options on ProShares Ultra VIX Short-Term Futures (UVXY). Sure enough, they ended up about 61% on the day as UVXY closed with a 7.2% gain. As an example of my wariness, I did not take the quick profits even as my trading rules for options typically dictate taking such profits right off the table. I cannot imagine UVXY sustaining momentum all week though, so I doubt I will be holding the position past this week.


UVXY awakens again but remains trapped in a very familiar downtrend

UVXY awakens again but remains trapped in a very familiar downtrend


Another example of my growing wariness? Caterpillar (CAT) hit my downside target at $95, and I did NOT close out my put spread. This put spread is a hedge on my overall bullishness, and it delivered bigtime today. The position still has another month of life, so I can afford to be a little more patient. CAT made a VERY bearish extension of its 50DMA breakdown. It has now effectively closed its post-earnings gap up from two months ago. It is also well below its lower-Bollinger Band (BB). I will not be surprised to see a (dead-cat) bounce (pun sorta intended). I have no problem sitting on the put spread right through such a move.


Caterpillar Inc. (CAT) underlines the growing bearish undertones of the market

Caterpillar Inc. (CAT) underlines the growing bearish undertones of the market


Quick sidebar – at the time of writing, I saw the following tweet that gave me even more urgency to get this T2108 Update published. It certainly bodes poorly for stocks like CAT in the Tuesday trading session! If CAT extends lower, I will sell the put spread as additional upside becomes too small to be worth the risk of holding.


So those bearish signals are STILL not enough for you? Let me introdue you to my other reliable friend the Australian dollar (FXA). In overnight trading, the Australian dollar extended its breakdown against the Japanese yen (FXY). As a reminder, AUD/JPY has served as relatively reliable leading indicator or confirming signal on the way up and down. It is warning of more downside immediately ahead just as it refused to confirm the last S&P 500 all-time highs.


An ominous breakdown from recent highs continues for the Australian dollar versus the Japanese yen

An ominous breakdown from recent highs continues for the Australian dollar versus the Japanese yen


Even I could find some charts of encouragement, I would not post them. I do not want to get distracted with “hope” right now. This is a time to process what is directly in front of the trading screen.

I am still holding my long-standing shares in ProShares Ultra S&P500 (SSO). I will have to exit if the S&P 500 closes lower as it would confirm the end of the immediate momentum. Aggressive bears can already start fresh shorts here. Stops can be placed a little higher than all-time highs so as to avoid whiplash (notice that new highs have come on very marginal moves lately). Bulls should be taking SOME profits as a “just in case,” especially if you are not hedged. Note well, that I am NOT suddenly turning bearish. Let’s call it “protective.” I am still expecting a lot of chop from here until year-end. A major breakdown, for example below the 50DMA, will force me to reassess.

I conclude with some other charts that have me worried or at least are not helping my mood: Apple (AAPL), Best Buy (BBY), Baidu (BIDU), Tesla (TSLA), and Alibaba (BABA).


Apple is not far away from confirming a topping signal

Apple is not far away from confirming a topping signal


I earlier took AAPL’s “flash dip” in stride and assumed this would prove to be a blip on the way to ever higher prices. The continued weakness is concerning and leaves AAPL just a hair away from confirming a topping signal with a close below the low of the flash dip. I went into Monday with an active call option position and I happily took the discount at the opening to add to the position. When it paid off with a small gain in rapid order, I closed out the new position. The image of watching profits fade from last week’s flash dip buying is simply too fresh. The sale proved timely as later in the day a limit order at lower prices triggered. The Apple Trading Model (ATM) is marginally predicting upside for Tuesday. I will be wise to close out this position if the market cooperates with the model.


Best Buy fills its post-earnings gap up and manages to bounce back in a sign of relative strength on the day

Best Buy fills its post-earnings gap up and manages to bounce back in a sign of relative strength on the day


BBY SHOULD be an encouraging chart given the upward trend supported by the 50DMA. However, with a different lens, I see it as another stock that is proving it cannot sustain current heights. The fill of the earnings gap is bearish, and the reflexive buying changes little. I am watching to see whether BBY can hold its 50DMA support long enough to resume upward momentum.


Baidu (BIDU) attempts to comeback from a bearish breakdown of its 50DMA

Baidu (BIDU) attempts to comeback from a bearish breakdown of its 50DMA


I went into this week bullishly expecting BIDU to bounce from its 50DMA support. Instead, it took a deep plunge below this important line of support. The stock made a spirited comeback into the close that has formed a bottoming hammer pattern. I normally would be encouraged by this action, but now I need to see some follow-through buying. I am also seeing a growing downtrend between the lower Bollinger Bands (BBs) that has developed from December 1st’s breakdown below the 20DMA.


Tesla Motors (TSLA) is starting to print a classic topping pattern: a break lower from a head and shoulders below the 50 and 200DMAs....

Tesla Motors (TSLA) is starting to print a classic topping pattern: a break lower from a head and shoulders below the 50 and 200DMAs….


I was actually prepared for the breakdown TSLA is now confirming. The stock has enjoyed nearly unquestioned support from a technical standpoint, but the breakdown that began last week was ominous. Volume rose on the double breakdown from the 50DMA and 200DMA, and it rose today on the confirming follow-through. The damage can of course be repaired by a rally that takes the stock above the 200DMA again. Until then, this is looking like a broken momentum stock and adds to the bearish signals looming overhead.


The downtrend from all-time highs extends, putting a retest of $100 in play

The downtrend from all-time highs extends, putting a retest of $100 in play


The downtrend from all-time highs has extended further on BABA. This stock continues to be an avoid until that downtrend breaks or MAYBE on a retest of $100 and/or the nascent 50DMA. Needless to say, the Ali Rah Rah pop is losing steam even as the S&P 500 has out-performed BABA for the past month.

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 put spread on CAT; long call options on BIDU; short TSLA; net short the Australian dollar; long UVXY put options

Dec
3

T2108 Update (December 3, 2014) – Sellers Fail to Seal the Deal On Topping Pattern

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: 62.2% (2-day decline of 20% qualifies for quasi-oversold status)
T2107 Status: 52.0%
VIX Status: 12.5
General (Short-term) Trading Call: Hold bullish positions. Aggressive bears should have stopped out on fresh all-time highs. (That is the risk you take here!)
Active T2108 periods: Day #32 over 20%, Day #30 over 30%, Day #27 over 40%, Day #25 over 50%, Day #1 over 60%, Day #102 under 70%

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

Commentary
I am bullish yet even *I* am surprised to see the S&P 500 (SPY) already printing a fresh all-time high. Just two days ago, I was bracing for bearish follow-through selling to a topping pattern. Instead, sellers absolutely failed to capture the imagination of the market as buyers went right back to work snapping up early holiday season “bargains.”


The trend remains our friend as the S&P 500 prints yet another marginal all-time high

The trend remains our friend as the S&P 500 prints yet another marginal all-time high


Even Caterpillar (CAT) shocked me by jumping above $100 before hitting my lower price target first. Although the stock faded hard from its high of the day, CAT still put on a convincing enough show to suggest the 50DMA will be support for now.

The S&P 500’s latest celebration was preceded by a big blowback in the volatility index. The VIX dropped 10% and similarly sent ProShares Ultra VIX Short-Term Futures (UVXY) tumbling downward 11.2%. Needless to say, I took my profits on the put options I discussed in the last T2108 Update. With the help of some hindsight, that fresh plunge in the VIX becomes a telling signal for and strong precedence for the new all-time high.

My other two trades of the week remind me that it is difficult to use individual stocks to play expectations on the S&P 500. Amazon.com (AMZN) held up well at the 200DMA yesterday but swooshed again today for a 3.0% loss. I stayed stubborn and pulled the trigger on one more call option as AMZN bounced from its 50DMA. The weakness in Baidu (BIDU) continued and looks ominous enough that I decided to switch my bias to bearish and a 50DMA retest.

Most interesting in this quick snapback for the S&P 500 is that T2108 notably lagged. My favorite technical indicator failed to retest the overbought threshold at 70% and sits a full 8 percentage points below. This indicates that the index has left some stocks behind…like AMZN and probably a whole host of energy-related plays. The optimistic way to interpret the quasi-divergence is that the S&P 500 now has plenty of upside to go.

Note however that my favorite confirmation signal in the currency market is lagging in a bad way. The Australian dollar (FXA) is barely holding 100 against the Japanese yen (FXY) and could easily swoon to retest the 50DMA. This would be a MAJOR non-confirming signal if the S&P 500 continues to pull higher. I am watching this action even more closely now. This week contained a LOT of important economic news for the Australian dollar. I hope to produce a summary by the end of the week.


The Australian dollar is losing ground against the Japanese yen (which itself continues to weaken against the U.S. dollar)

The Australian dollar is losing ground against the Japanese yen (which itself continues to weaken against the U.S. dollar)


Regardless, failing follow-through selling to confirm the previous topping pattern, I am still happily holding onto my shares in ProShares Ultra S&P500 (SSO). My recommendation for bears is that you should have stopped out of new shorts that were taken based on the bearish topping pattern. That pattern was effectively invalidated by today’s fresh all-time high. Even Netflix is showing signs of life again as the neat downtrend channel formed by the lower-Bollinger Bands is starting to give way…


Netflix is showing signs of life as buying volume re-appears and sellers notably failed to hold the stock at the day's lows

Netflix is showing signs of life as buying volume re-appears and sellers notably failed to hold the stock at the day’s lows


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 put spread on CAT; long call options on AMZN, BIDU; long put options on BIDU; Long puts and a put spread on NFLX.

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