(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: 40.8%
VIX Status: 15.1
General (Short-term) Trading Call: Aggressive traders stay short. Tight stop remains with close above 1800.
Active T2108 periods: Day #112 over 20% (overperiod), Day #3 under 50%, Day #20 under 60%, Day #25 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)
Commentary
For the third day in a row, T2108 printed quasi-oversold conditions. The 10.3% plunge took T2108 to 40.8%, just a few percentage points away from the two-month intraday low set in October at 37.3% and a new 3-month closing low. The 2-day fall of 17.0% is a little closer to the 20% and larger 2-day fall that I like for playing a quasi-oversold bounce.
The previous day’s quasi-oversold conditions generated an 86% chance of upside for today, but the classification error rate was around 35%. The S&P 500 closed down by another fraction of a percent, but sellers finally managed to press their will into the close. The S&P 500 is now below 20DMA support and down for a rare 5 days in a row. None of the down days have even reached 1% though. So while the trading bias remains bearish as long as the S&P 500 stays below 1800, the technical setup for bears still looks tenuous.
The current quasi-oversold conditions have a classification error rate of 30% and a prediction of 62% for an upside close tomorrow (Friday, December 6). This is still not good enough for a trade; moreover, the U.S. employment report is a wlidcard not factored into the model.
With all the implications for 2014 tapering of bond purchases by the Federal Reserve, I am looking to the employment report to provide at least a hint of resolution for this current cycle: the beginning of a real sell-off/pullback or yet another pause on the way to ever higher all-time highs. I will most likely initiate new trades in the direction of Friday’s close. Stay tuned…
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 SSO puts and calls; long VXX