T2108 Update (May 23, 2012) – Oversold Period Ends While Risks Remain High

(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: 22.5% (Last oversold period ends at 4 days)
VIX Status: 22.3
General (Short-term) Trading Call: Hold with a bullish bias (click here for a trading summary posted on twitter)
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)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)

For the first half of the trading day, it appeared the S&P 500 would close with its fifth oversold day in a row. Instead, a strong rally in less than two hours reversed all the losses on the day, returning the index to its starting point. This performance was good enough to drag T2108 out of oversold territory. The four-day long oversold period is just below average. Here are the statistics I reviewed in last summer’s discussion of the rules for trading oversold periods:

  • The average oversold period lasts six trading days.
  • 31% of oversold periods last only 1 day.
  • 56% of oversold periods last no more than 2 days.
  • 80% of all oversold periods end in 9 days
  • 90% of all oversold periods end in 10 days.

After an oversold period ends, the big trick is what to do next. The risks remain high. The S&P 500 did not quite retest 200DMA support – that test may still come in the near future. The volatility index, the VIX, remains above the critical 21 threshold – this means May’s slide may resume at any moment. The euro is still sliding, the Japanese yen is still rising, and the U.S. dollar continues to rally. I recommend taking some profits if possible. Otherwise, plan to hold trading positions through an extension of the oversold bounce or stop out if the S&P 500 closes below its 200DMA. Maintaining a hedge is probably the least complicated way to manage the on-going high risks.

As I mentioned in Monday’s T2108 Update, I bought VXX calls as a hedge on Tuesday. I was fortunate to get even lower prices. The move was timely as I found myself with a tidy double after today’s open. I gulped hard and sold my VXX calls. I next set a lowball bid on SSO calls that got filled. It was one of those rare double-jackpot days. The SSO calls ended the day up 30% thanks to the strong close. Although these are June calls, I highly doubt I will hold them through the Memorial Day weekend. As always, stay tuned on my twitter feed for reporting on trade execution using the #120trade hashtag.

My bonus feature today is the daily chart for Apple (AAPL). I have posted so much on Apple because the chart technicals are like poetry in motion. Nearly improbable stops and starts all dancing around critical technical levels. Today, Apple’s rally stopped right at the current downtrend line. A nice pop above that will be very bullish, but Apple will next need to overcome resistance at its 50DMA. Note also that buying volume was a little lower than I would like. I sold one of Apple calls near the close (see “Apple’s Revenge Part Two” for my technical review of Monday’s historic pop).

Click image for a larger view…

Apple is now close to a bullish breakout above the current downtrend
Apple is now close to a bullish breakout above the current downtrend

Finally, in other news, both Caterpillar (CAT) and JPMorgan Chase (JPM) bounced enough to get back into the green for the year. These are positive moves, but I want to see follow-through in the next week or less.

(Note – as of May 11, 2012, some glitch in FreeStockCharts.com is screwing up the overlay of the S&P 500 with T2108. I am still waiting for a response from technical support).

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)

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 SDS, SSO calls; long Apple calls and puts; net short euro, net long Japanese yen

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