(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are highly likely to reverse. 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: 48.5%
VIX Status: 19 (up 34%!!!)
General (Short-term) Trading Call: Hold
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
All the bearish warnings from the last week or so converged into a major flashpoint today. The market finally got its excuse to sell – presumably in the form of election concerns in Italy – and the rush to the exits caused dramatic moves in stocks and currencies.
Let’s start with T2108. It dropped 20% to sit at 48.5%, a level unseen since November 28th, 2012. When I decided T2108 was flashing a quasi-oversold condition, T2108 had dropped 22% over TWO days. So, it seems natural to assume that the S&P 500 is quasi-oversold again. While I have yet to formalize this new signal, I do not think there are enough signs to have strong confidence in such a call, especially not the strong signals that flashed last week.
Instead, I have every reason to think that the S&P 500 will drop at least one more day in this sell-off before any bounce. The S&P 500 tagged the lower limit of a Bollinger Band (BB) that is now opening up, suggesting a coming increase in volatility and a continuation of the current move. The index is hovering tantalizingly above its 50DMA, begging for a retest. My initial downside target is also within grasp. Moreover, today’s downside move is essentially a bearish engulfing pattern that confirms last week’s sell-off. Adding insult to the injury of buyers, the S&P 500 was actually UP nicely at the beginning of the day. Such strong fades stick to the memory, the pain stings, and overhead resistance firms as tricked buyers eagerly await an opportunity just to get out even.
The VIX, the volatility index, FINALLY broke through resistance at 15.35. The VIX seems set to now at least retest resistance at 20.79, the lasting level which marks the breakout for the 2011 swoon. I will acknowledge that the VIX experienced its own extreme move (and I added to my VXX puts as a result to get back to delta neutral on my VXX share/put combo). With it perched well above the upper-BB, it is begging for a pullback. Also note how the breakout above 20.79 resistance was very fleeting. However, I think a pullback in the VIX will only be a rest-stop on the way to higher trading levels.
The charts below show the drama in vivid detail.
The VIX soared an incredible 34%. This gives new meaning to the trader’s truism that a periods of low volatility precede periods of high volatility. In THIS case, a period of EXTREMELY low volatility has preceded at least an EXTREME burst in the change in volatility.
In addition to adding to my VXX puts to re-establish a hedge on VXX shares, I sold my remaining SSO puts near the close of trading. It was actually not intentional as I had planned to hold them for at least one more day, but a limit order from last week carried the puts away. At least my stubborn insistence on holding the remaining half of my SSO puts paid off in a big way. I will be back into SSO puts if the S&P 500 rallies without first fulfilling its bearish destiny with the 50DMA below.
So what turns me bullish again? I REALLY want to see T2108 drop to 20% or lower before considering the bullish case. However, if T2108 plunges again on Tuesday by a large amount, it should take the S&P 500 at least to its 50DMA if not my initial downside target. At that point, I at least need to put a leash on the growling bears.
If you tried the bullish follow-through to Friday’s close above the 20DMA, I sure hope you paid heed to my recommendation to only play with tight stops. I know you had little time to scalp profits before the market careened backwards. I must also emphasize and reiterated my opinion that going bullish was NOT the wise risk/reward move to make.
Finally, let’s take a look at important developments in the currency market. (I also recommend checking out my latest forex commentary on Seeking Alpha: “The Reserve Bank Of Australia Explains The Link Between The Currency And Interest Rates“, “Pound Vs. Euro – Debt Downgrade Vs. GDP Downgrade“, “A Weakening Canadian Economy Needs A Weaker Currency“). I will let the pictures do most of the talking here.
A rush back to the Swiss franc is in full effect as evidence that fears about the euro are rapidly rising. EUR/CHF broke through its 50DMA and is now retesting its 200DMA. I continue to buy here as a hedge against shorting EUR/GBP and generally bearish opinion on the euro. I am counting on the Swiss National Bank (SNB) to continue to deliver on its 1.20 floor.
The breakdown from the 50DMA continues as the euro now seems sure to retest the 200DMA at 1.29 against the U.S. dollar.
As expected, the pound reversed its losses from the Moody’s downgrade. It is now retesting what was previously support. I am back to being a bear on the pound, but I prefer getting aggressive on a bigger relief rally.
I remain bearish on the Australian dollar (FXA), but it failed to crack critical support. This is something in the market’s favor as I think AUD/USD and SPY still “want” to remain correlated. In this case, the Aussie has served its role as a leading indicator.
Finally, the winds are shifting around the yen. Traders trampled over each other to (presumably) close out carry trades and overly aggressive bets on further weakness in the yen. The long overdue reversal seems to have finally begun.
Put this all together, and the currency markets are painting a bearish mosaic everywhere I look. I am heeding the warnings!
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
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 VXX shares and puts, long EUR/CHF, net long Japanese yen
Great post! Your charts give an interesting and valuable insight.
Thanks for the feedback.