{"id":6982,"date":"2011-08-29T20:09:16","date_gmt":"2011-08-30T00:09:16","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=6982"},"modified":"2011-08-30T08:42:51","modified_gmt":"2011-08-30T12:42:51","slug":"t2108-update-110829","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2011\/08\/29\/t2108-update-110829\/","title":{"rendered":"T2108 Update &#8211; August 29, 2011 (Finally Oversold No More)"},"content":{"rendered":"<p>(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my <a href=\"http:\/\/www.drduru.com\/money\/T2108.htm\">T2108 Resource Page<\/a>. You can <a href=\"http:\/\/twitter.com\/#!\/search\/%23T2108\">follow real-time T2108 commentary<\/a> on twitter using the #T2108 hashtag.)<\/p>\n<p><strong>T2108 Status<\/strong>: 27% (The FIRST day out of an historic oversold period that lasted 17 days &#8211; 3rd longest since 1987).<br \/>\n<strong>VIX Status<\/strong>: 32<br \/>\n<strong>General (Short-term) Trading Call<\/strong>: Hold<\/p>\n<p><strong>Commentary<\/strong><\/p>\n<p>What a pleasant surprise. On Friday, <a href=\"http:\/\/drduru.com\/onetwentytwo\/2011\/08\/27\/t2108-update-110826\/\">I was thinking that the market would remain stymied by the 20DMA and the 20% oversold threshold<\/a>. Neither held, as T2108 finally bolted out of oversold territory after spending a historic 17 days mired in oversold conditions. Moreover, the S&#038;P 500 broke above key resistance levels; I was expecting a rally like today&#8217;s 3% pop on the S&#038;P 500 to wait until the first of September. The index is now trying to leave behind a tangled and twisted mess of angst and churn, but it will quickly need to deal with overhead resistance from the now declining 50DMA and flattening 200DMA.<\/p>\n<p><center><br \/>\n<figure id=\"attachment_7006\" aria-describedby=\"caption-attachment-7006\" style=\"width: 515px\" class=\"wp-caption aligncenter\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2011\/08\/110829_SP500.jpg\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2011\/08\/110829_SP500.jpg\" alt=\"S&amp;P 500 overcomes major resistance to break out of oversold territory\" title=\"S&amp;P 500 overcomes major resistance to break out of oversold territory\" width=\"525\" height=\"466\" class=\"size-full wp-image-7006\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2011\/08\/110829_SP500.jpg 525w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2011\/08\/110829_SP500-300x266.jpg 300w\" sizes=\"auto, (max-width: 525px) 100vw, 525px\" \/><\/a><figcaption id=\"caption-attachment-7006\" class=\"wp-caption-text\">S&P 500 overcomes major resistance to break out of oversold territory<\/figcaption><\/figure><br \/>\n<\/center><br \/>\n<\/p>\n<p>One of the tests for success in playing oversold conditions is to compare the maximum downdraft (risk) with the return on the first day post-oversold (initial reward). <a href=\"http:\/\/drduru.com\/onetwentytwo\/2011\/08\/05\/t2108-update-110804\/\" title=\"Extremely Oversold, Longer-Term Bearish Signal Confirmed\">On August 4<\/a>, the S&#038;P 500 fell 5% to close at 1200 and first entered oversold territory. The index hit rock bottom 5 days later on an intra-day basis at 1101 for an 8.3% maximum drawdown. The conservative trader waited until close to the low of the next day as the VIX (the volatility index) quickly surged 20% above the previous day&#8217;s high. The low on August 5 was 1168, and assuming the conservative trader was quick and nimble that day (not likely), s\/he suffered a maximum drawdown of 5.7%. With the S&#038;P 500 closing at 1210, the aggressive trader so far has little to show for all that risk UNLESS s\/he followed my advice to add to positions. The conservative trader has a more attractive, but still tiny, return of 2.8%. This poor risk\/reward on the first day out of oversold territory is not a surprise given the extreme and historic nature of this sell-off. I am expecting some extremes on the positive side to follow eventually.<\/p>\n<p>The best outcome so far is that no one following T2108 panicked and dumped entire portfolios during the oversold period, thus saving a lot of grief and unnecessary loss. (Note well that the rules to sell <strong>trading<\/strong> positions on a break of the 1101 low included a rule to buy back into the market well before the oversold period ended and to maintain short positions).<\/p>\n<p>So, surviving the oversold period was the &#8220;easy&#8221; part. As I have mentioned before (prematurely as it turned out!), constructing an exit strategy after the oversold period ends represents a bigger mental challenge. I have no set rules. Given the virulence of this sell-off, I think caution remains warranted. Locking in some profits makes a lot of sense, especially to provide stamina if the market suddenly dips back into oversold territory (I am expecting a retest of overhead resistance first). I sold some of my long SSO position and intend to evaluate further sales on a day-by-day basis. I still have not closed out the few shorts and puts that I have. My ultimate target is to wait on overbought conditions to return and\/or a retest of the overhead resistance shown above. I think the S&#038;P 500 hits overhead resistance well before T2108 gets overbought, even with most 40DMAs in decline now. (For details on related trades see <a href=\"http:\/\/twitter.com\/#!\/DrDuru\" title=\"Dr. Duru's twitter feed\" target=\"_blank\">my twitter feed<\/a> and\/or search for <a href=\"http:\/\/twitter.com\/#!\/search\/%23120trade\" title=\"Dr. Duru's trade feed\" target=\"_blank\">the #120trade hashtag<\/a>.)<\/p>\n<p>I have switched the trading call to &#8220;hold&#8221; primarily to reflect the end of a period where buying on the dips appeared to hold large rewards relative to risk. Traders should use very careful discretion in new bullish trades given today&#8217;s technical discussion.<\/p>\n<p>Finally, <a href=\"http:\/\/stockcharts.com\/h-sc\/ui?s=$VIX&#038;p=D&#038;st=2011-01-01&#038;en=2011-08-29&#038;id=p78209565396\" title=\"Today's VIX from stockcharts.com\" target=\"_blank\">the VIX<\/a> appears just about ready to validate a sustained rally. It dropped 9% and is testing the levels from the last local peak in the S&#038;P 500. A close below 30.8 or so, should grease the skids for the VIX. With these expectations, I am maintaining my put positions on <a href=\"http:\/\/stockcharts.com\/h-sc\/ui?s=VXX&#038;p=D&#038;st=2011-01-01&#038;en=2011-08-29&#038;id=p53889579707\" title=\"Today's VXX from stockcharts.com\" target=\"_blank\">VXX<\/a> here. (Click preceding links for current charts.)<\/p>\n<p><center><br \/>\n<em>Charts below are the <strong>latest<\/strong> snapshots of T2108 (and the S&#038;P 500)<\/em><br \/>\nRefresh browser if the charts are the same as the last T2108 update.<br \/>\n<\/p>\n<p><strong>Daily T2108 vs the S&#038;P 500<\/strong><br \/>\n<img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/www.drduru.com\/money\/charts\/T2108-daily_s.jpg\" width=\"525\" height=\"356\" alt=\"T2108 vs. the S&#038;P 500 (DAILY)\" title=\"T2108 vs. the S&#038;P 500 (DAILY)\"><\/p>\n<p>Black line: T2108 (measured on the right); Red line: S&#038;P 500 (for comparative purposes)<br \/>\n<\/center><\/p>\n<p><center><br \/>\n<strong>Weekly T2108<\/strong><br \/>\n<img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/www.drduru.com\/money\/charts\/T2108-weekly_s.jpg\" width=\"525\" height=\"354\" alt=\"Weekly T2108\" title=\"Weekly T2108\"><br \/>\n*<strong>All charts created using TeleChart:<\/strong> <a href=\"http:\/\/www.worden.com\/CURRENTAFPROMO.aspx?AFCODE=866\"><img decoding=\"async\" src=\"http:\/\/www.worden.com\/Content\/Banners\/images\/88x31.gif\"><\/a><br \/>\n<\/center><\/p>\n<p><strong>Related links:<\/strong><br \/>\n<a href=\"http:\/\/www.drduru.com\/money\/T2108.htm\">The T2108 Resource Page<\/a><br \/>\n<a href=\"http:\/\/www.drduru.com\/money\/charts\/T2108-daily.jpg\">Expanded daily chart of T2108 versus the S&#038;P 500<\/a><br \/>\n<a href=\"http:\/\/www.drduru.com\/money\/charts\/T2108-weekly.jpg\">Expanded weekly chart of T2108 <\/a><\/p>\n<p>Be careful out there!<\/p>\n<p>Full disclosure: long shares and calls on SSO, long VXX puts<\/p>\n","protected":false},"excerpt":{"rendered":"<p>(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag.) T2108 Status: 27% (The FIRST day out of an historic oversold period that lasted 17 days &#8211; 3rd longest &#8230; <a title=\"T2108 Update &#8211; August 29, 2011 (Finally Oversold No More)\" class=\"read-more\" href=\"https:\/\/drduru.com\/onetwentytwo\/2011\/08\/29\/t2108-update-110829\/\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[135,62],"tags":[65,226,1597],"class_list":["post-6982","post","type-post","status-publish","format-standard","hentry","category-stock-market-trading","category-technical-analysis","tag-sp-500","tag-t2108","tag-technical-analysis"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>T2108 Update - August 29, 2011 (Finally Oversold No More) - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2011\/08\/29\/t2108-update-110829\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"T2108 Update - August 29, 2011 (Finally Oversold No More) - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag.) T2108 Status: 27% (The FIRST day out of an historic oversold period that lasted 17 days &#8211; 3rd longest ... 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To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag.) T2108 Status: 27% (The FIRST day out of an historic oversold period that lasted 17 days &#8211; 3rd longest ... 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