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 (N: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 (N: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 (N: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.
ProShares Short VIX Short-Term Futures (N: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 (O: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 upgraded First Solar (O: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 (N:GS) but the 20DMA uptrend is holding for now.
The 200DMA breakout for Canadian Solar Inc (O:CSIQ) has come to a quick end. The high-volume 50DMA breakdown looks a bit ominous.
SolarCity Corporation (O: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 (N: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 (O: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 (N: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 (N: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
Be careful out there!
Full disclosure: long SVXY shares, long call options in SSO, FSLR, and WMT