(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 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: 72.9%
VIX Status: 14.5
General (Short-term) Trading Call: Short (fade rallies)
Active T2108 periods: Day #176 over 20%, Day #22 over 60%, Day #1 over 70% (overperiod)
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)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
Commentary
Since 1986, I have recorded 184 overbought periods through March 4, 2014. Over this period, I count approximately 11 periods where T2108 hit overbought at least 3 times in the span of 13 trading days. Today, marks the 12th occasion.
When the S&P 500 (SPY) staged a sharp one-day recovery that just missed holding T2108 in overbought status, I (marginally) switched my trading call to short and warned of more churn ahead. At the time, I was NOT imaging T2108 bouncing in and out of overbought status. Yet, that is what has happened as T2108 made a strong move today, returning to overbought status with a close at 72.9%. The S&P 500 made almost as strong a move as it did yesterday with a gain of 0.7%. The trading call stays at short until the S&P 500 makes a fresh all-time high. Such a move would beat out the presumed top marked by the “evening star” chart pattern that typically mark that end of upward momentum. Such a move would also put a quick end to my call of a top.
While the churn in and out of overbought territory is frustrating, I know I need to stick to the rules so that I am in position whenever the big move (up or down) comes. In the meantime, I will continue looking at individual charts that are consistent with the current trading call or can act as a hedge for it. To that end, I closed out my call options on Google (GOOG) as the stock has experienced nice follow-through (as expected) from a retest of its 50DMA. GOOG’s uptrend is too strong to be taken out so easily. But I think it is coming sooner than later…
The potential quick end to my call for a top reminded me to take a look at the percentage of stocks trading above their respective 200DMAs, or T2107. It turns out that T2107 has yet to retest its post-recession downtrend. In essence, there remains room to expand although I have no reason to insist that T2107 MUST retest the downtrend line from here.
The chart above makes me think that T2107 is quite extended given the sharpness of the upward push. It is the exact reverse of the over-extended move that took it down in June of last year.
The Federal Reserve is up next (on Wednesday, March 19th). I am bracing for a game-changing move from the market in response after the dust settles from typical pre/post-Fed gyrations. In preparation, I added a few more shares in ProShares Ultra VIX Short-Term Fut ETF (UVXY) that I hope to sell at a profit on the next pop in volatility.
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: long SSO puts and calls, long UVXY shares; short GOOG