T2108 Update (August 7, 2012) – Critical Juncture: Overbought, 2012 Highs, and the Australian Dollar

(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: 76.4% (third day of FOURTH overbought period in six weeks)
VIX Status: 16.0
General (Short-term) Trading Call: Accumulate or initiate fresh bearish position

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)

Commentary
The overbought rally continued for a third day as T2108 trickled up to 76 and the S&P 500 gained 0.5%. The index got within 8 points of retesting the May intraday high. The high of the day retested the May closing high.


The S&P 500 creeps its way into resistance
The S&P 500 creeps its way into resistance

This is about the time the S&P 500 has found a reason to cool off for a few days, and I have been looking for reasons to launch my T2108 rules to open new bearish positions. On Monday, overbought day #2, I finally found that reason in the form of an Australian dollar (FXA) fading intra-day. I bought a first tranche of puts in SSO. The S&P 500 followed with a very weak close, losing most gains. On Tuesday, I found more reason to get bearish and bought a second tranche of SSO puts as the Australian dollar faded most of the day. I tweeted the following sequence over the course of the day:

“Bearish divergence on $AUDUSD vs $SPY. Rally not getting confirmed.”

“Intraday bearish divergence btwn $AUDUSD and $SPY getting even stronger. Expecting $SPY selling into close heavier than yesterday. We’ll see”

“$AUDUSD does it again. While $SPY did not hit a new low of the day, it did fade all gains from the open. VERY cautious on Wed open.”

I wrote about caution on Wednesday’s open because I expected follow-through on Aussie weakness. At the time of writing, that is not panning out. Here is an intra-day chart of the trading on Tuesday that demonstrates the bearish divergence I observed. Also note how the S&P 500 gave up most of its gains in the wake of AUD/USD weakness.


The Australian dollar provides a leading signal for the S&P 500 yet again
The Australian dollar provides a leading signal for the S&P 500 yet again

I have written about the valuable relationship between AUD/USD and the S&P 500 in several other pieces; for example, see “Another Key Bullish Divergence Between The Australian Dollar And The S&P 500.” At some point, these correlations will not work or outright fail as conditions change. For now, I maintain close vigilance on an intra-day and daily level. The S&P 500’s challenge of key resistance levels also present a key test of this relationship with the Australian dollar.

Daily T2108 vs the S&P 500
Click chart for extended view with S&P 500 fully scaled vertically (updated at least once a week)
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; long SSO puts; long VXX shares, calls, and puts; short VXX calls; short AUD/USD

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