T2108 Update (June 24, 2014) – Stall Speed: Overbought Period Ends

(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: 66.6% (end a 4-day overbought period)
VIX Status: 12.1
General (Short-term) Trading Call: Even aggressive traders hold. Longs still stop below 1940 on the S&P 500
Active T2108 periods: Day #243 over 20%, Day #95 over 40%, Day #22 over 60% (overperiod), Day #1 under 70% (underperiod)

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).

T2108 ended a very lacluster 4-day overbought period with a close at 66.6%. The extended overbought rally that I expected never even opened its eyes. Looking back, I feel very fortunate I made some good trades in individual stocks during the overbought period.

The dip in the S&P 500 (SPY) has a very classic bearish pattern: three days of indecisive trading followed by a pullback that easily wipes away the paltry gains of all three days. However, I am sticking with the original bearish trigger of a close below 1940 on the S&P 500. The market is moving in such slow motion that I think patience is warranted. The potential for getting trades chopped up in market churn remains high until the market somehow delivers a more clear directional signal. Moreover, the higher lows on T2108 suggest that the next pullback will be quite shallow.

The S&P 500 takes an ominous tumble out of overbought conditions
The S&P 500 takes an ominous tumble out of overbought conditions

The volatility index, the VIX, DID open its eyes, apparently waking from a deep slumber. It rose a healthy 10.4% in a move that should perk up the bears.

Under “normal” conditions, I would rush to buy puts on ProShares Ultra S&P500 (SSO) and/or PowerShares QQQ (QQQ) with this combination of signals. Again, I do not see a need to rush. If I find an individual stock with a good technical setup below resistance, I might try to short it for a quick trade. But that is as far as I will go on new trades. Note I DO think the bullish setups I noted in the last T2108 Update are already on probation given the way the NASDAQ (QQQ) faded from fresh multi-year highs. This kind of false breakout is typically a very bearish sign. I prefer to have the wind behind my back, especially when dealing with high-multiple and/or (former) momentum stocks.

The NASDAQ suffers a false breakout with a bearish fade
The NASDAQ suffers a false breakout with a bearish fade

Finally, here is an interesting contrast to the gathering bearish clouds. Wix.com (WIX) cleanly broke out above its 50DMA with high buying volume. This is one stock I am going to try to hold. It is even a fresh buy here with a stop below the 50DMA.

Buyers step up on Wix.com
Buyers step up on Wix.com

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 WIX

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