{"id":9869,"date":"2012-02-09T04:38:29","date_gmt":"2012-02-09T09:38:29","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=9869"},"modified":"2012-02-09T12:51:37","modified_gmt":"2012-02-09T17:51:37","slug":"t2108-update-120208","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2012\/02\/09\/t2108-update-120208\/","title":{"rendered":"T2108 Update – February 8, 2012 (Preliminary Analysis of Post-Overbought Periods)"},"content":{"rendered":"

(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<\/a>. You can follow real-time T2108 commentary<\/a> on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)<\/p>\n

T2108 Status<\/strong>: 87% (overbought day #26)
\nVIX Status<\/strong>: 18.2
\nGeneral (Short-term) Trading Call<\/strong>: Close more bullish positions. Begin but do NOT expand an existing bearish position.<\/p>\n

Reference Charts<\/strong> (click for view of last 6 months from Stockcharts.com):
\nS&P 500<\/a> or SPY<\/a>
\nSDS<\/a> (ProShares UltraShort S&P500)
\nU.S. Dollar Index<\/a> (volatility index)
\nVIX<\/a> (volatility index)
\nVXX<\/a> (iPath S&P 500 VIX Short-Term Futures ETN)
\nEWG<\/a> (iShares MSCI Germany Index Fund)<\/p>\n

Commentary<\/strong>
\nDay #26 for this historical overbought period – the top 8% of all overbought periods since 1986 and one of the best performing at this point in time in the cycle. The S&P 500 continues to linger agonizingly directly below fresh multi-year highs. <\/p>\n

I have finally taken some time to extend my analysis of overbought periods<\/a> into what happens in between<\/strong> overbought periods. I will eventually dedicate a post to the complete analysis, but in the meantime I wanted to share some preliminary results.<\/p>\n

The chart below is a scatter plot showing the maximum loss in the S&P 500 between overbought periods indexed by the duration of the preceding overbought period. In other words, this is an attempt to answer the following question: “what is the maximum correction a trader might expect after this current overbought period ends?”<\/p>\n


\n
\"Returns<\/a>
Returns between overbought periods can vary tremendously<\/figcaption><\/figure>
\n<\/center><\/p>\n

First, notice that there is no correlation between the duration of the overbought period and the maximum loss that follows its end. Also notice that in SOME cases, the maximum “loss” is actually a gain! Returns are measured from the close of the day the overbought period ends.<\/p>\n

I would describe the chart as having three distinct areas.<\/p>\n