T2108 Update – November 21, 2011 (Decisive Plunge)

(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: 39%
VIX Status: 33
General (Short-term) Trading Call: Close at least one bearish trade. Prepare to go long VXX. Otherwise hold.

Commentary
The selling picked up again today as T2108 plunged an amazing 19 percentage points to 39%. The S&P 500 took a decisive plunge below the presumed support at the 50DMA. This tenuous support lasted all of one day, and it broke just as I warned was likely for Friday’s T2108 Update. My forecast for tame volatility this week seems to be playing out as well. However, given the S&P 500 lost as much as 2.5% at one point, I am still a bit surprised that the day ended with only a 2.8% gain for the VIX and 1.4% gain for VXX. On twitter, I called it “volatility fatigue”.

Today’s trading action firmly puts the S&P 500 in bearish territory. The presumed support of the 50DMA has quickly turned into presumed resistance, at least until T2108 visits oversold territory again. On twitter, I placed my downside target for T2108 at 20-30%. As usual, I will revisit this forecast as needed. The downside forecast means I am much more interested in fading rallies than buying dips for now. In particular, I want to get long VXX again on a retest of the 50DMA resistance. Finally, I am still holding 60% of my position in SDS which I initiated during the T2108-overbought period.

There were many significant technical developments in individual stocks. I will point out just a few here. One theme is that favorite momentum stocks and much-loved stocks took big to oversized hits today.

• Sina.com (SINA) dropped 11% to a fresh 52-week low. This happened to be the one bearish position I closed out today (a put spread).
• Amazon.com (AMZN) followed through on Friday’s break of its 200DMA for a 4% loss. I tweeted earlier that I think AMZN will trade below its 200DMA for more than the four trading days the last time it was below its 200DMA.
• Apple (AAPL) dropped 1.6% and essentially retested the 200DMA as expected.
• Goldman Sachs closed right at its 52-week and 2 1/2 year low (also see “Chart Review: Bottom in Jeopardy for Goldman Sachs“)

These technical developments do not PROVE or CONFIRM the bearish outlook for the market; they are merely what I call an “accumulation of evidence” that prevents me from being bullish. The more of these developments I see, the firmer my bearishness (again, until conditions change appropriately like an oversold T2108).

For those of you relatively new to the T2108 Update, by this point, you may be thinking that all this bearishness is “obvious” given the headlines of European sovereign debt problems and now the failure of the Congressional “Super Committee” to agree on reducing the U.S. Federal deficit. My quick response is that negative headlines were just as obvious and more in late September and early October when a final wave of selling sent the S&P 500 into a one-day bear market. T2108 was extremely oversold at that point, and the large rally I continued to anticipate from oversold conditions finally unfolded.

My more measured response is that T2108 is not about following the headlines. It is all about following what the market is actually doing and about executing on rules that take fear and greed out of short-term trading. (Long-term investors should get improved entry points).

The S&P 500 is still well-above its 52-week low. Bears have the advantage, but they still have a lot to prove.

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 AAPL call spread, long GS