(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page.)
T2108 Status: 33%.
VIX Status: 24.0
General (Short-term) Trading Call: Hold. Continue identifying potential bullish positions. Start closing bearish positions on next market sell-off from current levels.
Commentary
T2108 dropped slightly to 33% and hit my original forecast for T2108 to hit the lower 30s. It was certainly not the path I had in mind, but here we are. The big question is what is next? Based on today’s weak close, and a 200DMA begging to get retested, I am adjusting my T2108 forecast downward for this cycle to a true oversold reading of 20% or lower. (Important reminder: since the March, 2009 lows, the stock market has generally found a bottom when T2108 approached 30%).
The S&P 500 dropped 0.3% to 1300. It was up as much as 1% at the day’s highs. This strong fade confirms the new strength of the sellers (or, better yet, the lack of conviction in buyers). Today’s behavior is a main reason I am now expecting T2108 to hit true oversold levels very soon.
The volatility index, VIX, pushed higher to close at another 4-month high. The index looks like it is ready to make one of those classic large surges higher.
Overall, we have all the ingredients for a classic rush to oversold conditions: T2108 plunge to 20% or below, the S&P 500 retesting or even breaking the 200DMA (1.2% away), and a volatility surge. Given how close we are to this scenario, I continue to recommend getting a shopping list ready for making fresh bullish trades. Traders should also start closing out bearish positions on the next sell-off in the market. I am fully aware of how difficult these actions will be given the screaming headlines about the debt ceiling debate! All I can do is remind traders that the T2108 Update is about executing on simple rules, holistically managing risks, and avoiding the emotional tricks and traps that weighty headlines can produce.
On the bearish side, traders should duly note that a retest of the 200DMA still keeps the S&P 500 above the June and March lows. Despite the intensity of selling in June, the S&P 500 never traded below the intraday lows from March. The index also never closed below March’s lowest close. Needless to say, this fact could represent unfinished business for August.
(For this post, see stockcharts.com for chart updates: S&P 500, VIX)
Charts below are the latest snapshots of T2108 (and the S&P 500)
Refresh browser if the charts are the same as the last T2108 update.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Red line: S&P 500 (for comparative purposes)
Weekly T2108
*All charts created using TeleChart:
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 puts on SSO, long SDS, long AAPL call spread