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


Oct
6

T2108 Update – October 5, 2011 (Another Typical Oversold Period)

written by Dr. Duru
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(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: 21% (2nd day of oversold conditions)
VIX Status: 38
General (Short-term) Trading Call: Conservative traders open first T2108 bullish positions. Otherwise hold. More details below.

Commentary
Now this is more like it. T2108 jumped to 21% and out of oversold territory. The two-day oversold period that T2108 just left behind represents the second typical oversold period in a row (click here for a description of the end of the last one just last week). As I have mentioned several times, the historical record shows the majority of oversold periods last 2 days or less. Once again, this means the aggressive strategy of buying on the first day of the oversold period outperforms the conservative strategy of waiting for the oversold period to end. Conservative traders who buy now should place stops below yesterday’s close given the focus of the conservative strategy is to minimize downside risk more than to maximize gains.

The S&P 500 rose 1.8%. The VIX fell back into the middle of its trading range. Along with T2108’s bounce, these signals delivered some important follow-through to the “preponderance” of bullish signals that I pointed out in the last T2108 Update. Even Acme Packet (APKT) printed another typical bounce from a strong gap down, reducing its post-earnings warning losses from 15% to 6% (I still bought a put as a fade on this rally and a hedge to my bullish positions). My pairs trade on Cisco Systems (CSCO) versus Juniper Networks (JNPR) did not get tested as I expected and instead performed exceptionally well with JNPR soaring 8%. In three days, the CSCO:JNPR ratio has already dropped from 0.91 to 0.81.

During yesterday’s trading I even jumped on calls for Ford Motor Company (F) after seeing news that Moody’s is considering upgrading the company’s debt. I was floored to see such a thing given the economy is supposed to be dangerously close to the edge of another recession. I bought January’s strikes which seem incredibly “cheap” right now.

However, the S&P 500 is not officially “in the clear” until it can hurdle over the top of the last trading range. Also recall that the onset of the last bear market was preceded by an increasing number of oversold periods over the course of 18 months or so. Given the sudden surge in oversold periods since the summer of last year when I published my comprehensive study (free registration required), I now need to update my historical stats!

As I write, the futures are up and international markets, especially the Hang Seng, have delivered very strong performances. I will likely sell my last T2108 trade into this rally (as always, I will post the trade on my twitter feed with the #120trade hashtag). I am going to hold onto my puts on VXX, the iPath S&P 500 VIX Short-Term Futures, a little longer. I am now looking to the VXX to follow-up on its bearish engulfing topping pattern with a break of its strong two-month uptrend. Such an event would further increase my bullishness and hope that the S&P 500 can finally break the previous trading range to the upside.


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
T2108 vs. the S&P 500 (DAILY)

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)


Weekly T2108
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 and CSCO; long puts on APKT, CSCO and VXX puts; long calls on JNPR and F

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