T2108 Status: 71.1% (66.0% at the intraday low)
T2107 Status: 59.9%
VIX Status: 15.7 (17.1 at the high)
General (Short-term) Trading Call: cautiously bullish
Active T2108 periods: Day #55 over 20%, Day #54 over 30%, Day #51 over 40%, Day #48 over 50%, Day #44 over 60%, Day #43 over 70% (Thursday ended 11 days over 80%) (overbought)
Commentary
Today was a close-call for this now 43-day old overbought period. For the second day in a row, sellers got active. This selling flared right after I wrote about the market’s proven resilience with T2107, the percentage of stocks trading above their respective 200DMAs, reaching new rally highs despite the difficulties in tech stocks. Buyers rallied just enough into the close to keep T2108, the percentage of stocks trading above their respective 40DMAs, above the overbought threshold of 70%.
Ever so slowly, T2108 is getting “heavier.” A break of overbought status looks imminent!
T2108 has spent almost two months churning around in overbought territory. A very subtle downtrend has taken hold with today’s brief break of overbought status confirming the indicator’s increasing “heaviness.” I am keeping my trading bias at cautiously bullish, but a complete break of overbought status seems imminent. This juncture is important because the end of an extended run in overbought conditions typically happens at the front end of a sell-off. Interestingly, the S&P 500 is now under-performing projections of performance for an overbought period of 43 days in length.
S&P 500 Performance By T2108 Duration Above the 70% Threshold
The good news is that each day of duration for this overbought period linearly adds to the expected performance of the S&P 500 (SPY (NYSE:SPY)). The S&P 500 has gained 4.4% so far during this overbought period. This performance runs below the roughly 6% to 7% I expect from this overbought period. To meet expectations, the S&P 500 will need to springboard from this 2-day sell-off to go on a freshly invigorated run-up. Such a bounce would be consistent with the hammer like candlestick pattern from Friday’s trading. Small bounces have followed other similar hammer patterns in recent months.
The S&P 500 (SPY) breaks support at its 20DMA, but the index manages to bounce of a lower-Bollinger Band (BB)
The NASDAQ (QQQ) also bounced, but the tech-laden index sits in a much more precarious position than the S&P 500. If T2108 breaks overbought territory, I will first target tech stocks for more bearish trading strategies because such bearishness will likely find confirmation of the current 200DMA and 50DMA breakdowns.
The NASDAQ broke 200DMA support on Thursday (4/28) and followed that up with an even more ominous 50DMA breakdown. Buying off the lows did not manage to avert the breakdown.
The volatility index came to life again with the selling. Today, the VIX soared all the way through the 15.35 pivot point before fading back to 15.70. This move confirms sellers are getting restless. I countered with a small purchase of shares in ProShares Short VIX Short-Term Futures (SVXY) and put options in ProShares Ultra VIX Short-Term Futures (UVXY) in anticipation of the first day of trading in May. The first trading day of the month tends to deliver gains, particularly following strong bouts of selling. For example, since the bounce from oversold conditions in October, the first trading day of the month has delivered gains 5 of 7 months. The two months that started with selling were January and February. Needless to say, if May manages to start with selling, the bearish scenario I discussed above will trigger.
Volatility comes alive as sellers get antsy.
Finally, as if we need any more ominous charts, the Australian dollar (FXA) versus the Japanese yen (FXY) ended at its lowest close during this overbought period. This is close is yet another close call. A few more “inches” lower, and AUD/JPY will add a LOT more weight to the bear case.
AUD/JPY completely plunged over the past week – a very ominous sign.
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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
Be careful out there!
Full disclosure: long SVXY, long UVXY put options