Last week, I suggested that T2108 was at such low levels that the next spike in the VIX would represent a major buying opportunity. Sure enough, the VIX printed only its second higher high of the entire rally off the March lows and buyers rushed immediately into the market (put sellers probably also rushed in to snatch high premiums). The buying enthusiasm hurtled the S&P 500 upward 2% in the last two hours of the trading day.
On Friday, T2108, the percentage of stocks closing above their 40DMA, closed at 24% and was as low as 21% during one of my sporadic intra-day checks (unfortunately, T2108 is not reported with an open/close, low/high range). The indicator inched lower on Monday to 22%. A new low for the rally still seems in the works (see last post for a chart extending to late 2008).
The tension between the VIX and the T2108 now appears even higher than on Friday. As implied in the chart below, VIX spikes have always led to immediate lower closes since the March bottom (the last post on this topic includes a chart back to last July). So, another surge upward in the VIX could turn trading models upside down and contort mental models into a temporary state of confusion. Such a move should motivate enough selling to push T2108 well below the 20% oversold threshold. Combined, these two technical events could lead to some violent and wild moves in the market bigger in scope than the two hours of trading that ended last Friday. (Click here for a review of the ability of spikes in the VIX and T2108 to signal bottoms in the stock market).
*Chart created using TeleChart:
Of course, the biggest wildcard looming over any technical understanding of the market is the news flow on the sovereign debt issues in Europe. The markets concern and awareness of the issues may soar and wane with the tide, but the debt problems are not going away any time soon. This creates an extremely fluid situation that must be considered for any “buy the bottom” or “sell the rally” strategies. Respectively, keep some puts handy or keep some calls handy, especially when holding positions overnight. Michael Kahn describes the precarious nature of trading under these conditions in Barron’s: “The Bears Are Putting On Weight.”
Be careful out there!
Full disclosure: no positions
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