(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-related trades and other trades are posted on twitter using the #120trade hashtag)
T2108 Status: 44%
VIX Status: 16.4%
General (Short-term) Trading Call: Trade with a bullish bias. (click here for a trading summary posted on twitter)
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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)
Commentary
My expectations for an imminent surge in the S&P 500 may already be proven wrong. The S&P 500 “plunged” a full 1.1%, relatively large for the current rally. The S&P 500 has now violated the last breakout (2 days ago), signifying a cooling of upward momentum. The second to last breakout is still holding…barely. Moreover, the S&P 500 has now gone absolutely nowhere for three weeks. Combined, these observations tell me the index may be entering a consolidation phase where the index bounces within a tight range, say 1390-1420. Such behavior works just fine for my current approach of buying SSO calls on dips and selling into the next bounce.
Accompanying today’s sell-off was a similarly large drop in T2108. At 44%, T2108 is at its low for the year, almost a 4-month low. In other words, a lot of stocks have now fallen off their primary uptrends. To bulls, these will look like bargains in the making. For bears, these will look like the beginnings of a major sell-off. For now, I continue to side with the bulls. On a relative basis, T2108 is getting extended (not oversold) and is due for another bounce. The chart below shows that T2108 is testing the uptrend from the August lows.
If this uptrend breaks, I will finally project oversold conditions to arrive before overbought ones. The implication for such a switch is that those so inclined can feel more comfortable shorting the market. I will not do so and instead focus on getting ready to buy steeper dips. I will also need to check the data to assess whether the arrival of oversold conditions completely invalidates the entire bullish assumption based on historical performance after extremely extended overbought periods. Stay tuned on that one.
My “experiment” with the staggered SSO call spread failed. At least there was no cost. If the market goes into a consolidative period, it will rarely make sense to sell open calls against an established position. Instead, I should continue planning tight exit points.
CAT-watch: Caterpillar (CAT) actually managed a rally from its lows on the day to finish flat. This stock also looks ready for consolidation. It surprisingly did NOT confirm today’s bearish action.
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
*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 SDS; long SSO calls; long VXX calls and puts; long CAT shares and puts