(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: 70.9% (7th overbought day)
VIX Status: 12.6
General (Short-term) Trading Call: Hold
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
Looks like Friday’s prediction for today’s trading action may have been worth something after all. The T2108 Trading Model (TTM) predicted a 46% chance of a down day and a 54% chance of an up day. Given the high error rate, this prediction was not worth trading. The S&P 500 seemed to agree with the stalemate by closing exactly flat on the day. T2108 declined again today (and has almost fallen from overbought territory), producing a new 2-day decline for creating a new prediction. However, the parameters are little changed from Friday, and the TTM produces the exact same prediction for Tuesday as it did for Monday. This lackluster prediction seems to defy my typical (anecdotal!) expectation from such bearish divergence between T2108 and the S&P 500.
If the S&P 500 (SPY) has another lackluster close, suddenly I get much more interested in “stalemate” predictions. Like the fortuitous find of quasi-oversold conditions, finding a reliable prediction of a do-nothing day could form the basis for a fade trade that assumes the day will close opposite to a large open.
My assumption going into this week was that stocks would finally inherit the volatility exhibited by currency markets last week. Instead, the currency market has smoothed out a bit. There was little to no follow-through in Japanese yen or Australian dollar weakness. So now it seems the odds of a lackluster Tuesday have increased. Such a day will also force me to significantly ramp down my expectations for a volatile week.
Stay tuned!
Daily T2108 vs the S&P 500
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
*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: short Australian dollar, net long Japanese yen (marginally)