(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: 78% (third day of overbought period and a new 6-month high)
VIX Status: 30
General (Short-term) Trading Call: Continue closing out bullish trades, identify bearish trades for execution between now and 200DMA resistance.
Commentary
I am writing a short update today. With the Euro Zone striking a deal to cut Greece’s debt with a 50% haircut on its bonds, and with the Chinese agreeing to invest more heavily in Euro Zone debt, I actually feel compelled to dial back on the prognostication in this update. I want to see how the market reacts to what on the surface seems like great news. The stock market should keep soaring. However, financial markets have been quite demanding on the Europeans and only time will tell whether they are truly satisfied. For example, as late as Friday, October 21, the spread between French and German bonds widened to its highest level since the euro was created (1.2 percentage points)!
Anyway, back to the technicals. Tuesday’s 2% sell-off in the S&P 500 took T2108 right to the edge of overbought territory. Wednesday’s 1% bounce back managed to push T2108 one percentage point higher than Monday’s level. In overbought territory, I consider such a divergence to be bearish. The bias here is already to the downside, so strong moves in T2108 should be accompanied by strong market moves.
The VIX dropped 7% and is just below the previous trading range but not below Monday’s level. Similarly, VXX is still trying to cling to its 50DMA.
Nothing has changed with my previous trading call. Despite the seemingly good news, I am sticking to the technical rules. The stock market is in an area for selling trading positions. Accordingly, I sold the last of my SSO positions on Tuesday and started a small tranche of SDS. I continue to hold puts on VXX because I am still anticipating a large and swift decline in volatility soon.
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 puts on VXX