(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. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag.)
T2108 Status: 24% (ends last oversold period at 2 days)
VIX Status: 39
General (Short-term) Trading Call: Conservative traders buy with a stop upon a return to oversold conditions. Aggressive traders should already have positions. Otherwise hold. See below for more details.
Commentary
Today’s market action was a pleasant and a welcome surprise. The market finally delivered a “typical” oversold period. As I have mentioned before, the majority of oversold periods last no longer than two days. Today’s 2.3% rally in the S&P 500 ended the last oversold period at two days in duration. This means aggressive traders gained the performance advantage over conservative traders this round. Conservative traders are just jumping in whereas aggressive traders who bought the close of the first oversold day are sitting on at least 3.0% gains.
Although last Thursday’s big down day is almost completely erased, the VIX, the volatility index is still sitting near the top of its range. Similarly, the S&P 500 is just bouncing off the bottom of what we can now confirm is an extended trading range. In other words, we should expect more churn ahead.
This trading range also gives a clear selling target for oversold purchases: 1200-1210 on the S&P 500 coincides with the 200DMA and is close to the top of the range. I will be selling the SSO shares I bought on Thursday as early as tomorrow since I am still heavily overweight long from the oversold period preceding this last one. This trade is yet another reminder of the importance of following rules regardless of my own attempts to apply discretionary interpretation. I literally had to close my eyes and buy even as many important cyclical stocks like Caterpillar (CAT) were breaking down to fresh 2011 lows. Note that until stocks like CAT recover those gaps and their prior 2011 lows, I must remain circumspect about the market’s upside potential.
Your interpretation of the downside risks will influence your exit strategy from any T2108 trades. The S&P 500 has still not technically closed with a 20% loss from the recent highs, so I do not consider it to be mired in a bear market yet. If you think this is a bear market anyway, or are strongly anticipating one, then as an aggressive trader, you want to maintain a bias to sell on your trading positions. For the more bullishly inclined, it makes sense to hold with a stop either upon re-entering oversold conditions (conservative traders) or a close below previous support (in this case, the 2011 closing or intra-day lows). Conservative traders who just bought today or plan to buy tomorrow will need to maintain tight stops either way.
(Post a comment or question if that sequence of conditionals is unclear!)
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); Green line: S&P 500 (for comparative purposes)
Weekly T2108
*T2108 charts created using freestockcharts.com
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