T2108 Update (April 18, 2013) – S&P 500 Is Quasi-Oversold for A Critical Test of Support On Options Expiration Day

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are highly likely to reverse. 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: 37.2%
VIX Status: 16.5 (#rd out of 4 days of 6%+ gains)
General (Short-term) Trading Call: Buy for a bounce off/from 50DMA only

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
I was hoping for a continued bounce off the 50DMA for the S&P 500 (SPY), but instead selling pressures continued as the index closed just below that support. It was a mild selling day with the S&P 500 off 0.7%, but it was enough to drive the VIX up to levels last seen in February. In concert, T2108 dropped further below 40%. It was also the second straight day of declines for T2108, triggering the T2108 Trading Model (TTM) into action {I am introducing this shorthand here for the first time}.

T2108 is once again quasi-oversold given it has declined (steeply) for the past two days (drop of 25.7%). As a reminder, the TTM takes into account the closing level of T2108, the 1 and 2-day percentage declines in T2108, the percentage change in the VIX, and whether or not the S&P 500 is above/below its 20, 50, and/or 200DMAs. The response/dependent variable is the percentage change in the S&P 500 which is changed into a true/false on whether the change is positive/negative (zero is treated as a positive). Based on Thursday’s values, and the TTM predicts an up day for Friday with a 68.4% probability. This is not as strong as I would like (>75%), but it is still much better than the 53% chance (historical) of a gain on any given day.

The model did not use the S&P 500’s position relative to its 20, 50, and 200DMAs. The specific prediction is based on the following decision tree branches (I removed one redundant branch):

  • VIX Change < 6.6%
  • T2108 Close < 38.43
  • T2108 1-Day Change >= -16.4%
  • T2108 2-Day Change >= -34.0%

{Data mining/machine learning folks interested in viewing the complete decision tree, click here. Please note that this model is not static and is subject to change with additional data. As always, let me know whether you have questions about it. I still have a long to-do list to enhance my modeling and its write-up. Perhaps in another month or so I can get it done.}

The largest caveat to this prediction is the occurrence of options expiration on Friday. Legend is that options expiration is supposed to be extremely volatile, but it seems to me, more often than not, options expiration is quite calm and quiet…almost as if no one wants to make sudden moves for fear of losing too much money all at once. If we do indeed get a very quiet Friday, I will assume Monday will have a high chance of exploding to the upside (even Apple!).

Finally, let’s review some predictions/observations during the week:

  1. April 15: “Latest China GDP Figures Set Up Next Buying Opportunity” – I referred to a report from Todd Salamone in his latest “Monday Morning Outlook” on Schaeffer’s Investment Research in which he noted the alrge amount of VIX call buying. Given these calls expired on Wednesday, he expected weakness to persist if the S&P 500 went into expiration in a sell-off mode. I overlooked this observation in anticipating a rebound for Thursday instead.
  2. April 17: “S&P 500 Retests 50DMA and Other Positive Signs Even As Apple Drops Into the Red Zone“…
    • Caterpillar (CAT) failed to hold the hammer pattern and closed at a fresh 9-month low. Very bearish.
    • Intel (INTC) continued its post-earnings turn-around and rally in a sign of defiance against general market malaise. It pulled away from a retest of the 200DMA resistance. Bullish but now burden of proof is firmly resting on the shoulders of buyers.
    • The Australian dollar continued to creep upward, especially against the Japanese yen (AUD/JPY). The rolling washout patterns continue to create ever higher support. As I type, the return of weakness in the yen should bode well for stocks on Friday’s open. I also feel vindicated in sticking to a strategy of buying into Sunday and Monday’s collective weakness. Bullish.
    • Apple (AAPL) did not experience calamity, but it also did not soar. I sold my last round of puts for a small profit and anticipate taking a small net loss when my calls expire worthless. The stock plunged even further into “the red zone”, closing at an eye-popping $392.05. I was banking on a historical pattern of bouncing off the lower-BB, but it runs directly counter to a very strong pattern of weak trading on Friday. Maybe the end result will be a stalemate and then a pop on Monday. I stand ready either way after buying a call spread for next week’s expiration (and earnings!). Neutral given Apple has exhibited persistent and stubborn relative weakness versus the general stock market.

Further note that the volume put/call ratio on AAPL ticked higher from 0.68 to 0.71. This is a new 2-month high. Sentiment remains very bullish on Apple, and I am doubting it will turn sour before earnings. This will complicate the earnings trade analysis. Stay tuned…


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)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


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 VXX shares, calls and puts; long AUD/JPY (net long Australian dollar); net short Japanese yen; long AAPL shares, calls, and puts; long SSO calls; long INTC puts; long CAT shares and put spread

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