T2108 Update (November 20, 2013) – A Divergence Into Quasi-Oversold Conditions

(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 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: 48.9%
VIX Status: 13.4
General (Short-term) Trading Call: Aggressive traders should stay short. Stop out on S&P 500 follow-through above 1800. T2108 Trading Model (TTM) generates 68% chance of an up day for November 21st based on quasi-oversold conditions.
Active T2108 periods: Day #102 over 20% (overperiod), Day #1 under 50% (underperiod), Day #10 under 60%, Day #15 under 70%

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)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

The S&P 500 (SPY) ended last Friday with its sixth straight week delivering upside to investors.

The S&P 500 has had a strong two years full of streaks
The S&P 500 has had a strong two years full of streaks

Source: StockCharts.com

The chart above is a handy reminder of what the bears are up against when trying to fade this market. While the recent six-week up-streak was noteworthy, it was not surprising given this strong uptrend. What IS surprising is that once again, T2108 is plunging while the S&P 500 is not also selling off hard. In three days, T2108 has fallen 16% while the S&P 500 is off only -0.9%. At least the index IS moving downward. When T2108 plunged for over a week recently, the S&P 500 barely moved at all until a one-day sell-off on November 7th. Sellers quickly exhausted themselves and buyers had no trouble reversing the losses. It only took a day.

I failed to examine November 7th’s drop as a quasi-oversold condition. This time, I am ready. I even updated the historical data through November 13, 2013 (long overdue!). With T2108 dropping 14% over the past two days, the T2108 Trading Model (TTM) generates a 68% chance that the S&P 500 will close up tomorrow (November 21, 2013). Interestingly, the data refresh finally brings a condition on the S&P 500’s position relative to its 200DMA. If the S&P 500 were trading BELOW the 200DMA, with all else being equal, the TTM would have generated an 87% chance of a DOWN day. This differentiation according to technicals is what I originally expected when I first constructed the TTM. It is reassuring to see this condition finally appear. There are no branches in the classification tree for position relative to the 20 or 50DMAs.

I continue to watch closely the on-going selling in the high-flyers of the stock market. See my last T2108 Update for examples. Also, Bespoke Investments quantified the sell-off by slicing up the Russell 1000 into deciles and showing the differentiated performance in the past two weeks versus year-to-date (see “2013’s Big Winners Having A Rough Week“).

The sudden weakness in highly speculative stocks will likely continue, maybe even accelerate, given tapering fears have reignited in the stock market. The yield on the 10-year Treasury soared today from 2.71% to 2.79% in the wake of the minutes from the last Fed meeting. One of my favorite plays in this volatile rate environment remains a straddle or strangle on iShares MSCI Emerging Markets (EEM). EEM printed another short setup yesterday and today cracked below its 50DMA again. I think this ETF is topping out…if you look closely, you might even recognize a head and shoulders top in the making.

EEM cracks important support again in what looks like confirmed topping action
EEM cracks important support again in what looks like confirmed topping action

I end by pointing out that Apple (AAPL) is on the edge of confirming my warning of a downward resolution to a Bollinger Band squeeze. AAPL closed exactly at $515 today which is the support from the January post-earnings gap down. Crack through this, and AAPL will easily retest its 50DMA support which just so happens to rest right around $500…

Apple continues to sag toward a 50DMA retest
Apple continues to sag toward a 50DMA retest

Piecing all these signals together, I am looking through Thursday’s likely upside to an important and critical juncture with Black Friday. I continue to think that season will serve as a “last stand” for bears to get some real selling going. Until then, I am being very opportunistic in shorting stocks and will use a rally on Thursday to look for new short candidates. I have NOT yet expanded my small tranche of SSO puts. I still prefer to wait for overbought conditions before doing so.

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)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)

Weekly T2108
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 SSO puts; long AAPL shares; long AAPL put spread

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