T2108 Update (April 11, 2014) – Continuation Selling Quickly Brings Back Quasi-Oversold Conditions

(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: 40.9%
VIX Status: 17.0
General (Short-term) Trading Call: Short (fade rallies), quasi-oversold conditions described below
Active T2108 periods: Day #194 over 20%, Day #46 over 40% (over-period), Day #2 under 50% (under-period), Day #2 under 60%, Day #6 under 70%

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
At the current rate of selling, the market should be oversold, not just quasi-oversold, by the end of the week.

T2108 closed Friday, April 10, 2014 at 40.9%. This move capped a massive 2-day plunge of 31.9%, much larger than the drop which generated quasi-oversold conditions in the previous week. The T2108 Trading Model (TTM) produces 100% odds for a bounce on Monday. Note well that these odds come from 11 cases out of 138 quasi-oversold conditions since 1990 where T2108’s 2-day drop was at least 31.9%. The matching classification criteria consist of a 1-day change in T2108 below -8.9% and a T2108 close above 38.8%. The classification error is better than last time at 39.4%, but it remains too high. So, again, take this prediction more as guidance NOT to chase the market lower than to buy aggressively.

The chart of T2108 suggests that my favorite technical indicator is over-extended and due for a bounce. Note that bounces have occurred after every recent puncture to such levels. Also note how T2108 is making higher lows since oversold conditions last occurred (June, 2013). These observations lead to a very important implication: if the market is still in bull mode, an upcoming bounce from over-sold conditions could be sustained for weeks to come…that is a caution to the bears. I will consider a break below 35% to add yet one more solid confirmation that the market has topped out for a good while. That is the caution for the bulls who will likely be very quick to buy into a bounce next week.

Another technical perspective to balance out the T2108 observations is SwingTradeBot, a stock alert platform built by my old-time mentor TraderMike (he’s back!). He provides a great summary of stocks making bearish and bullish technical milestones. Another click provides the list of those stocks for trading consideration. While T2108 dropped at a larger percentage than the previous day, the number of stocks making fresh bearish signals contracted (there is some work to do to filter on inverse ETFs which of course provide the reverse trading signal). I post the pie charts below (he is still working on getting the color-coding working). Click the charts for more details. I am assuming a contraction in bearish signals is confirmation that downward momentum is more likely to reverse in the very short-term.

Source: SwingTradeBot.com for April 10, 2014 and April 11, 2014

I used the bounce from the last quasi-oversold condition to close out some fortunately timed longs and call options. I did not get aggressive with shorts because I preferred to wait for a third day into the bounce. But, as I stated, I did purchase puts on the PowerShares QQQ (QQQ) as my focus has shifted from ProShares Ultra S&P500 (SSO). Seeing the quasi-oversold conditions, I closed out all those puts into Friday’s selling. I also unloaded a SSO put option with a June expiration and closed out short positions in Google (GOOG) and Tesla (TSLA). The next time around, I will like target the ProShares UltraShort QQQ (QID). Check out how volume has SURGED since last January. Perhaps this was an early signal for the beginning of the end of momentum!

The sell-off has reached a new level of criticality. The S&P 500 (SPY) finally dropped below its 50DMA. The NASDAQ gapped down, rallied and then faded again to close near the converging support of 2014 intraday lows and its 200DMA. Astute technicians will notice that Thursday featured “continuation” selling that confirmed more downside was likely coming.

Looking at these charts, I like starting the next fades on a S&P 500 retest of the 50DMA and 4100 or so on the NASDAQ.

I used Friday’s sell-off to finally close out my long position in ProShares Ultra VIX Short-Term Fut ETF (UVXY). This second trip was another experience in high risk and small reward. Even worse, it took three tranches of buys this time to get the small reward. Needless to say, I am pretty much done with UVXY. I sold out with UVXY hitting its 50DMA. I promptly turned on it and started in on UVXY puts to play the inevitable gravitational pull. I am much more comfortable using UVXY puts as a hedge on other short positions than using UVXY shares as a hedge on other long positions.

Finally, some chart reviews. Going forward, SwingTradeBot will likely become an increasing source of my scans for interesting charts. To-date I collect charts from my own small watchlists and some browsing of stocks in the news. I think the pictures speak for themselves along with the short captions. I follow the charts with a brief summary of trades I have done with these stocks.

IBM: I WISH I had stuck with my call last November by buying and holding shares. Instead, I do not even find myself holding call options as IBM has finally proven my old thesis correct that a time would come when traders would look for “cheap” stocks like IBM. I got more caught up in playing IBM like a trading range.

Intel (INTC): I still like INTC on the long side. I sold call options early in the week as part of a new strategy to buy and sell Intel between earnings. After two successful rounds, I am almost ready to write about it.

Voxeljet AG (VJET): Looks like VJET’s days of riding the momentum in 3D printing are over for now. I went ahead and bought on Friday’s plunge because I often find success buying a stock when it drops to the price of a share offering. Plunging well below the lower-BB is an added bonus. There is a lot of incentive baked into this situation to make sure these generous investors get rewarded for their agreement to fund the company. VJET was particularly accommodating in issuing stock at a (relative) firesale. This is a trade for a bounce.

Netflix (NFLX): I am of course disappointed the stock could not hold support, but I am sticking with the May call spread. Upcoming earnings will likely make or break this position now. Even if I did not have my current position, I would NOT short NFLX on this breakdown. Next up is the 2014 low…which could mess with the little optimism I am clutching.

Zillow (Z): This is clearly a stock to own whenever the market starts loving momentum stocks again. In the meantime, it looks like a stock that can still be played off support and a general uptrend. The wild volatility along the way gives opportunities for bulls AND bears.

Starbucks (SBUX): I wish I still had my short position! My trade in SBUX was very sub-optimal. I first shorted it as a chase downward on the first breakdown from its 200DMA. I failed to make any further trades despite the opportunities to add to the position at better prices. I achieved a small reward barely worth the risks I took.

VMWare (VMW): I have not touched this one in a while, but it has been one of my preferred tech stocks to buy on dips. I have put it back on the radar now that it has finally started breaking down. A tumble to the 200DMA would be a gift.

iShares 20+ Year Treasury Bond (TLT): I have maintained a “strangle” on TLT with out of the money puts and calls in anticipation of some big move either way. It looks like the big move could be a breakout.

General Motors (GM): One word: “ugly.” The stock has the classic pattern of a good short. It broke down below its 200DMA on February 3rd to signal/confirm growing weakness. After struggling with 200DMA resistance it finally broke out only to quickly fail at 50DMA resistance. The subsequent plunge below 200DMA confirmed the stock as a good short. More churn and another 50DMA failure set-up the current sell-off. Friday’s plunge is the exclamation point to sell this stock (on rallies). I do not even think I need to map out the bearish headlines on this chart. It simply speaks volumes on its own. (Disclosure: I drive and LOVE a GM vehicle, my second one in a row using credits from purchases on a GM credit card. I stopped using the card after my last purchase as I suspected I did not want to feel compelled to buy a third GM car in a row whenever the next moment comes!).

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, long NFLX call options, long VJET, long UVXY puts, long TLT calls and puts