(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.)
T2108 Status: 32%.
VIX Status: 25.3
General (Short-term) Trading Call: Cover a few bearish positions. Continue identifying fresh bullish positions.
Commentary
T2108 barely changed although it was at least as low as 27% at one point during the day on Friday (at the close, T2108 does not include lows or highs). The S&P 500 made a picture-perfect retest of the 200DMA and buyers promptly appeared to defend that important support level – again, you just cannot make this stuff up. The index has now tested the 200DMA three times since June and has yet to close below it. With T2108 approaching official oversold levels and the VIX, the volatility index, spiking upward to another 4-month high (and the third highest close since August, 2010), bears and sellers are quickly running out of time to exert their damage.
Friday’s action resembled the scenario I predicted in Thursday’s T2108 update. Only a T2108 trip to 20% below was missing. Buyers were so swift at the 200DMA that I was only nimble enough to close out half my shares in SDS and sell a few of my SSO puts; I had other puts that were left begging to get sold at great prices. Another sell-off should create the final catalyst to switch the outlook from bearish to bullish. At this point, I have a difficult time believing the S&P 500 will punch through the June lows, much less the March low, during this cycle. These price levels are “obvious” points to stop out of new bullish positions. If the market somehow manages to close below these support lines, I will revisit my forecasts.
My first move into a bullish trade will be to buy puts on VXX, the iPath S&P 500 VIX Short-Term Futures. This approach worked like a charm during June’s oversold cycle. It is a relatively low risk, high reward way of positioning in an oversold period. My main concern is that I may have already missed the best entry point on Friday. While the VIX increased 6.4%, VXX somehow managed to lose 1.8%!
(For this post, see stockcharts.com for chart updates: S&P 500, VIX, VXX)
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); Red line: S&P 500 (for comparative purposes)
Weekly T2108
*All charts created using TeleChart:
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 puts on SSO, long SDS