Health Care Archives - ONE-TWENTY TWO: Trading Financial Markets

(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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 63.8%
T2107 Status: 31.7%
VIX Status: 14.5
General (Short-term) Trading Call: MILDLY bearish
Active T2108 periods: Day #15 over 20%, Day #14 over 30%, Day #14 over 40%, Day #12 over 50% (underperiod), Day #1 over 60% (ending 1 day under 60%) (overperiod), Day #329 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).
IBB (iShares Nasdaq Biotechnology).

Commentary
Just as I had given up the idea of a 200DMA test of resistance in favor of an earlier test of 50DMA support, the S&P 500 (SPY) staged a sharp reversal. Today’s strong 1.7% gain places the index just below a major test of strength and within a shout of completely reversing all of August’s sell-off.

The S&P 500 leaves the prior day’s weakness in the dust. A major test of resistance now looms.

T2108 jumped as well but refused to break into overbought territory. My favorite technical indicator closed at 63.8% and even faded a bit off its highs. So the tease just below overbought conditions continues. In the last T2108 Update I declared T2108 had gotten close enough because, after all, T2108 has now gone 329 trading days without breaking through official overbought territory. With this context, “close enough” is sufficient.

More important is the meaning of overbought in this case. Until the S&P 500 breaks through 200DMA resistance AND follows through, my trading call will stay some shade of bearish (right now “mild”). If the index follows through on a breakout, I flip right back to bullish with the assumption that a major overbought rally is underway. Again, one step at a time.

The volatility index was hit hard by the sudden return of excited buyers. The VIX hit a fresh 2-month low on a 13.5% decline and is once again below the 15.35 pivot – I call it a pivot for a good reason…

The volatility index quickly resumes its descent even as the 15.35 pivot serves as a magnet

A major driver of the action was the European Central Bank (ECB). Whatever President Mario Draghi said (I hope to write a quick piece on it over the weekend), thumped the euro (FXE) and sent traders scrambling for “risk on” trades; I closed out my short on EUR/USD. The dollar index was a major beneficiary: “Super Mario” helped to save the dollar’s current trading range. The U.S. dollar even surged against the Japanese yen (FXY).

The euro plunges and faces its own critical 200DMA test against the U.S. dollar. A total breakdown looms.

The dollar index confirms nice bounce from the lower depths of its on-going trading range. Can it finally break out from the short-term downtrend in place since March?

Once again, the currency markets are key to the stock market. This swift move is a game changer. If the euro proceeds to break down, the stock market could get a turbo boost. The next looming caveat would be yet another Fed meeting next week. The Fed may “decide” to counteract the U.S. dollar’s resurgent strength with an extra dose of deference to the uncertain economic conditions preventing it from starting its rate-tightening cycle. Paradoxically, the market could like that kind of talk as well!

Although my trading bias is now set to mildly bearish, I found myself all day hunting down buying opportunities, especially in biotech. When I looked up and noticed my bullish posture, I hunted down Goldman Sachs and faded its bounce. I am looking for the 50DMA to hold as resistance.

Goldman Sachs (GS) does not quite reverse the previous day’s sudden selling. For now, the declining 50DMA rules trading.

Even if GS eventually wiggles its way above its 50DMA I like it now as a hedge on bullishness. The stock overall looks very weak. If the next calamity for the market is a financial incident, GS could be right at the center.

Speaking of hedges, Caterpillar (CAT) was the big post-earnings reversal of the day. It managed to stay green for the day even after its 50DMA resistance held strong. I was fortunate to rush in to call options near the open after I noticed buyers piling into the gap down. It turned into a quick double. I am still holding shares short.

Caterpillar attempts a contrary move to breakout above its 50DMA resistance after first doing a post-earnings gap down.

Back to biotech…

Earlier this month, I wrote about buying into Gilead Sciences (GILD) as a good bio-tech “catch-up” play. Since then, it has steadily, albeit in choppy fashion, marched higher even as the iShares Nasdaq Biotechnology ETF (IBB) has barely followed support off its lows. Today was a big day as GILD soared 5.8% for a double 50 and 200DMA breakout.

Gilead Sciences (GILD) rallies to the edge of a major breakout and end of its downtrend from recent highs

Given I had already made several successful trades on IBB and Valeant Pharmaceuticals (VRX), I was very content to sit on my GILD call options (they do not expire until next year). As I noted in the last T2108 Update, I was primed to lock in profits on my IBB call options. I also decided to lock in profits on my shares. That decision turned out well as it freed me to buy another intraday dip that I in turn flipped. VRX was in focus for me given its extreme sell-off the previous day. I bought a call option soon after the open given the stock gapped down an additional 7%. I was on the lookout for signs of strength; as soon as I noticed some, I added shares.

I later discovered that the short-selling firm Citron that took down VRX confirmed that Andrew Left would appear on BloombergTV at 12:30pm Eastern. I locked in profits on the shares ahead of that interview. Sure enough, the stock began to wane after 12:30pm. I set a limit order to double-down on my call option in case the selling got bad. I got filled in due time. I was not watching the interview, but I am guessing the strength returned after the interview ended. Going into the close, VRX was about 21% off its low of the day and I locked in substantial profits on my call options. VRX still ended the day down 7.4%, roughly flat with its open. This kind of wide-ranging volatility is a trader’s dream.

Valeant Pharmaceuticals (VRX) is struggling to get back on its feet after Citron’s squeeze

A roller coaster ride intraday equals a lot of trading opportunities.

One reversal I completely missed – by mere minutes – was in Build-a-bear Workshop (BBW). News of a significant recall of the company’s Starbrights Dragon sent investors selling in a panic. I hesitated just a few minutes and quicker, more calm traders and investors, stepped right in and relieved BBW of most its losses. Clearly, the market is jittery, but these jitters are often turning into major buying opportunities (even if short-term).

Build-a-bear Workshop craters momentarily as panic quicky gives way to cooler heads

Build-a-bear Workshop’s buying opportunity lasted less than 10 minutes

A reversal I inexcusably missed was Intuitive Surgical (ISRG). I was looking to follow-up the previous day’s success. I was watching the stock like a hawk…

$ISRG post-earnings fade continues. Now below the 50DMA. A gap-fill is now in play.

— Duru A (@DrDuru) Oct. 22 at 10:06 AM

…but after concluding that ISRG was on pace to completely fill its gap, I relaxed. Big mistake. ISRG eventually continued its sell-off, but when signs of life appeared it took off like a rocket into the close. The stock recovered from its 50DMA and even closed above the upper-Bollinger Band again.

Intuitive Surgical (ISRG) comes back from a 50DMA breakdown and barely misses a complete fill of its post-earnings gap up.

Needless to say, after all this, I was not in a bearish mood. Now, Alphabet (GOOG) and Amazon.com (AMZN) got 10%+ after-hours gains after reporting earnings. It will be difficult to get in a bearish mood tomorrow (Friday, October 23rd). Stay tuned…

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long IBB call options, short CAT and GS, long GILD call options, net long the U.S. dollar

T2108 Status: 55.2%
T2107 Status: 30.6%
VIX Status: 15.4
General (Short-term) Trading Call: neutral, changed from mildly bearish – see below
Active T2108 periods: Day #18 over 20%, Day #17 over 30%, Day #17 over 40%, Day #15 over 50% (overperiod), Day #1 under 60% (underperiod), Day #332 under 70%

Commentary
The day before the Federal Reserve issues yet another decision on monetary policy, the stock market took a turn that raised red flags.

T2108, my favorite technical indicator, plunged to its lowest level in almost three weeks. This move suggests that T2108 will NOT flip overbought anytime soon after all.

T2108, the percentage of stocks trading above their respective 40DMAs, plunges away from the overbought thresdhold

The S&P 500 (SPY) did not follow this sharp move. Instead, the index “gently” pulled back to 200DMA support and neatly bounced from there into the close.

The S&P 500 pulls off an apparently successful test of support at its 200DMA

The volatility index, the VIX, traded up a mere 0.9% to close just above its pivot line. So no alarm is present here (meaning that there is little point in playing my typical “fade volatility” pre/post-Fed trade).

The VIX struggles to close above its pivot line.

Only the transports provided clear confirmation that underlying technicals for the market took a turn for the worse on the day. The iShares Transportation Average ETF (IYT) dropped 2.7% although it did manage to close above its 50DMA support. Railroad CSX Corp. (CSX) was not so lucky at the end of its 3.8% loss on the day.

Transports take a dive on the day but hold support at the 50DMA.

Railroad CSX suffers another 50DMA breakdown

I would be very prepared to get more aggressive with short positions if not for the Federal Reserve meeting on Wednesday, October 28, 2015. As usual, I expect the Fed to work its magic to try to soothe any outstanding fears out in the market. However, the volatility index did not increase enough going into the meeting to make a good risk/reward trade to fade volatility. So, I am stuck in neutral until the Fed ushers down its latest declarations.

The iShares Nasdaq Biotechnology ETF (IBB) also ran contrary to my bias to get more bearish given T2108’s plunge. IBB continues to show more life. It rallied for a 3.2% gain on the day in an impressive show of relative strength. IBB closed right at its 50DMA resistance so follow-through in the next few days will be key. Note that I sold my last IBB-related position on the spike higher on the previous day. That includes Gilead – I decided not to risk holding the call options through earnings.

The iShares Nasdaq Biotechnology ETF (IBB) is showing more and more signs of life. Early signs of buying interest are paying off now.

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: no positions

The iShares Nasdaq Biotechnology ETF (IBB) finally broke out above resistance from its downtrending 50-day moving average (DMA) on Wednesday, October 28th. This was the same day as the Federal Reserve’s October decision on monetary policy. Unfortunately, the breakout failed its first test as it stopped cold right at the low of the “Clinton Bash” from September 21st.

iShares Nasdaq Biotechnology ETF (IBB) ends the week with a post-breakout failure.

Source: FreeStockCharts.com

IBB’s 50DMA breakout was its first trade above this critical line of support/resistance since early August. While the weak close for the week was disappointing, encouraging signs continue to build for IBB. In previous posts, I pointed out the appearance of significance buying interest as support along the uptrend from recent lows generally held firm (see the chart above). This rally has accumulated enough strength to produce an uptrend in the 20-day moving average (dashed line in the chart). While the 50DMA support may quickly fail here, I am expecting the 20DMA to hold as support. I am targeting my next trade(s) on IBB at this line of support.

Most importantly, this overdue test of the Clinton Bash low is the first sign that my prediction of a complete reversal of that loss is finally somewhere just over the horizon.

Be careful out there!

Full disclosure: no positions

T2108 Status: 60.3%
T2107 Status: 32.8%
VIX Status: 15.1
General (Short-term) Trading Call: neutral, changed from mildly bearish – see below
Active T2108 periods: Day #21 over 20%, Day #20 over 30%, Day #20 over 40%, Day #18 over 50%, Day #3 over 60% (overperiod), Day #335 under 70% (underperiod)

Commentary
After the U.S. Federal Reserve announced its latest decision on monetary policy, the S&P 500 (SPY) extended its breakout. The U.S. dollar also broke out. In the two days since, both have stalled out.

The S&P 500’s post Fed rally has already stalled.

No post-Fed follow-through yet for the U.S. dollar index

Incredibly, T2108 has still failed to cross the overbought threshold. In fact, the momentum on my favorite technical indicator is ever so subtly waning. On Wednesday, T2108 only reached a high of 65.4%. It is now back to 60.3%. This is T2108’s 4th lowest close since the churn directly underneath the overbought threshold began over three weeks ago. This waning momentum is a slightly bearish sign as it contradicts the apparent momentum from the S&P 500.

It is very subtle, but T2108 is slowly but surely losing momentum. As it does so, it acts as a con-confirming indicator to the on-going rally for the S&P 500 (SPY).

When the S&P 500 tagged its 200DMA support, I posted a red flag on the market technicals as T2108 made its lowest close during this period of churn. At the time, iShares Transportation Average ETF (IYT) appeared to validate my concerns. Since then, IYT has managed to hold support at its 50DMA. So, overall, my trading call remains at neutral. As a reminder, I am assuming it makes little to no sense get aggressive on short positions until/unless the S&P 500 closes below 200DMA support. On the flip side, a breakout for T2108 into overbought territory will likely trigger my trading rules for riding the momentum of an overbought rally.

The volatility index, the VIX, is still making no news. For two weeks, the VIX has bounced in a very tight range neatly around the 15.35 pivot. I never cease to marvel at how well this pivot actually works. I am assuming a breakout/down from this pivot will be consistent with market sentiment and will thus will help drive directional trades.

While this suspense continues to build, earnings season rolls along. Plenty of drama abounds in individual stocks. Some juicy post-earnings reversals continue to provide great trading opportunities as well. Here are a few sample charts with commentary in the captions.

Goldman Sachs (GS) has followed through with its major post-earnings reversal. It is now stalling around the September highs and right below its 200DMA.

Intercept Pharmaceuticals, Inc. (ICPT) plunged after its latest update on drug trials. Buyers stepped right in and completely closed the gap. Momentum has stalled since then.

Solar City (SCTY) followed through on multiple failures at 50DMA resistance with a post-earnings collapse to 2-year lows. The previous trading range (in dark, horizontal lines) is a distant memory.

Tesla Motors (TSLA) approaches earnings on Nov 3rd with a weak hand. Buyers have yet to step into the breach after criticism from Consumer Reports.

A post-earnings sell-off for Twitter (TWTR) stopped cold at 50DMA support. Buyers nearly closed the entire gap but buying momentum has since stalled.

Whirlpool (WHR) put on one of the bigger shows I have seen during this earnings season. WHR reported in the morning with a gap up. Sellers stepped in for the rest of the day as reactions turned negative to the conference call. Buyers took over again to register a net post-earnings gain. Note however that WHR is overall still following its 50DMA downward.

Baidu (BIDU) has almost closed the big post-earnings gap down from July. Missing this resurgence has hurt, but I simply could not buy into the 50DMA breakout ahead of earnings at this juncture in the market. BIDU buyers are clearly snatching back control of this stock. A 200DMA breakout would add yet more confirmation.

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: short GS, short TWTR put options

T2108 Status: 55.7%
T2107 Status: 31.9%
VIX Status: 15.3
General (Short-term) Trading Call: slightly bearish
Active T2108 periods: Day #27 over 20%, Day #26 over 30%, Day #26 over 40%, Day #24 over 50% (overperiod), Day #1 under 60% (ending 8 days over 60%) (underperiod), Day #341 under 70%

Commentary
In the last T2108 Update, I continued to make the case that the market’s momentum is waning. I left out an important piece of the story: T2107 – the percentage of stocks trading above their respective 200-day moving averages (DMAs).

The recovery for T2107 stopped cold just short of a complete reversal of the losses from the August Angst

As the chart above shows, the percentage of stocks trading above their respective 200DMAs has yet to recover all the losses recorded since the August Angst began. This means the downtrend that accelerated starting in May is still in place and still telling us that the underlying breadth of the market’s advance is very poor. As a reminder, T2107 has been in decline ever since its first rapid post-crisis recovery.

To-date, the on-going deterioration in breadth – relative to the critical long-term trend indicator 200DMA – of the market has mattered little

T2108 closed at 55.7% after recovering from early losses. For a brief moment it looked like the bearish breakdown was underway. The S&P 500 similarly held up and marked a second day honoring its 200DMA support. Note how that support has now converged with an uptrending 20DMA.

The S&P 500 (SPY) prints a small rebound above 200DMA support

The volatility index, the VIX, failed to follow through on its recent breakout. It closed right on top of the 15.35 pivot line. I am still looking for a definitive break upward or downward.

The volatility index is like a moth to a flame when it comes to the longstanding pivot at 15.35.

Speaking of churning in place, I am similarly waiting on Intuitive Surgical (ISRG) to make its next move. It has settled down quickly since printing a post-earnings fade.

Intuitive Surgical is now stuck in post-earnings holding patterns as buyers and sellers lock horns.

Just beyond the apparent surface calm of the market, traders can still find evidence of increasing deterioration. Two important charts demonstrate more of the waning momentum I am monitoring.

Tableau Software, Inc. (DATA) had a very impressive post-earnings gap up last Friday that caught me completely off-guard. After the stock failed to show any signs of life after August earnings, I figured sentiment was starting to turn against DATA. However, it looks like the celebration is already coming to a slow end as DATA has failed to resume its post-earnings rally. Instead, its 200DMA breakout has quickly swung to a fresh 200DMA breakdown that could be the beginning of a gap fill.

The post-earnings celebration for Tableau Software, Inc. (DATA) is already starting to wane.

Surprised one analyst note can knock $AAPL off its rocker but consistent with waning market: http://stks.co/h3QxK 200DMA holds as resist

— Duru A (@DrDuru) Nov. 10 at 06:44 AM

Credit Suisse issued a report expressing concerns about Apple’s Asian supply chain. An analyst there claims AAPL is cutting iPhone production by 10%.

I was taken aback by the market’s violent response with a 2%+ gap down that ended with a 3.2% loss on the day. Not only did this sell-off confirm the 200DMA as resistance for AAPL, but also the stock is almost right back to its price the day before earnings. Now I have to back off my post-earnings bullishness on AAPL and trade much more cautiously.

Is this readiness of sellers to dump Apple (AAPL) on a single analyst report flagging a warning that confirms waning momentum in the stock market?

All hope is not lost for AAPL, of course. The 50DMA is now trending upward. A successful retest of 50DMA support would be a very bullish event for AAPL and the tech market in general.

Finally, a big story of the day was another big sell-off in solar stocks. SunEdison, Inc. (SUNE) stunk up the joint yet again and called into question to whole notion of the YieldCo as a sustainably profitable business model for solar companies. An incredible 116.2M shares traded hands on the day – a one-day record for SUNE and almost 4x 3-month average volume. SUNE lost 22.0%. It is still well above its last major low around $1.50 set back in 2012.

The collapse of SunEdison, Inc. (SUNE) continues with another awful earnings report.

This quote from President and CEO Ahmad R. Chatila provided by the Seeking Alpha transcript of the earnings call is the understatement of the day as many investors still cling to hope that SUNE can avoid the fate of so many solar companies before it that ran into doubts about the strength of its balance sheet…

“Right now, I would like the company to become a lot more boring, generating cash flows, making profits, because the market continues to grow and I do not need to grow faster than it.”

Canadian Solar (CSIQ) also reported earnings and ended the day with a much less dramatic loss. Despite the bearish engulfing pattern that indicates the end of the previous rally, at least the stock bounced well off its lows and still has the potential to find support with a new uptrending 50DMA.

Canadian Solar (CSIQ) ends its rally with a post-earnings fade. Now 50DMA support must hold.

Needless to say, Guggenheim Solar ETF (TAN) is looking very bearish again with a fresh 50DMA breakdown.

Guggenheim Solar ETF (TAN) looks ready to resume its sell-off with a fresh 50DMA breakdown

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long AAPL put spread, short shares, long call options

T2108 Status: 27.4%
T2107 Status: 27.6%
VIX Status: 19.6
General (Short-term) Trading Call: neutral – bullish bias
Active T2108 periods: Day #47 over 20% (overperiod), Day #1 under 30% (ending 45 days over 30%) (underperiod), Day #3 under 40%, Day #6 below 50%, Day #20 under 60%, Day #361 under 70%

Commentary
After a brief stumble, the S&P 500 (SPY) sprinted higher from the open. Shortly after the U.S. oil inventory report, trading quickly changed. The index dropped straight down for over two hours.

Could be entering new phase of selling as both euro and yen gain favor: aka more carry trades closing. $EURUSD $USDJPY #forex $SPY

— Dr. Duru (@DrDuru) December 9, 2015

The currency markets caught my eye before stocks because of the synchronized gains in the euro (FXE) and the yen (FXY) which suggested a major “risk off” move was underway. It took longer than I expected, but the euro made a definitive continuation move from last week’s Draghi Drubbing. With EUR/USD at 1.10 I sold my fist full of FXE call options for a 33% gain.

The euro leaps above 50DMA resistance against the U.S. dollar

I am still overall bearish on the Japanese yen, especially against the U.S. dollar, so I used the dip in USD/JPY as an entry to my next trade. However, USD/JPY made an important break of support, so I am more wary than usual. The breakout from November is already over now.

The Japanese yen pushes through converged support from the converged 50 and 200DMAs versus the U.S. dollar. This brings the breakout on Nov 6th to a quick end as no follow-through ever materialized.

The overall impact on the U.S. dollar left a lot of bruises. The U.S. dollar index is now staring down an important test of 50DMA support. Just last week the index was pushing against 12+ year highs and trading above 100.

The U.S. dollar took a beating. The March, 2015 and 12-year high now stands out as firm resistance.

Note well that this sudden weakness in the U.S. dollar is unfolding despite the steady march toward near certainty in a Fed rate hike next week.

The odds of rate hike next week are now at 87%. Up from 83% the previous day.

Source: CME Group FedWatch

As euro and yen strength appeared to suck the buying wind out the market, I checked on T2108. Much to my surprise, T2108 was hurtling toward oversold conditions. Such a move was NOT on my radar. In fact, in my last T2108 Update, I was bracing for another quick bounce back from recent selling even as I see an overall weakening of underlying technicals. Oversold trading conditions would substantially raise the stakes of the Fed’s big rate decision in a week!

Head-spinner: %stocks>40DMA down to about 25% now. Close to oversold levels!!! (<20%). #T2108 $SPY #VIX around 20%, officially "elevated"

— Dr. Duru (@DrDuru) December 9, 2015

I quickly went to the trading rule book and placed an order for shares in ProShares Short VIX Short-Term Futures (SVXY). That order filled quickly. The volatility index, the VIX, ended the day with an 11.4% gain after trading down toward recent lows. The VIX stopped just short of “elevated” levels starting at 20.

The volatility index, the VIX, is on the move again. It is now setup for a very important breakout.

Next up, was Apple (AAPL). As a member of the privileged few leading the market higher, I liked the retest of the 50-day moving average support as a buying point. I ended up with two tranches of call options.

Apple (AAPL) clings to critical 50DMA support.

I did not reach for Netflix (NFLX) this time. It IS still on my radar of course, especially after the 20DMA uptrend held up for the second day in a row.

The S&P 500 ended the day with another modest loss. However, it closed marginally below its 50DMA support. The lows from November are now in play. Given December is typically a mild month – Fed rate hike notwithstanding – I am VERY intrigued by the possibilities of aggressively buying oversold conditions if they arrive. Fading pre-Fed volatility could be particularly lucrative this time around as well. With a first tranche of shares in SVXY in hand, my next trade will be to grab call options on ProShares Ultra S&P500 (SSO) as cheaply as I can. I am now on alert for an intraday trigger of oversold trading conditions – see my StockTwits and/or Twitter feeds for a near real-time alert.

The S&P 500 is on the edge of breaking down again.

Finally, two last charts.

Wynn Resorts (WYNN) gapped up higher on news that the CEO loaded up on 1M shares in the open market between December 4th and the 8th. This purchase ups his stake by about 10% – substantial move. With 23% of the float sold short, this event could begin an important sentiment shift. Today was a good start with a 13% gain and a gap up that used the 50DMA as support. The stock still needs to clear recent highs in order to put an end to the most recent downtrend. I will interpret a close of this gap as a very bearish event and confirmation that the downtrend remains well intact.

Wynn Resorts (WYNN) tries to change the bearish narrative…

The iShares Nasdaq Biotechnology (IBB) has held up better than the overall market in recent days. For five straight days, IBB has churned right above 50DMA support. After twice failing in November to finish a reversal of the Clinton Bash, this battle at support becomes very important. A clean breakdown would be very bearish and would put the lows of September and October back into play.

Can iShares Nasdaq Biotechnology (IBB) survive this critical test of 50DMA support?

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long SVXY shares, net long the U.S. dollar index, net short the euro, long and short various positions against the Japanese yen, long IBB call options

So often I see “value investors” who equate the conviction of their position and alacrity of their analysis for being able to pick a bottom in a hapless stock. If the bottom fails, sometimes these investors will continue accumulating stock with each buy delivering the welcome opportunity to lower their cost basis. Meanwhile, losses keep growing and momentum continues delivering greater and greater discounts. I have never been a value investor, but I have been on this losing end of an argument with the market. I have learned the hard way that my opinions and analysis mean nothing if the market sustains its disagreement with me.

Instead of arguing with sellers, bottom-fishers should celebrate with buyers. A bottom cannot happen when the most interested participants are sellers. It takes buyers to turn the tide of downward momentum. So, it makes sense to wait for signs of buying interest before making a move. It makes even more sense to let buyers PROVE that something fundamental has changed in a stock.

I have some charts of current trading situations to demonstrate these concepts.

Solar City (SCTY)
I have been pounding the table for SCTY for a while now. A month ago, I included SCTY in “Some Bullish Solar Stock Setups.” I cautiously pointed out that buyers finally showed up in the stock in volume. Given the large short interest in the stock, it was entirely possible this volume surge represented a rapid convergence of short-covering to lock in profits. At least the move printed a clear stop-loss at a new low. SCTY has not looked back since.

Solar City (SCTY) left its bottom a while back. It is now in a full throttle breakout.

This is the power of waiting out a downtrend until buyers make a convincing showing. In this case, two days of high volume buying was followed by a sharp day of selling that failed to generate follow-through or a new low. The momentum was shifting. At the end of November, a Bollinger Band (BB) squeeze appeared. A BB squeeze occurs when volatility suddenly compresses to create a stalemate between buyers and sellers. The resolution of this squeeze often creates fresh momentum. SCTY broke out to the upside. In three days, SCTY gained 29% and tested resistance at its 50-day moving average (DMA). The stock stumbled around its 50DMA for 5 trading days before resuming the upside push. I did not stick with my bottom-fishing trade through the 50DMA breakout; with hindsight, I am of course kicking myself bigtime.

Today’s 34.1% gain looks like it could be a climax, like a buyer’s panic. However, as long as the 200DMA holds as support, SCTY will remain in good shape. I am positioning to re-enter this trade with a hedge. I started by buying put options. If SCTY closes at a fresh high, I will begin making small purchases with some comfort my backside is covered in case it turns out I am over-chasing. Even if SCTY breaks down below its 200DMA, there are points for buying the dip at or near natural supports. The best case would be the lower part of the former trading channel that defined SCTY’s upward thrust from the BB squeeze.

Valeant Pharmaceuticals (VRX)
VRX is a very controversial company. Like SCTY, VRX has the attention of some notable short sellers. I will not get into all the complexities of VRX’s drama. I will just point out that VRX’s potential bottom came in an even clearer signal than SCTY. Buyers showed up in volume for three days. Subsequent selling was barely able to reverse the gains of the third day of the rally. Sellers never showed up in force again. Now, VRX is working on a breakout. Like SCTY, I sold out my position at the test of 50DMA resistance. I am now preparing for a new play using call options if VRX can successfully test its 50DMA as support.

Valeant Pharmaceuticals (VRX) is getting into breakout mode a full month after buyers finally showed up in force.

Whole Foods Market (WFM)
WFM is TRYING to bottom. M&A speculation is providing the catalyst for buyers. The latest spike is a bit more convincing than the first given it was preceded by a surge in call buying. I bought into the pullback from the first M&A spike. I was hoping that the 50DMA would hold as approximate support. That shows what hope will get you. I should have waited for buyers to PROVE the 50DMA had transitioned from resistance to support – like now. The proof may have arrived. Buyers now need to power through a breakout from the presumed resistance from the last M&A spike. I am holding long-term call options, so I have dug in my heels on this one. I like the call options in this case because I have an automatic and tight cap on my losses with a lot of potential upside if (when?) WFM finally breaks out.

Whole Foods Market (WFM) is TRYING to carve out a bottom. Buyers have not quite demonstrated a willingness to deliver follow-through.

Lumber Liquidators (LL)
LL is yet another controversial stock with a lot of attention from short sellers. LL has not confirmed a bottom, but it is working on one. In the chart below I drew an approximate trading channel at important closes. This channel helps show how sellers have failed to renew LL’s downward momentum.

During this channel – sometimes called a “base” for its potential to serve as a launching pad for upward momentum – on-balance volume (OBV) has steadily increased. This kind of increase means buying volume is dominating selling volume: shares are being transferred from weaker hands to stronger hands. Now that Whitley Tilson has apparently closed out his short position, buyers will likely become more emboldened. They have taken LL right to the top of the trading channel which closes the big gap down in August for a second time. A close above resistance will confirm a likely change in momentum. The downtrending 200DMA looms overhead as even more important resistance to overcome. I am watching this one closely for a breakout (or breakdown!).

Lumber Liquidators (LL) is working on a “base” where shares are likely transferring from sellers to committed buyers. On-balance volume has risen consistently during this process.

FireEye (FEYE)
Not all bottoms are created equally. FEYE is fighting a major struggle. The current bottoming pattern is very weak and unconvincing. Buyers are not showing up in volume. No major line of resistance has broken. A significant downtrend represented by the 50DMA is well intact and looms directly overhead. If FEYE can even stretch out a trading channel for a few months, the stock will earn some glimmer of hope. Until then, I am not even thinking about touching FEYE as a potential bottom. What happened to all that hype about cybersecurity stocks?!

FireEye (FEYE) is making another feeble attempt at a bottom. It still has a LOT to prove.

Source for charts: StockCharts.com

Be careful out there!

Full disclosure: long WFM call options, long SCTY put options

T2108 Status: 17.1%
T2107 Status: 19.5%
VIX Status: 25.0 (an elevated close last seen September, 2015)
General (Short-term) Trading Call: bullish with a “very short leash”
Active T2108 periods: Day #1 under 20% (first oversold daay ends 15 days over 20%), Day #4 under 30%, Day #20 under 40%, Day #24 below 50%, Day #39 under 60%, Day #380 under 70%

Commentary

“Given the deteriorating technicals going into this oversold period – chronicled over and over again in previous days and weeks – I think trading conditions are actually even more dangerous than they were during the August Angst…

Astute traders will notice a particularly dangerous pattern that has developed in the S&P 500: a potential double-top. The double-top is messy but it is reinforced by the index’s stubborn insistence on trading just below the last all-time closing high set in May for three months until all heck broke loose in the August Angst. The rally off the subsequent W-bottom and oversold trading conditions decisively ended just short of the all-time high…twice, both times in November. So, the stock market is oversold but dangerous: sure it should bounce from round current levels, but the upside prospects are limited…

A retest of that W-bottom seems a near lock in the coming weeks or months. Again, because December is typically a mild month when it comes to maximum drawdowns, I am assuming a massive plunge is not in the cards for this month…”

This is what I wrote on December 11th as the last oversold period began. I titled the T2108 Update “Oversold But Dangerous” because the technical health of the market looked so poor going into the oversold period. I feel nearly the same going into this latest oversold period. T2108 closed at 17.1%. T2107, the percentage of stocks trading above their respective 200-day moving averages (DMAs) is starting this oversold period at 19.5%, even lower than the start of the last oversold period and a 3-month low. Most importantly, the S&P 500 (SPY) is also at a 3-month low.

More than ever, a top seems to be set for a while in the S&P 500 (SPY). Too much technical damage has occurred n the way to the latest breakdown.

The volatility index, the VIX, closed at 25.0. The VIX has not closed this high since September 28th. The increasing fear is appropriate as the trading chaos in China adds a fresh element of trading uncertainty and instability in market sentiment.

The Shanghai Composite continues a very bearish breakdown.

For the third time in two months, the 15.35 pivot has served as a launching pad for a surge in volatility.

I went into this oversold period already holding a first tranche of one of my favorite trades on an oversold period: call options on ProShares Ultra S&P500 (SSO). Once T2108 dropped below 20%, I doubled down on those call options. Earlier in the day, I sold my call options on ProShares Ultra VIX Short-Term Futures (UVXY) as UVXY started fading from the open. It was up about 9% at that point. UVXY closed the day with a 22% gain (dang). After selling my UVXY call options, I bought shares in my other favorite play on oversold conditions: ProShares Short VIX Short-Term Futures (SVXY).

I was fooled by UVXY’s early inability to hold the opening gap up.

SVXY closed at a fresh 2 1/2 year low. However, note how little time SVXY spends trading below the lower-Bollinger Band once oversold conditions begin.

The stock market is full of broken down stocks now. I could spend the rest of the weekend posting the charts and barely scratch the surface. Even the leaders are getting hammered pretty good. For example, Amazon.com (AMZN) is breaking down sharply below its 50DMA. Even during the August Angst and subsequent sell-offs, AMZN spent a maximum of TWO days selling off below the 50DMA. It is starting to look like the last all-time high was a big fake-out. When it occurred, I thought it invalidated the topping pattern I pointed out in mid-December. AMZN has not closed lower since the company reported October earnings.

Even the mighty are crumbling: Amazon.com (AMZN) breaks down sharply below 50DMA (uptrending) support.

When the big leaders like AMZN look toppy, I think it is fair to call the stock market “dangerous.” As a reminder, this means I am shortening the duration of my trades on oversold conditions. I am also more willing to consider NEW short positions when T2108 is approaching, but NOT below, the 20% oversold threshold and the setup makes technical sense. Moreover, with China’s trading chaos, I held onto more bearish positions than my T2108 trading rules recommend.

Solar was the darling this week for a hot minute. Goldman Sachs (GS) upgraded First Solar (FSLR) and sent the stock soaring. I patiently waited for the next entry point. It came in the form of a quick reversal of that gap up. I bought a single call option because too many technicals are now breaking down for solar stocks.

First Solar (FSLR) reverses the good vibes from Goldman Sachs but the 20DMA uptrend is holding for now.

The 200DMA breakout for Canadian Solar (CSIQ) has come to a quick end. The high-volume 50DMA breakdown looks a bit ominous.

Solar City (SCTY) has been under new pressure ever since Chanos confirmed he has stayed short the stock even through the recent run-up. The close below 200DMA support has reversed the incremental gains from December 16th’s oil export/alt energy deal.

Guggenheim Solar ETF (TAN) reminds me that the “average” solar stock is NOT doing well. Today’s 9% drop takes the solar ETF right back toward 2 1/2 year lows.

I am finally throwing up the white flag on iShares Nasdaq Biotechnology (IBB). IBB ALMOST fulfilled my prediction of a complete reversal of the “Clinton Bash.” Three times since last November, IBB closed above the low of that fateful day. The latest fall from that level features a very nasty, and I daresay, bearish 50DMA breakdown. I will be watching IBB closely to see whether it can emerge from oversold trading conditions in a healthier technical position.

After failing to fully reverse the loss from the Clinton Bash, iShares Nasdaq Biotechnology (IBB) now looks ready to challenge recent lows.

And then there is Caterpillar (CAT). My favorite hedge on bullishness plunged back to a post-earnings low. Recall that my fistful of put options on CAT was my first bearish position to close on the selling that began the new year (dang).

Caterpillar (CAT) looks set to resume the sell-off that was in place going into October earnings.

I will end on a good note. My play this week on Wal-Mart (WMT) is going amazingly well. I bought a long-term call option. However, with the stock up almost 10% from my entry point in just days, I find myself sitting on an 84% gain. If no new news comes out Friday to explain this strengthening, I will just lock in the profits and look for the next entry point.

Is Amazon.com money flowing to Wal-Mart?!? The bounce off 50DMA support is getting almost parabolic relative to the upper-Bollinger Band (BB)

Next up is the latest U.S. jobs report. =gulp=!

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long SVXY shares, long call options in SSO, FSLR, and WMT

T2108 Status: 9.5% (5-month closing low)
T2107 Status: 17.2% (4 1/2 year closing low)
VIX Status: 25.2% (still below last week’s high)
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #5 under 20%, Day #8 under 30%, Day #24 under 40%, Day #28 below 50%, Day #43 under 60%, Day #384 under 70%

Commentary
T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), sank to rare single-digit territory. At 9.5%, this oversold period joins just 15 other oversold periods since 1987 that have sent T2108 into single digits. (Recall that I define oversold as T2108 trading below 20%). Since 1987, the market has experienced 70 oversold periods. The last oversold period that included a T2108 dive into single digits was just last August/September. T2108 has not experienced a 1-2 punch like this since the 2008/2009 financial crisis.

Another way to look at the rarity of T2108 trading action is to count trading days. Of the 7311 trading days since 1987, 5.1% have suffered oversold trading. Of those 372 oversold trading days, 26.1% have suffered T2108 below 10%. The crash of 1987 produced the longest oversold period on record (I have data since late 1986). Excluding 1987, these numbers shift a bit to 4.7% of trading days spent in oversold territory and 19.0% of those oversold trading days below 10%. In other words, very roughly, for every five days that an oversold period drags on, one of those days features T2108 dropping into single digits. This is day #5 of the oversold period and day #1 under 10% – right on track! Unless the market makes an amazing comeback tomorrow (January 14, 2016), this oversold period could very well last 9 or 10 days before it ends with one more day of single digits for T2108.

T2108 is plunging fast and furiously in a redux of the kind of bear market action that hit the market last year.

Twenty-two oversold periods have lasted longer than this 5-day one. I mention this because the frequency and ferocity of these oversold periods since August further confirms that this market is suffering a major deterioration in its technicals. I am now worrying that a VERY long, extended oversold period is imminent before a sustained bottom occurs. Based on the chart below, “long” may be defined as 11 to 20 days. Only two oversold periods have lasted longer (in 1987 and 2008 – major crisis years!).

This frequency (distribution) chart for oversold duration shows that over half of oversold periods last just one or two days.

T2107, the percentage of stocks trading below their 200DMAs, may be working in favor of an imminent end to this oversold period. T2107 has plunged all the way to 14.4%, a whopping 4 1/2 year closing low.

T2107 is now even worse off than it was during the August Angst of 2015. Note how the post-recovery double-top delivered plenty of warning.

These extreme technicals translate into an S&P 500 (SPY) stretched further and further downward. For the fourth trading day of the last six, the index closed below its lower-Bollinger Band. Sellers remain firmly in control of this market but the “rubber band” is getting stretched awfully thin…

The S&P 500 is now within one more sell-off day of a test of last year’s lows.

With sellers asserting themselves so forcefully, I would have expected the volatility index, the VIX, to trade a LOT higher than current levels. Instead, the VIX has still not overcome resistance from the 2012 intraday low and did not even close at a high for this oversold period.

The VIX increased 12% but could not set a new high for the oversold period.

Like the volatility spike last Friday, I moved to fade the VIX. I technically prefer a spike to a new high as a sign that fear could finally be reaching a peak. Since the VIX was not yet above its upper-BB, I put in a lowball offer for more shares in ProShares Short VIX Short-Term Futures (SVXY). That order never filled. I did grab some fresh put options on ProShares Ultra VIX Short-Term Futures (UVXY) in case that order never filled. Unlike Friday, I did not get an intraday reversal to generate a quick and profitable trade.

In a menacing move, ProShares Ultra VIX Short-Term Futures (UVXY) manages to close above 200DMA resistance again.

I held off on adding more shares or call options on ProShares Ultra S&P500 (SSO). This trade is at the top of my list going forward.

My favorite sentiment indicator from the currency market, AUD/JPY, the Australian dollar (FXA) versus the Japanese yen (FXY), also surprised me as it failed to break to a fresh low for the oversold period. This behavior provides some support for a tradeable bounce. At the time of writing, AUD/JPY is rallying strongly off lows and I am beginning a fresh fade as a hedge…

AUD/JPY plunges with the market but, like the VIX, fails to break to new bearish levels.

With T2108 in single-digits, I am compelled to finally get a lot more aggressive in making buys – even without a fresh spike in the VIX. As an old trading friend would say, this is a time to hold my nose and buy. It is folly to try to pick an exact bottom, but this is a moment where I am getting more comfortable assuming the market is “close enough” (even as I am increasingly uncomfortable that I have so few hedges left!). Even more conservative traders should not wait until T2108 exits the oversold period. Instead, a break below the day’s low on the VIX should provide a buy signal with a sufficient reduction of additional downside risk. Even long-term investors should plan to put some cash to work here: just like the last deep plunge into oversold territory, this is a classic “buy the dip” moment for those of you with equally deep faith in the future of the market.

I went after more individual stocks with a focus this time on shares as well as call options (expiring next week and February). I was particularly keen to load up on home builders which I think are being hit at a time when the housing market still appears good. Moreover, this is the best time of the year to trade housing-related stocks.

Even as I ramp up my accumulation mode, I recognize that the ugliness of the selling means that some timely short positions could rake in a lot of profit for the quick (and the fortunate). For example, Netflix (NFLX) plunged as much as 10% before closing with a 8.6% loss. This drop confirms the 50DMA as resistance after a classic short setup printed the previous day: the 50DMA held firm and NFLX closed with the declining 20DMA proving itself as firm resistance as well. If not for my rule to avoid new short positions during an oversold period, NFLX would have been a perfect stock to chase down right from the open.

Netflix (NFLX) is struggling with 50DMA resistance which makes a test of 200DMA support all the more likely. Such a test last happened in April, 2015.

The iShares Nasdaq Biotechnology ETF (IBB) is now officially breaking down. I threw up the white flag on IBB last week. I now throw up the red flag. IBB should still be good for solid oversold bounces, but the ETF is exhibiting dangerous bear behavior. IBB closed at a level last seen around October, 2014. The current high-volume selling confirms the 50DMA breakdown that started 2016 for IBB. I would have to hold my nose a very LONG time to buy into IBB here for more than a quick bounce.

The iShares Nasdaq Biotechnology (IBB) breaks down on increasingly bearish trading action. Note how the Clinton Bash ultimately provided a lid on all previous rally attempts.

I have my eye on Tableau Software (DATA) for a buy. Today’s selling confirmed the complete reversal of DATA’s impressive post-earnings gap up from last October. I am interested in a retest of the pre-earnings lows.

Tableau Software (DATA) has lost all its post-earnings mojo.

Workday (WDAY) is already over-stretched. Sellers closed out the stock for four straight days below the lower-BB before buyers finally fought back. I bought on today’s plunge below the lower-BB and was fortunate to find like-minded buyers. I think a stock like WDAY can easily bounce back to 50DMA resistance on an oversold bounce.

Workday (WDAY) is trying to hold recent lows.

For readers interested in reviewing my trading rules for T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long SVXY shares, long UVXY put options, long SSO call options, long SSO shares, short AUD/JPY, long IBB call options, long WDAY call options

T2108 Status: 29.4%
T2107 Status: 19.9%
VIX Status: 20.2
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #1 over 20% (ends 15 days oversold) (overperiod), Day #19 under 30%, Day #35 under 40%, Day #39 below 50%, Day #54 under 60%, Day #395 under 70%

Commentary
“Full Bull” was the theme for the last T2108 Update. Today’s theme should be “Fully Bullish” – at least to describe the way the stock market launched out of another historic oversold period.

The S&P 500 launches a convincing breakout from the previous 5 days of churn.

The S&P 500’s 2.5% gain was enough to punch the index right through the downtrend from its 20-day moving average (DMA). Overhead resistance looms next at the declining 50DMA which is coincidentally converging with 2000. That level provides the optimistic upside target for this breakout.

Unlike the deteriorating technicals that brought the market to this point, T2108, the percentage of stocks trading above their respective 40DMAs, fully confirmed the S&P 500’s breakout. T2108 gapped OVER the oversold threshold and never looked back. The close at 29.4% incredibly wiped out ALL of the losses for 2016.

T2108 soars to a new high for 2016.

T2107, the percentage of stocks trading above their respective 200DMAs, also came to life but it did not make as dramatic a breakout as T2108.

T2107 reminds us of the technical damage suffered by the market for many months…

The volatility index, the VIX, also cooperated with the definitive change in tone. The post-Fed fade I anticipated has come two days late.

The volatility index, the VIX, is now clinging to its uptrend from its 50DMA

There are three key observations for the way this latest oversold period unfolded.

First, the bottom formed after the VIX spiked twice. I now define a spike anytime a stock or index trades “well above” its upper-Bollinger Band (BB). That band defnes a two standard deviation move away from the 20DMA. So a move even higher is truly extreme. The above chart of the S&P 500 shows where those spikes occurred. Note the second attempted bottom was confirmed when buyers first took the index well off its lows and followed up their commitment with more buying power the next two days.

An important sidebar: the monthly chart below for SPY is a stark reminder of the index’s stalled momentum. This is a slow-motion topping pattern if there ever was one. Note carefully the subtle lower highs and lower lows (on an intraday basis).

This monthly chart shows how SPY is stalling out – especially relative to the many preceding months.

Second, the S&P 500 ended the oversold period almost exactly where it started: 1940.24 vs 1943.09 respectively. This performance is slightly better than expectations given historical patterns. Generally, the longer the oversold duration, the worse the performance of the S&P 500 after the oversold period finally ends. This last oversold period lasted 15 days.

The performance of the S&P 500 for a given oversold duration (T2108 below 20%).

Third, this oversold period was historic. Only five oversold periods since 1987 have lasted longer. Moreover, the market has suffered five oversold periods in five months. These frequent returns to such depths of selling have the look and smell of bear market trading action. As I noted in an earlier T2108 Update, I expected the last oversold period to last around 25 days given the amount of time T2108 spent in single digits. Since the period ended well short at 15 days, I am bracing for yet another oversold period to arrive in coming weeks. I do not have a specific timetable.

This frequency (distribution) chart for oversold duration shows that over half of oversold periods last just one or two days.

Given these observations, my go-forward strategy is a mix of intention and pragmatism. My intention is to hold my remaining bullish trades from the oversold period until the S&P 500 hits natural overhead resistance from the downtrending 50DMA. Being pragmatic, I will be looking for fresh hedges in the coming week. My interest in such hedges will become more aggressive as the targeted stock or index approaches natural resistance levels.

As readers know, Caterpillar (CAT) is one of my favorite hedges against bullishness. As the chart below shows, CAT may actually be in the middle of a bottoming formation. So, I will start tentatively in order to hold a “just in case” position.

The downtrend in Caterpillar (CAT) is VERY clear. Yet, the recent churn may have generated a bottom that can last for a while: a hammer and buyers saving the stock post-earnings.

In previous weeks, I threw up a yellow and then a red flag on iShares Nasdaq Biotechnology (IBB). In the previous week, IBB experienced a fresh breakdown that confirms bearish trading action. Yet another Congressional hearing on drug pricing is coming up on February 4th. I strongly suspect traders were selling early to get out the way. IBB should stay weak until the hearing ends. I will be watching closely to see how IBB reacts afterward. I may even (ugh) buy puts on IBB ahead of the hearing as early hedge…

iShares Nasdaq Biotechnology (IBB) is getting left behind by the general market. A fresh breakdown has taken IBB to a 15-month low.

Netflix (NFLX) and Amazon.com (AMZN) also under-performed this week. AMZN’s post-earnings plunge was exaggerated by a strange 9% surge ahead of earnings. While that move was unreal, resistance at the 50DMA looks very real. Traders will no doubt ask whether the stumbles of these two titans of the market’s performance are providing early confirmation of topping in the general market.

Amazon.com (AMZN) drops 7.6% and erases all its pre-earnings surge.

Netflix (NFLX) continues to sag after it finally succumbed to 50DMA resistance.

On the positive side, Wal-Mart (WMT) continues to shine; value investors must be trying to squeeze into the barn door all at the same time. I sold my second swing trade (call options) into Friday’s close. WMT is now not only stretching above its upper-BB but also overhead resistance looms from the 200DMA. I am STILL waiting for some definitive news to explain this sudden interest in WMT. In the meantime, I am going to keep buying dips for swing trades. The last dip was a trader’s dream with a perfect test of 50DMA and immediate bounce.

Wal-Mart Stores (WMT) has almost erased October’s ugly drawdown.

Heading for solid exit from oversold conditions. %stocks>40DMA is about 28% heading into close. Thank you Bank of Japan! $SPY #T2108

— Dr. Duru (@DrDuru) January 29, 2016

Now that I have laid out the technical backdrop for the stock market, I am going into the presumed trigger for Friday’s celebration. The Bank of Japan went negative on monetary policy and sent the Japanese yen (FXY) plunging. Initially, stubborn yen buyers succeeded in pulling off a full reversal of the initial move, but they could not stop the bumrush.

And just like that, the breakdown for USD/JPY ends.

Traders faded the first trigger reaction to the BoJ announcement. The resumption of yen selling should become a defining theme for coming weeks or more.

The Bank of Japan caught speculators flat-footed: they were in the middle of ramping net longs to levels last seen in late 2012. Since then, not a single week had even featured net long positions.

The BoJ clearly got increasingly concerned with the market’s return to the yen for “safety” during recent market turbulence:

“Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected.”

These are codewords for saying the Japanese yen is too strong.

With the BoJ taking action, the U.S. Federal Reserve is even more isolated on the island of policy divergence.

Now that the Bank of Japan has gone negative, no way the Fed can raise rates again anytime soon. $USDJPY $FXY $GBPJPY #forex

— Dr. Duru (@DrDuru) January 29, 2016

The BoJ has added its own loud confirmation that this is indeed a low-rate world. The Fed’s ceiling for normalization just got lower. The market recognizes this and has now pushed out the next rate hike all the way to December…and just barely.

The market now expects the next rate hike to come in 11 months! The marginal 52.8% probability represents a dramatic change from just two days ago post-Fed.

Source: CME Group FedWatch

So, the market’s latest rally is at least partly a recognition that yet more liquidity is coming to the rescue. The BoJ has gone negative, and last week the European Central Bank (ECB) insisted that it is ready to do a lot more to pump liquidity into the eurozone economy. How long this relief lasts is anyone’s guess. I laid out the technical case for a short-lived respite.

For now, market sentiment is in a healing mode. The Australian dollar (FXA) versus the Japanese yen is working on a breakout above 50DMA resistance thanks to the Bank of Japan’s generoisty. Such a breakout would confirm the improvement in sentiment.

AUD/JPY continues a sharp bounce from recent 3-year lows as market sentiment is trending upward.

— – —

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
U.S. Dollar Index (U.S. dollar)
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).
IBB (iShares Nasdaq Biotechnology).

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long SSO call options, long SSO shares, short AUD/JPY, long SVXY shares, short UVXY put.

T2108 Status: 83.3% (March 3rd marked the first time above 80% since 2013!) – 6th overbought day
T2107 Status: 34.0% (matches highs from December, 2015)
VIX Status: 16.9
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #16 over 20%, Day #15 over 30%, Day #12 over 40%, Day #9 over 50%, Day #5 over 60%, Day #4 over 70%, Day #2 over 80% (overbought)

Commentary

$X great example of the current melt-up. Up 62% this week alone. $SLX up 23%.

— Dr. Duru (@DrDuru) March 4, 2016

This week was remarkable, but you may not realize it by simply reviewing the major indices.

The S&P 500 (SPY) closed up 2.7% for the week, dominated by a 2.4% rally to start the month of March. This move was a convincing confirmation of a 50DMA breakout that ushered in the first overbought period in 414 trading days.

The S&P 500 has followed-through on its breakout with gains every day of this overbought period.

The NASDAQ’s follow-through has been more muted than the S&P 500’s

At 1999.99, the S&P 500 is still below declining 200DMA resistance. As the chart above shows, even the NASDAQ experienced a very moderate follow-through to its own 50DMA breakout. Traders have to turn to T2108, the percentage of stocks trading above their respective 40DMAs, and T2107, the percentage of stocks trading above their respective 200DMAs, to see the remarkable (relative) strength in the market.

T2108 has raced upward in a near straight line since going oversold for the last time. At 83.3%, T2108 is at a level last seen in January, 2013.

T2107 has also raced higher nearly non-stop and has now finally returned to recent highs.

T2108 and T2107 provide evidence of a rapidly healing market. This healing is not readily evident from the major indices. T2108 was last this high in January, 2013. T2108 is back to the highs seen after the recovery from the August angst. T2108 is so high that I am not expecting a lot further progress. I have only recorded THREE periods since 1986 where more than 90% of stocks traded above their respective 40DMAs: February to March, 1991, May to June, 2003, and April to May, 2009. Stock market historians will notice that these were the sharp recovery months following major market sell-offs. The last few stocks that have yet to recover above their 40DMAs are mainly the worst of the lot. I will give examples below of speculative stocks that have ripped higher for big gains. The stocks who could not gain on a week like this last one are simply not likely to gain much support later without a direct stock-specific catalyst.

I now move from T2108 to T2107. As long as T2107 can continue its advance, I will assume the market is still getting stronger. I have downgraded my trading call from bullish to cautiously bullish to reflect the dependence on a new dynamic. Moreover, the S&P 500 is now “close enough” to its 200DMA resistance to warrant even more caution than what I expressed when the index first began testing its 50DMA resistance; the index also finally showed more tentativeness by fading off Friday’s intraday high.

Overall, the trading rules I introduced in the last T2108 Update remain. I will stay bullish until/if the S&P 500 closes below its 50DMA support AND follows through. Even a failure to break through 200DMA resistance will not cause me immediate alarm, especially if T2107 is advancing. Since there is little room between the 50 and 200DMAs, I do not feel an urgency to switch back to a bearish bias. The bearish alarms will go off if/once T2108 tumbles out of overbought status (below 70%).

The volatility index, the VIX, managed to print a marginal gain, but it remains in a definite downtrend. The VIX is on a path to return to the old 15.35 pivot.

The volatility index, the VIX, continues its breakdown.

The Australian dollar (FXA) is fully supporting the bullish market sentiment. However, against the Japanese yen (FXY), the Aussie is getting very stretched. It has closed above its upper-Bollinger Band (BB) for four days straight and Friday’s close was well above the region that defines two standard deviations from the 20DMA. Resistance also looms overhead from the 200DMA.

AUD/JPY confirms bullish sentiment by breaking out of the recent consolidation above 3 1/2 year lows. Now I watch for a retest of 200DMA resistance.

AUD/USD is particularly impressive at a 7+ month high.

Currency speculators are further confirming a bullish change in sentiment with increasing net long positions on the Australian dollar.

Speculators have not been this bullish on the Australian dollar since September, 2014

Source: Oanda’s CFTC’s Commitments of Traders

The signs of bullishness are actually everywhere and easy to find. I present a a stream of charts showing different flavors and aspects of the current bullishness; yet they are just a small sample. I also discuss the key trades I have made in the past three days.

First the trades with no charts…

I decided to finally sell all my shares of ProShares Ultra S&P500 (SSO) and ProShares Short VIX Short-Term Futures (SVXY). This closes out my T2108 oversold trades. From here, I will primarily focus on the trades of individual stocks. I will get interested in SSO and SVXY on the next big dip in the market. I sold my shares in Tableau (DATA) just in time. The stock is sliding along its 20DMA. A critical Bollinger Band squeeze is developing. I added a few hedges with shares in Direxion Daily Energy Bear 3X ETF (ERY) and Direxion Daily Russia Bear 3X ETF (RUSS). I also sold the bulk of my shares in FXCM (FXCM).

What better way to start a chart-fest than with Caterpillar (CAT) and Apple (AAPL)?

CAT is following along with the run-up in commodities. CAT has ripped off a 26% gain from the January lows. When it tested 200DMA resistance I purchased a new round of hedges with put options. CAT promptly faded from this resistance. Needless to say, my overall bullishness will be tainted if CAT turns south from here.

Caterpillar (CAT) faces its next critical test at 200DMA resistance.

Apple (AAPL) finally woke up this week. It not only broke out above 50DMA resistance, but also it broke through a region of consolidation. I am rubbing my eyes as I contemplate a LONG overdue AAPL bottom. I could not pull the trigger on AAPL calls this past week because the stock traded along the upper-BB. Going long at such an out-stretched point carries too much risk for a short-term trade. Buyers are showing off by maintaining the upward pressure here.

Apple (AAPL) makes a strong case for a bottom.

Joy Global (JOY) ripped higher in post-earnings trade. No doubt, this burst added a little more confidence to CAT buyers. I last talked about JOY on October 9, 2015 as a “catch-up” stock for buyers late to the bounce from oversold conditions. I have traded in and out of JOY since then with mixed results. The April call options I bought shortly after my post are now back to even with the stock returning to those October levels. With hindsight, I should have “backed up the truck” when JOY confirmed 50DMA support on February 24th.

Joy Global (JOY) has more than doubled since hitting an historic 12-year low in January

The commodity space has been absolutely fascinating. There is nothing like a run-up in this space to scream bullishness. In the previous week, I decided to double-down on iShares Silver Trust (SLV) despite its big pullback. I assumed the 50DMA support would hold, and it did. I locked in my profits with SLV touching its upper-BB. I did not open a fresh short-term trade on SPDR Gold Shares (GLD) because it did not dip enough; it has proved out once again the power of my method of analyzing short-term gold moves (for example, see “Gold Still Has Room to Run“). I was very fortunate to let go of my raging bearishness on iron ore long enough to pair my standing put options on BHP Billiton Limited (BHP) with a fistful of call options on Rio Tinto plc (RIO). The BHP put options are nearly worthless, but I almost paid for them with the profits I took on my RIO call options. Going forward, I will be trading this space a lot more actively. (Stay tuned for my trading calls).

The iShares Silver Trust (SLV) survived what initially looked like another failure to hold a 200DMA breakout. It now needs to print a higher high.

SPDR Gold Shares (GLD) is still going strong with resolute buyers. Printing a fresh 13-month high was a signature moment.

Rio Tinto plc (RIO) has churned higher to levels last seen in December by surviving what looked like a devastating gap down below its 50DMA. THe earnings and dividend cut has turned into the latest bottoming event. (The numbers in the chart approximate the sport price of iron ore).

BHP Billiton Limited (BHP) looks even stronger than RIO now.

Vale S.A. (VALE) has jumped from a 13-year low to print a double.

Steel stocks have ripped higher along with commodities. Nevermind that higher commodities are adding to costs. Hopefully, demand is ripping even higher!

Market Vectors Steel ETF (SLX) has risen an incredible 42% from the January lows. This is a major run-up for an index and speaks to a broad bullishness across steel stocks. 50DMA support was long ago confirmed. Now, 200DMA resistance looms large.

U.S. Steel (X) caught the bug late. The majority of its gains from the lows have happened in just the past week!

The Australian dollar has of course benefited from the sharp recovery in commodities. Emerging markets have as well (or have perhaps helped drive commodities higher). The iShares MSCI Emerging Markets (EEM) soared 9.4% on the week with a confirmation of a 50DMA breakout. With EEM stretched well above its upper-BB, I took this moment to re-establish one of my favorite hedge trades: long out-of-the money call and put options.

iShares MSCI Emerging Markets (EEM) is streaking relentlessly.

The market is so bullish that even broken down GoPro (GPRO) is filing a petition for a breakout. Friday’s big fade put that request in jeopardy.

GoPro, Inc. (GPRO) is struggling to notch a 50DMA breakout.

Some of my biggest successes from this rally have come from the shares of home builders. I will cover some of my latest opinions in future posts. Here is iShares US Home Construction (ITB) with a 17% gain from February lows with a near relentless march upward.

The iShares US Home Construction (ITB) is making a well-deserved comeback.

Red Robin Gourmet Burgers Inc. (RRGB) is making a steady surge higher. The rise is nearly in stealth mode as the stock makes very incremental gains in a curved form through the upper-BB channel.

Red Robin Gourmet Burgers Inc. is turning the corner from what looks like a sustainable bottom.

Like AAPL, Shopify Inc. (SHOP) is breaking out of a tight period of consolidation. Buyers have made a convincing comeback from February’s false 50DMA breakout.

Shopify Inc. (SHOP) is making a case for a bottom by breaking out of a consolidation period.

Tesla Motors (TSLA) followed through on my earlier claim that the stock would bounce back quickly from the Citron-related selling. I locked in my profits on Thursday thinking that buyers would only be able to reverse the selling before resuming a press downward. Buyers did not stop there. They decided instead to continue the previous momentum with what is now a bullish 50DMA breakout. Notice the increase in volume and increasing on-balance volume (OBV).

Tesla Motors (TSLA) has continued its run-up after what now looks like a Citron speedbump.

Wal-Mart Stores (WMT) has stalled with a 200DMA pivot. At these levels, the stock is neatly holding onto a reversal of October’s big sell-off. This is a critical juncture. Buy on the breakout, buy on the next big dip to 50DMA support.

Wal-Mart Stores (WMT) is stuck in a 200DMA pivot, but it still enjoys 50DMA support.

Controversial Weight Watchers International, Inc. (WTW) was walloped after earnings, but the 200DMA held true as support. Getting over the immediate pre-earnings price could launch the next big run-up. Otherwise, a lot more churn may be ahead.

Weight Watchers International, Inc. (WTW) continues surviving tests of 200DMA support.

Finally, financials are also strong participants in the rally. The 50DMA breakout pretty much confirms February’s abandoned baby bottom and 2 1/2 year closing low as a sustainable bottom.

Financial Select Sector SPDR ETF (XLF) breaks out above its 50DMA and has very likely confirmed the 2 1/2 year low as a sustainable bottom.

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: short AUD/JPY, long ITB call options, long GLD, long SLV call options, long RRGB call options, long CAT put options, long EEM call and put options

T2108 Status: 80.6%
T2107 Status: 32.2%
VIX Status: 18.7
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #18 over 20%, Day #17 over 30%, Day #14 over 40%, Day #11 over 50%, Day #7 over 60%, Day #6 over 70%, Day #4 over 80% (overbought)

Commentary
In the last T2108 Update I described a synchronous failure of market leaders. These same leaders followed-up with an attempted rally that fizzled across the board with all closing the day flat. The S&P 500 could not hold flat and instead lost 1.1%.

The S&P 500 closes down for the first time in March.

The volatility index, the VIX, gained for the third straight day. I had previously expected a rendezvous with the old 15.35 pivot. Instead, the VIX may have another rally to go before sinking that low again.

The volatility index is trying to sustain a rebound from recent lows.

T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), fell along with the market. It closed at 80.6%. This is only the fourth loss since the February 11 low at oversold conditions. The decline in T2107, the percentage of stocks trading above their respective 200DMAs, fell for only the third day since February 11th’s low. The decline from 35.7% to 32.2% was significant and confirms the market’s first notable setback in this bounce from oversold conditions.

I am keeping the trading call at “cautiously bullish.” Recall that I am not flipping bearish until the S&P 500 (SPY) falls below and follows through its selling below its 50DMA AND after T2108 has fallen from overbought conditions. If T2107 shows significant weakness, I could pull the trigger on bearishness a little earlier.

Speculative stocks were particularly hard hit. These are stocks that have enjoyed out-sized gains in this rally; membership has been dominated by commodity-related stocks. For example, Cliffs Natural Resources Inc (CLF) plunged 20.7% and fell back under its 200DMA.

Cliffs Natural Resources Inc (CLF) plunges and erases two days of heady gains tied to a record surge in iron ore prices.

Even Caterpillar (CAT) sank under its 200DMA.

Does a false 200DMA breakout signal the beginning of the end for the strong rally in Caterpillar (CAT)

U.S. Steel (X) is on the verge of confirming resistance at its 200DMA.

The rally in U.S. Steel (X) stops dead in its tracks at 200DMA resistance.

These are just examples of what a sinking T2107 meant for the market today. They confirm today as a notable day of setbacks for this rally.

The sharp move in iron ore particularly concerns me. These kinds of moves are typically a rally’s last gasp as buyers finally exhaust themselves in one last panicked buying spree. Sure enough, the immediate aftermath of Monday’s sharp spike has created major reversals like in CLF.

When I wrote “Glencore’s Instructive Reversal On Commodity Prices,” I did not cover the insane gain in iron ore from Monday. Its price surged 20% in a move that had to include a lot of short-covering. This conclusion was echoed by traders and analysts. Even industrial mining giants cast doubts on the sustainability of the move as quoted in the Sydney Morning Herald in “Iron ore price leap stuns industry’s top brass.” The mechanics of the move were also discussed in an aptly titled Bloomberg article: “Iron Ore Jumps Most on Record as Market Goes ‘Berserk’.” Business Insider Australia provided some context in “CHART: The overnight surge in iron ore nearly doubled the previous record gain.”

Monster run-up in iron ore may have some precedence in last year’s pull-forward in steel production.

Iron ore’s one day gain even surpassed last July’s sudden burst higher.

Apparently, shorts are also running from their bets against oil. In “Specter of $20 Oil Recedes as Speculators Flee Bearish Bets,” Bloomberg notes “hedge funds unwound bearish bets at the fastest pace in 10 months…Speculators’ short positions in WTI fell by 25,639 contracts of futures and options combined to 150,718, the biggest decline since April 21, CFTC data show. Longs, or bets on rising prices, fell by 753. The exodus of bearish bets resulted in a 24,886-contract jump in the net-long position.”

I am more worried about iron ore than oil for now because of iron ore’s heavy dependence on China’s economy.

Speaking of speculative stocks, I have not posted a chart of iShares Nasdaq Biotechnology (IBB) in a long while. Biotech stocks have benefited little from the current rally as IBB has largely churned in a tight range since the initial bounce from the February 11 lows. Today, IBB fell 3.6%.

iShares Nasdaq Biotechnology (IBB) is struggling mightily to resume making progress.

— – —

For readers interested in reviewing my trading rules for an oversold T2108, please see my post in the wake of the August Angst, “How To Profit From An EPIC Oversold Period“, and/or review my T2108 Resource Page.

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: short FB, long FB call options, long CAT put options

In January of this year, I finally gave up on the near-term prospects of the iShares Nasdaq Biotechnology ETF (IBB) reversing what I called “The Clinton Bash.” After a rapid cascade downward from The Clinton Bash, IBB made three attempts from November to December, 2015 to reverse those losses. Those attempts came to a crashing end when IBB broke down below its 50-day moving average (DMA) as the rest of the stock market sold off to begin 2016.

Three months later, IBB looks like it has FINALLY formed a sustainable base that has in turn generated a breakout. Perhaps the fourth attempt to reverse The Clinton Bash is underway.

The iShares Nasdaq Biotechnology ETF (IBB) is breaking out from a 2-month long base.

Source: FreeStockCharts.com

This is a very bullish breakout that should be bought with confidence (preferably on the next limited pullback). The solid case for this trade is supported by two clear stop-loss points: 1) a close below Wednesday’s low which would mark the potential end of the breakout, or 2) a close below the 50-day moving average (DMA) which could begin a fresh sell-off.

Be careful out there!

Full disclosure: no positions (yet!)

T2108 Status: 73.8%
T2107 Status: 45.4%
VIX Status: 16.3
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #41 over 20%, Day #40 over 30%, Day #37 over 40%, Day #34 over 50%, Day #30 over 60%, Day #29 over 70% (overbought)

Commentary
The latest Fed play that I described in the last T2108 Update worked out pretty well. The market once again reacted with post-Fed soothing after CNN’s Fareed Zakaria hosted a discussion with the four living chairs of the U.S. Federal Reserve. ProShares Short VIX Short-Term Futures (SVXY) gapped up, and I sold (a bit too soon granted). However, that trading action is already old news. Since that small gap up, the S&P 500 (SPY) has logged two weak closes in a row. The index is starting to look like it is building a slippery slope with the past 7 trading days or so forming a small downtrend through the 20-day moving average (DMA).

The S&P 500 (SPY) is showing a slight negative bias although support lingers directly below from the 50 and 200-day moving averages (DMAs)

T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed at 73.8% as it tenuously holds onto overbought status. This is now day #29 of the overbought period, and the S&P 500 is starting to lag expected performance. The S&P 500 is up 3.2% for the overbought period. If the overbought period ended today, projections suggest around a 4-5% gain. To align with historical performance, the S&P 500 will either need to end right away, or resume in earnest its extended overbought rally.

S&P 500 Performance By T2108 Duration Above the 70% Threshold

While T2108 is slipping, T2107, the percentage of stocks trading above their respective 200DMAs, remains strong. At 45.4%, T2107 has managed marginal gains the past two days and is still just below recent highs. So while some of the fastest moving stocks are losing altitude, the longer-term underpinnings of the stock market remain strong for now.

The volatility index, the VIX, perked up again with an increase of 5.9% and its highest close since March 15th (by a hair). I will not get concerned until/unless the VIX shows the potential to pull away from the pivot by closing above the last intraday high.

The VIX is bouncing around the 15.35 pivot but with a very slight upward bias.

Of course, an increase in the VIX ahead of earnings should not cause too much surprise.

AUD/JPY jumped on the day and essentially nullified any alarm I might have otherwise felt from the gains on the VIX.

The Australian dollar versus the Japanese yen experiences a day of reprieve from its current 50 and 200DMA breakdown.

Caterpillar (CAT) is still milling around in what looks like consolidation above its 200DMA. This position keeps CAT in a bullish 200DMA breakout. I find it hard to get bearish with CAT trading so calmly.

Caterpillar (CAT) is maintaining its 200DMA breakout.

Overall, my trading call remains at neutral given T2108 has the potential to make a bearish drop out of overbought conditions at any moment. Recall that such a bearish change in market character has to be confirmed by a notable drop in T2107 as well.

I am following several interesting charts for profitable trades and/or useful signals…earnings not withstanding. These charts are a telling mix of bullish and bearish signals.

The iShares Nasdaq Biotechnology ETF (IBB) immediately put to test my bullish call to buy its breakout with confidence. Since sell-offs often end after the third day, Tuesday will be a critical test of the breakout in several ways. Note that IBB closed right at the bottom of the channel formed by the upper-Bollinger Bands (BB). Selling volume has steadily declined – a bullish sign that the selling may be coming to an imminent end.

iShares Nasdaq Biotechnology (IBB) has almost reversed its breakout with three straight days of selling.

Facebook (FB) faces a big test of 50DMA support. Heavy volume on the selling suggests support will not last much longer.

U.S. Steel finally breaks through resistance from the intraday low from 2009. Trading volume remains strong.

The rush is on into Market Vectors Gold Miners ETF (GDX). While the chart is VERY bullish, today’s pop is pushing GDX into an unsustainable parabolic move. While I have plenty of gold and silver plays already in hand, I am overdue to get exposure to GDX. I am buying the dips.

Market Vectors Gold Miners ETF (GDX) continues a major breakout. GDX was last this high January, 2015.

Ctrip.com International Ltd. (CTRP) looks ready for a major breakout as it approaches its high for 2016.

FXCM is in the middle of a Bollinger Band squeeze as it carefully pivots around 200DMA support and trades just below 50DMA resistance.

GW Pharmaceuticals plc (GWPH) has failed to follow-through on March 14th’s big gap up. The pressure is building with a THIRD test of 200DMA resistance just as a Bollinger Band (BB) squeeze builds.

Earlier, iPath Bloomberg Sugar SubTR ETN (SGG) as well ahead of commodities. Now it is lagging big time. 200DMA support needs to hold.

International Business Machines Corporation (IBM) is still holding its 200DMA breakout. Maybe earnings will finally be kind to IBM this time?

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: short AUD/JPY, short GWPH, long GWPH calls, long FXCM, long X call options, long IBB call options, short FB

At the current pace of trading The iShares Nasdaq Biotechnology ETF (IBB) will not likely recover its losses from the “Clinton Bash” before the November elections.

The iShares Nasdaq Biotechnology ETF (IBB) failed to build on its momentum from last month’s breakout from consolidation. IBB is now clinging to support at its 50-day moving average (DMA).

The iShares Nasdaq Biotechnology ETF (IBB) is still struggling to sustain some momentum.

Source: FreeStockCharts.com

After I wrote about buying IBB with confidence, I managed to make one winning and one losing trade using call options to net roughly even. The lack of sustained momentum hurt last week’s attempt. As IBB struggled today to hold 50DMA support, I decided to make one last trade on call options even though technically IBB has reversed and broken April’s breakout. Violation of 50DMA support will put IBB right back into bear territory.

Seeking Alpha author Ed Wijaranakula lays out a great guide for upcoming trading catalysts for IBB in “IBB Expecting A Rebound Ahead Of ASCO.” Specifically:

“Investors actually may want to avoid the biotech sector altogether during the weeks that the Senate Special Committee on Aging conducts their hearings on drug prices, as it has been a disaster for the IBB ETF in the past. Prior to Wednesday, the Senate Special Committee on Aging had conducted two hearings on drug pricing, one on December 9 and the other on March 17, when the IBB sold off 3.57% and 4.05%, respectively, during the week of the hearing. IBB, however, recovered 3.63% and 1.71%, respectively, during the week after the hearing. If history repeats itself, we expect IBB to recoup some of its losses this week…”

In other words, politics and regulation are going to weigh heavily on IBB for some time to come. In my book, such catalysts make IBB a poor investment in the current climate. IBB should still be good for shorter-term trades. I will do better going forward keeping these big calendar events on the radar as they can easily trump technicals. Hopefully, my timing this week works out just right.

Be careful out there!

Full disclosure: long IBB call options

T2108 Status: 61.7%
T2107 Status: 56.9%
VIX Status: 14.7
General (Short-term) Trading Call: cautiously bearish
Active T2108 periods: Day #59 over 20%, Day #58 over 30%, Day #55 over 40%, Day #52 over 50%, Day #48 over 60%, Day #4 under 70%

Commentary
Buyers drew a line in the sand after sellers tried to put a negative spin on the April U.S. jobs report. T2108, the percentage of stocks trading above their respective 40DMAs, dipped as low as 55.4% before closing at 61.7%. More importantly, the S&P 500 (SPY) broke below its 50-day moving average (DMA) before closing near its highs for a 0.3% gain. That tiny gain was the most important gain in what has become 6-weeks and counting of churn. The small intraday bounce happened right at the bottom of this churn.

The S&P 500 (SPY) survives a test of its 50DMA support as buyers draw a line in the sand.

With this successful test of 50DMA (and range) support, my conviction on my bearish call weakens a bit. That conviction is even more wobbly after I closed out a series of successful bearish trades to start the week only to fail at all my bearish trades to end the week.

The volatility index, the VIX, flipped below the 15.35 pivot and no longer looks poised to launch higher. So, volatility comes off the wall of potentially bearish signs.

The VIX folded to end the week.

While the case for the bears is less convincing, the case for the bulls is only slightly better. I cannot return to the bull until/unless T2108 returns to overbought status. Such a move would demonstrate a return of buying power to the market. However, I would still tread carefully if an overbought period began with the S&P 500 right under or at its recent high. So, T2108 is once again very useful for signaling trades and sentiment. T2107, the percentage of stocks trading above their respective 200DMAs, gained fractionally. Like T2108, this indicator is in a downtrend from recent highs.

Caterpillar (CAT), my favorite hedge against bullishness, cracked 50DMA support this week and added to my bearishness at the time. I took advantage of today’s rally to enter into put options that expire in August. I am assuming confirmation of CAT’s breakdown – a subsequent breakdown below the 200DMA – will take some time…unless of course sellers get serious again.

Caterpillar (CAT) gets a bounce near 200DMA support.. The stock is still in the middle of an accelerated breakdown below 50DMA support.

The iShares Nasdaq Biotechnology ETF (IBB) was the biggest disappointment of the week. IBB failed to hold support at its 50DMA and has officially invalidated the breakout from consolidation. The ETF is right back into bearish territory.

iShares Nasdaq Biotechnology (IBB) is back into bearish territory with another 50DMA breakdown

Tesla (TSLA) has broken down into bearish territory. First, the stock peaked with the hype over reservations for the Model S. The stock sold-off steeply going into earnings and broke down support at its 50 and 200DMAs. Post-earnings, the stock confirmed the breakdown with even more selling on very high volume. I am actively watching TSLA for hints on the market’s appetite for speculation. Right now, it sentiment looks poor as TSLA’s chart noticeably wilts.

Tesla Motors (TSLA) has broken down after a run-up that took it to about a 78% run-up in just under 2 months from the February lows.

There are a few notable big cap tech stocks that are suddenly showing life again. In particular, Alphabet (GOOG) (GOOGL) surged off 200DMA support. I was convinced all week that it would follow through on last Thursday’s break, but the stock held firm. GOOG now looks good for a test of presumed resistance at the 50DMA. After that, GOOG can look forward to filling its post-earnings gap down.

Alphabet (GOOG) gets a bounce near 200DMA support.. The stock is still in the middle of an accelerated breakdown below 50DMA support.

International Business Machines (IBM) is an interesting case. Stocks like this make me think the market is going to deliver many months of churn that excites bears and frustrates bulls and then the reverse. IBM has been dropping ever since its all-time high a little over 3 years ago; the stock is still in a downtrend from that peak. Yet, the rebound off 6-year lows has been dramatic and sharp enough to suggest that perhaps, just maybe, sentiment is turning. That rebound lasted 6 weeks. The cooling off period since then has found support from a declining 200DMA. If the market goes into a “non-bearish” mode, IBM could churn above this support for many more weeks until perhaps July earnings provides a jolt. The more immediate issue is a declining 20DMA. If IBM manages to break above recent highs, I will assume it is going into a fresh run-up. A breakdown below 200DMA support would be VERY bearish: like TSLA, the previous run-up was so fast and steep that there is no point of natural support on the way back down.

International Business Machines (IBM) is fighting to hold onto 200DMA support

On the currency front, AUD/JPY bounced off its lows along with the stock market. However, AUD/JPY did not manage to go green on the day. This signal remains firmly bearish for the market although it is likely over-extended and due for a respite from selling pressure. Per my practice, I covered my latest short in the middle of the selling.

AUD/JPY still has that sinking feeling.

The U.S. dollar (DXY0) continued its rebound. In the last T2108 Update, I suggested the dollar was over-extended and due for a rally. This looks like a bottom to me given the hammer pattern at that low. Currency markets being currency markets, I will not be surprised to see this bottom get some kind of retest. After all, markets are pretty much daring the Fed to get serious about hiking rates anytime in our lifetime.

The U.S. dollar index may have hit rock bottom for now.

The 30-day Fed Fund Futures are still pricing in the next rate hike for December. The odds jumped significantly in the wake of the jobs report. This signal is not worth much unless the odds shift in time.

The April jobs report helped make a next rate hike in December look much more likely.

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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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long CAT put spread and options, short AUD/JPY, net long the US dollar

T2108 Status: 56.0%
T2107 Status: 59.5%
VIX Status: 14.4
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #71 over 20%, Day #70 over 30%, Day #67 over 40%, Day #1 over 50% (ending 5 days under 50%) (overperiod), Day #9 under 60% (underperiod), Day #16 under 70%

Commentary
Just like that, sellers melted away from the market and the bulls ran wild. The buyers and bulls have forced bears and sellers to stand down.

In the last T2108 Update, I stayed cautiously bearish as the major indices remained in a chopfest under key 50-day moving average resistances. Today, May 24, 2016, that resistance melted away simultaneously as the S&P 500 (SPY) and the NASDAQ (QQQ) punched through resistance and re-entered bullish territory.

The S&P 500 (SPY) is just one follow-through day away from confirming a bullish breakout.

The NASDAQ (QQQ) pulls off a breakout of dual resistance at its 50 and 200DMAs

As my assumption of an extended “chopfest” gets challenged, this quick potential switch from a bearish to a bullish trading bias is consistent with the whiplash that a chopfest can dish out. My trading bias has moved from “cautiously bearish” to neutral to recognize the imminent switch to a bullish bias.

T2108, the percentage of stocks trading above their respective 40DMAs, fully confirmed today’s rally. T2108 soared from 48% to 56%. T2107, the percentage of stocks trading above their respective 200DMAs, could easily hit a new high in short order given the current momentum.

The volatility index, the VIX, receded with the bears and sellers. Once again the VIX treated the 15.35 level as a pivot.

The VIX looks ready to retest lows.

Several stocks demonstrate my changed thinking.

Netflix (NFLX) is a stock that was poised for a big breakdown or breakout from a Bollinger Band (BB) squeeze. With my bearish bias, I assumed the top of the recent range would hold, and NFLX would hurtle quickly downward from there. I was clearly thinking too many steps ahead. NFLX has gained about 10% in just three days. It is over-stretched above its upper-Bollinger Band (BB) and faded from its high to close on its 50DMA. Normally, I would expect a pullback from here to at least the upper-BB, but this is a stock on fire with INCREASING buying volume. The over-stretched trend could continue a lot further with this kind of momentum.

Netflix suddenly accelerates from 0 to 60 and stretches toward a 50DMA test of resistance.

The iShares Nasdaq Biotechnology ETF (IBB) broke out above its 50DMA resistance and goes from bearish to bullish all over again. I started this month lamenting how IBB completely disappointed me by failing to deliver much follow-through to April’s (initially) impressive breakout.

The iShares Nasdaq Biotechnology ETF (IBB) avoided a retest of recent lows so the latest 50DMA breakout looks like a bottoming underway.

Qualcomm (QCOM) broke out last week above its 200DMA. The buying has accelerated and put QCOM at a new high for 2016. The stock is definitely in a bullish position.

Qualcomm (QCOM) is surging higher in convincing follow-through to last week’s 200DMA breakout.

Even home builders joined the breakout party. I wrote about the bullish implications in housing in my latest Housing Review for May, 2016.

iShares US Home Construction (ITB) breaks out from 50 and 200-day moving average resistance on buying volume that has not been this large since the recovery from August’s flash crash.

This is an interesting time for the market to get a fresh boost. The rally comes right on the heels of selling that was presumed to come from rate hike fears. The odds of a rate hike in July are as strong as ever but so is the market. Even if I switch back to a bullish bias, I will remain bearish on dollar-sensitive plays (excluding gold and silver) as long as Fed Fund futures project an imminent rate hike.

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long UVXY call options, long SSO put options

T2108 Status: 70.9% (first overbought day)
T2107 Status: 67.4%
VIX Status: 13.7
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #79 over 20%, Day #78 over 30%, Day #75 over 40%, Day #9 over 50%, Day #8 over 60%, Day #1 over 70% (ending 23 days under 73%) (day #1 of the overbought period)

Commentary
The stock market overcame the sudden uncertainty from last Friday. The S&P 500 (SPY) continued its quick recovery from Friday’s poor jobs report to hit a new 7-month high. It is still inching closer to a new all-time high.

The S&P 500 (SPY) increased 0.5% for a new 2016 high and matched a value last seen in November.

This gain was good enough to push T2108, the percentage of stocks trading above their respective 40DMAs, into overbought territory for the first time in 23 trading days. This achievement makes the stock market incrementally more bullish. However, my trading bias stays “cautious” given the all-time high looms directly overhead (set on May 21, 2015 at 2130.82 on the S&P 500). The index needs to clear that hurdle and demonstrate follow-through buying to get me fully on-board with the bullish camp.

Even MORE interesting is T2107, the percentage of stocks trading above their respective 200DMAs. T2107 closed at 67.4%. This is a new 22+ month high which takes T2107 to a LONG overdue retest of its enduring downtrend. This test of the downtrend may be the most important one of the post-recession period. The stock market is struggling to make a new all-time high. A failure at this resistance could coincide with a failure of the index to break out – and this during a period when the U.S. Federal Reserve is trying to start a normalization of interest rates. On the other hand, my confidence in a new bullrun will be greatly enhanced by a breakout for T2107.

T2107 is up against what might be its most important test of the post-recession period.

The NASDAQ (QQQ) is also doing well. Still, the tech-laden index has more room for catching up to the S&P 500 on a relative year-to-date basis.

The NASDAQ (QQQ) has almost filled the gap that started 2016.

Despite the gains on the day, the volatility index, the VIX, managed to eke out a gain. Per the strategy I outlined in the last T2108 Update, I bought a first tranche of ProShares Ultra VIX Short-Term Futures (UVXY) call options expiring in September. (I have duly noted that the VIX managed to plunge all the way to 12.1 when the S&P 500 achieved its last all-time high).

The volatility index, the VIX held recent lows despite gains in the stock market.

I finish here with three charts of note: Caterpillar (CAT), iShares Nasdaq Biotechnology ETF (IBB), Apple (AAPL).

Caterpillar (CAT) rejoined the bullish crowd by printing an impressive 50DMA breakout which essentially confirms 200DMA support (admittedly a sloppy support). As long as the market doubts the Fed can hike rates anytime soon, CAT will likely stay aloft in this breakout. I was caught with put options that expire in August on CAT as part of a pro-dollar bet. The UVXY call options join my CAT puts as a hedge on all my bullish trades going forward.

Caterpillar (CAT) breaks out in a major bull move. The 2016 high lies ahead as the next potential resistance.

Apple (AAPL) is an interesting case. The Buffett bottom is still well-intact, but the stock slammed right into a brick wall at $100 at the end of May. The stock did not quite test 50DMA resistance. With the stock market turning incrementally more bullish, I think such a retest is still in play. My view is bolstered by last week’s hammer-like end to the pullback form the magic round number of $100. (Ignore that “wick” stretching to the 50DMA – that is an error from the price quoting system).

The jump off the Buffett bottom has lost momentum. Still, a 50DMA test seems in the cards once buyers gather themselves.

I have bounced between bullishness and bearishness on iShares Nasdaq Biotechnology ETF (IBB). In the middle of chart-reading, I completely neglected to keep an eye for near-term fundamental catalysts. IBB returned to a bullish posture just in time for the American Society of Clinical Oncology (ASCO) annual meeting from June 3 to 7, 2016. IBB has rallied nearly straight from its last low. With the last low remaining intact, the rally seems to confirm a sustainable bottom for IBB. The 50DMA breakout on May 24th was the first sign of that bottom. Now IBB is at a very critical juncture having rallied right to its last high just as ASCO launches. Will the “sell on the news” crowd rule the aftermath or will ASCO produce enough surprising catalysts that buyers will continue to this run? Note also a declining 200DMA looms directly overhead.

Can iShares Nasdaq Biotechnology ETF (IBB) overcome the “sell on the news” crowd right as it hits critical resistance?

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long CAT put options and put spread, long UVXY call options

T2108 Status: 71.8% (overbought)
T2107 Status: 68.2% (below post-recession downtrend again)
VIX Status: 14.6
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #82 over 20%, Day #81 over 30%, Day #78 over 40%, Day #12 over 50%, Day #11 over 60%, Day #4 over 70% (overbought)

Commentary

%stocks>40DMA falling below overbought threshold (70%). A close below would be (short-term) bearish. $SPY #T2108

— Dr. Duru (@DrDuru) June 9, 2016

Today was a close call! T2108 closed at 71.8%, just barely recovering from a breach of the overbought threshold at 70%. A close below this level would have flipped my short-term trading bias to bearish per my T2108 trading rules. T2107, the percentage of stocks trading above their 200-day moving averages (DMAs), closed at 68.2%, just below the big post-recession downtrend line that gave way just yesterday. I celebrated the big breakout (with caution of course) in the last T2108 Update.

Sellers once again proved unable to muster enough motivation to follow-through on an initial advantage. The S&P 500 (SPY) made a shallow dip to the bottom of its current uptrend channel – defined by the upper Bollinger Bands (BB) – and then neatly bounced back for a minute 0.2% loss on the day.

The S&P 500 maintains its upward trending channel.

While sellers fail on the indices, the traditional gauge of fear, the VIX, continued its gains off the bottom of the recent trading range. I am watching closely but will not get concerned until the VIX closes above the 15.35 pivot. Even then, the VIX needs to break out above the current range (above 17.50 or 18 or so) before fear/concern makes a point worth noting. My purchase of call options on ProShares Ultra VIX Short-Term Futures (UVXY) turned out to be well-timed but the gains are minimal so far.

Once again the volatility index, the VIX, cannot rest long at the lows of the recent range. So far, the stock market has not reacted much.

The VIX probably made such a big move relative to the S&P 500 because roiling under the surface of the market were some significant downward moves on the day in key sectors and stocks. I even had to open fresh bearish positions because of them (when I am cautiously bullish I allow myself some select bearish trades).

The SPDR S&P Retail ETF (XRT) lost 1.5% as it appeared to fail just below 50DMA resistance. A limit order for put options executed. I am targeting around $40. I do not expect that level to break unless the entire market turns bearish. I have followed this sector more closely ever since one retailer after another produced major stinkers this past earnings cycle.

The near non-stop rally from the last low is over SPDR S&P Retail ETF (XRT)

Netflix (NFLX) has not been the same ever since someone recycled rumors about Apple’s (AAPL) interest in buying the company. That gap up took the stock right to resistance at its 200DMA and now NFLX trades below 50DMA support. If not for the unimpressive selling volume and the steeply upward trending 20DMA, I would be aggressively shorting NFLX here. Still, the 50DMA breakdown IS a bearish signal.

Netflix (NFLX) continues to sell-off after the last recycled rumor of Apple’s interest in buying the company. Although volume has fallen off a cliff, the close below 50DMA support confirms a newly bearish bias on the stock.

The iShares Nasdaq Biotechnology ETF (IBB) added to the red on the day with a 1.8% loss. I never got a chance to swing during the run-up form the last low, and I waited for the market’s reaction to the American Society of Clinical Oncology (ASCO) annual meeting before deciding to enter. The market’s reaction was to buy on the way in and sell on the way out.

The iShares Nasdaq Biotechnology ETF (IBB) decided to sell-off on the ASCO news (plus some inopportune earnings news). IBB slammed right into 50DMA support. It is starting to look like an extended trading range is the best traders can expect for now.

Bad economic data from China was blamed for broad-based selling in related plays. The iShares MSCI Emerging Markets ETF (EEM) gapped down for a 1.2% loss that seemed to end a steady run-up from the May low. (Hmmmm – starting to notice that the sell-in-May and go away crowd must be getting a bit anxious at this point). I neglected to note in the last T2108 Update that I pulled the trigger on a fresh strangle position on EEM (out of the money call and put options).

The iShares MSCI Emerging Markets ETF (EEM) finally runs into a wall, gaps down, and has likely topped out for now.

Copper is the main driver for Freeport-McMoRan Inc (FCX). A nasty plunge in copper helped pushed FCX close to a year 2000 and all-time low. Since then, the stock has increased an incredible 3x. That run-up ended with April. In its place is churn around 50DMA support. After watching this a while, I am thinking of how best to play the range. I am getting ready to buy call options (on top of an existing position of shares bought a while ago) as my first attempt. As part of the China-driven pullback, FCX lost 5.9% on a gap down.

I am taking a fresh interest in trading Freeport-McMoRan Inc. (FCX). The stock is carefully pivoting around its 50DMA ever since May took the steam out of its recovery from prices last seen at the all-time lows in November, 2000.

Iron ore plays also took a beating on the day. BHP Billiton Limited (BHP) gapped down and ended the day with a 5.6% loss. Like FCX, BHP is pivoting around its 50DMA. However, I think BHP is setting up for a fresh breakdown. Since April’s high, selling volume has overwhelmed buying volume. The volume on today’s gap down was particularly large, and it left behind a small abandoned baby top. As part of my dynamic pairs trade strategy, I faded BHP on the latest rally and now hold a substantial short paired with call options on Rio Tinto (RIO) and now hedged with call options on BHP.

BHP Billiton Limited (BHP) gapped down 5.6% on heavy selling volume. The stock continues to pivot around its 50DMA and now its 200DMA.

RIO did not lose as much as BHP. Its 3.9% loss did not come with out-sized selling volume. However, RIO is struggling to overcome 50DMA resistance. With the 200DMA now bearing down, RIO looks headed for a fresh sell-off. On the flip side, a breakout above the double resistance could be a lot more sustainable than the last one. So I REALLY like buying call options on RIO as part of the pairs trade with BHP as it sets up a combination with a lot of upside potential on either a fresh sell-off or a big breakout.

Rio Tinto (RIO) is not quite as fortunate as FCX or BHP as April’s high bled into a 50DMA breakdown that continues to hold.

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Be careful out there!

Full disclosure: long XRT puts, long RIO calls, short BHP and long BHP calls and puts, long UVXY call options, long EEM call and put options

Reading Time: 4 minutes

T2108 Status: 64.1%
T2107 Status: 69.8%
VIX Status: 12.9
General (Short-term) Trading Call: bearish
Active T2108 periods: Day #120 over 20%, Day #26 over 30%, Day #25 over 40%, Day #24 over 50%, Day #1 over 60% (ending 1 day under 60%) (overperiod), Day #3 under 70%

Commentary
Days like these make it tough to stick to trading rules!

In the last T2108 Update, I determined that the S&P 500 (SPY) was “close enough” to a breakdown to change my short-term trading call from cautiously bearish to bearish. It turned out that the bears and sellers were not ready to follow-through. The S&P 500 bounced in near picture-perfect form from the bottom of the recent trading range. The index even closed on its high of the day.

The S&P 500 (SPY) is not quite ready to confirm a near bearish tone in trading.

Along with the bounce, T2108 stepped over 60% again and closed at 64.1%. This puts my favorite technical indicator back in sniffing distance of the overbought threshold.

Dip buyers were in effect everywhere.

As I speculated could happen, oil bulls took the “bear market” in oil as a buying trigger. United States Oil (USO) hopped 3.9% but stayed within the downward trading channel.

United States Oil (USO) prints an impressive relief bounce.

If oil sustains buying interest, I will likely need to stop out of my recent bear trades on oil. I would resume the trade on a fresh low for oil – I am not confident that attempting to find a top to fade will work any better than playing a breakdown. If I were a bull, I would just buy here and stop out on a new low. It is a great risk/reward trade that makes it tough to stick to my current trading rule (granted – there is no reason to assume that being bearish on stocks requires a bearishness on oil).

Oil hopped despite hops in the U.S. dollar (DXY0) as well. Once again, day-to-day correlations are dangerous to rely upon these days.

Oil and the dollar are marching in step again https://t.co/vZprKuzu7V pic.twitter.com/zHs4CoTrkS

— Bloomberg (@business) August 4, 2016

The U.S. dollar index finds enough buying interest to close at 50DMA resistance.

A sharp decline in the euro (FXE) was the main driver for U.S. dollar strength. The decline reminded of the on-going trouble in several European banks. The decline also reminded me that I failed to renew my bearish bets against Deutsche Bank (DB). DB is now retesting all-time lows and likely to bounce. I will look to fade such a bounce, but a hedged trade may be in order at these levels.

The troubles continue for Deutsche Bank (DB) as ti plumbs all-time lows.

The buyers chased after retail stocks after a major gap down apparently exhausted sellers. Kate Spade & Company (KATE) suffered an 18% post-earnings loss and helped drag down the sector. While that gap was far too large to close in one day, SPDR S&P Retail ETF (XRT) closed its gap and even ended up in the green. The reversal was far too swift for me to even think about closing out my existing put options on XRT (they are in the red).

Buyers rushed into the big gap down on SPDR S&P Retail ETF (XRT) . Could this reversal from 200DMA support mark a quick end to the selling in retailers?

If I were bullish, I would have rushed to buy upon seeing XRT soar above 200DMA resistance – one more example of how tough it was to stick to trading rules.

Retailers were not the only stocks gap buyers chased.

Community Health Systems, Inc. (CYH) suffered a 10% gap down and sold further before buyers rushed in to fill the breach. The reversal was strong enough to deliver a 1% gain for CYH. The chart below shows that this buying interest is quite similar to the bounce after the last two post-earnings disappointments. Is CYH gradually carving out a sustainable bottom or are buyers exhausting themselves trying to prop up this stock?

Community Health Systems, Inc. (CYH) disappoints for the third time this year and for the third time, buyers rush in to bottom-fish. Note that CYH has susbtaintial short interest at 26% of float, so perhaps this violent action is the result of shorts taking profits and subsequent buyers mistaking the move as a bullish sign.

As regular readers know, I like buying plunges well-below the lower-Bollinger Band (BB) as a quick trade on (often intraday) oversold conditions. I will need to find a way to make exceptions for these trades even when my trading call is bearish!

Like CYH, Tableau (DATA) delivered earnings that disappointed for the third time this year. Like CYH, buyers have stepped after each disappointment to deliver impressive reversals. Unlike CYH, DATA’s first gap down in 2016 was so deep that DATA has yet to come close to a complete reversal. Yet, the stock is gradually pushing onward with higher lows and higher highs – like it will not quit until it meets up with 200DMA resistance. This third episode is different from the first in that DATA managed to find substantial buying interest off the lows on the first post-earnings day. I originally shorted the stock expecting it to close near its lows and felt fortunate to decide to cover near the eventual low.

Tableau’s march to recover from February’s devastating post-earnings gap down has suffered blows, but none fatal. Will the latest disappointment prove to be just another hiccup on the path to recovery?

Even as bears failed to follow-through and buyers returned to scooping up “bargains,” I decided to go full speed ahead on my trading plan to accumulate bearish positions. Except for the brief day-trade on DATA, I chose put options. I faded intraday rallies on the following stocks: Expedia (EXPE) and Toyota Motor (TM) – which I mentioned in the last T2108 update; Nordstrom (JWN) – I felt it necessary to try to fade a retailer (JWN reports earnings next week); Goldman Sachs (GS) – it has trended downward ever since a gap up and brief post-earnings rally; and even DATA which triggered a limit order right before the close of trading. Of these trades, I am least sure of DATA and will look to take profits quickly if I can. I am good for now on bearish trades and will stand down until I see evidence that the sellers are ready to follow-through on yesterday’s bearish trading signal.

— – —

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

The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.

Related links:
The T2108 Resource Page

Be careful out there!

Full disclosure: long SSO put options, long SPY call options, long XRT put options, long DATA put options, hedged options trade on USO, long put options on GS, TM, and EXPE

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