T2108 Status: 56.7%
T2107 Status: 63.9%
VIX Status: 21.2
General (Short-term) Trading Call: bearish
Active T2108 periods: Day #91 over 20%, Day #90 over 30%, Day #87 over 40%, Day #2 over 50%, Day #2 under 60%, Day #9 under 70%
Commentary
At the time of writing, voting in the United Kingdom is underway on the referendum on membership in the European Union (EU). Sentiment flipped rather dramatically on “Brexit” in recent days. The week started with a lot of relief and a plunge in the volatility index, the VIX.
However, the VIX rallied off its lows and continued to increase from there. Suddenly, the VIX is right back to “elevated” levels (above 20) and at its highest close in 4 months.
The volatility index, the VIX, surges to a new 4-month closing high.
ProShares Ultra VIX Short-Term Futures (NYSE:UVXY) rallies but greatly trails the VIX on a relative basis: UVXY still closed below its 50DMA downtrend.
This flip flop aligns relatively well with a brief fallback in Brexit sentiment via Google trends of search terms. Google Trends fell back sharply Friday and Saturday only to rally from there to yet new highs. So, the VIX and Brexit sentiment are in agreement.
Google searches on “Brexit” dipped from Thursday’s previous high (now 75) to 50 as the market expressed relief. Anxiety is already back to new highs now.
While the VIX and sentiment show elevated fear and anxiety again, other potential indicators of fear are going int he exact opposite direction. I posted several days ago on the case for a blow-off top in SPDR Gold Shares (NYSE:GLD). After two additional days of selling, GLD sits just above 50DMA support. The follow-through selling has effectively confirmed the top, but a break of 50DMA support would further solidify the case.
SPDR Gold Shares (GLD) looks to hold support at its 50DMA after hitting a likely blow-off top.
Like GLD, the iShares 20+ Year Treasury Bond (NYSE:TLT) has also stood down from a major topping pattern on June 16th. TLT is trying to hold support at its uptrending 20DMA. I am guessing it will tumble to its 50DMA before finding solid support. TLT rallied into June 16th as fears mounted in financial markets.
The iShares 20+ Year Treasury Bond (TLT) tumbles from its recent 16-month high.
To round out this intriguing divergence in fear, the Japanese yen (Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)) has sold off since the key turning point day of June 16th. The Japanese yen is interesting because of its conventional treatment as a “safety” currency. Against the resurgent British pound (Guggenheim CurrencyShares British Pound Sterling (NYSE:FXB)), the focus of Brexit of course, the Japanese yen has faded sharply along with the fades in GLD and TLT.
The British pound (FXB) versus the Japanese yen (FXY) has rebounded sharply since June 16th but can it break through 50DMA resistance through the Brexit vote?
So, the VIX’s surge stands out like a sore thumb against GLD, TLT, and FXY (through GBP/JPY for example). Seeing this divergence encouraged me to sell call options against my accumulated position in UVXY. The premiums are quite large for July 1st expiration.
I started this position, along with long call options, on June 16th thinking it was time to get back to going long volatility. The typical market soothing of the Federal Reserve’s latest pronouncements on monetary policy had come and gone. Instead, it was a day that delivered a synchronized whiplash.
Still, through all the gyrations, my short-term trading call has stayed bearish. The S&P 500 (SPDR S&P 500 (NYSE:SPY)) is valiantly clinging to its 50DMA, but the index needs to BOTH recover overbought conditions AND punch through the all-time high in order to invalidate the bearish drop out of overbought conditions. The NASDAQ (PowerShares QQQ Trust Series 1 (NASDAQ:QQQ)) is also hanging close to its 50DMA although as resistance.
Since falling out of overbought conditions, the S&P 500 (SPY) has stuck to a 50DMA pivot.
The NASDAQ (QQQ) is tightly sandwiched between 50DMA resistance and 200DMA support.
The fall from overbought conditions on Friday, June 10th quickly resolved into a bottom six calendar days later. The bounce from that low also moved swiftly. In two more trading days, T2108, the percentage of stocks trading above their respective 40DMAs, surged as high as 65.9% before cooling off to Wednesday's close at 56.7%. This second fade seems to confirm T2108’s bearish fall from overbought conditions.
There are other very telling charts out in the market. Two of the big cap tech darlings are suddenly faring poorly from a technical perspective. Netflix (NASDAQ:NFLX) confirmed its 50DMA as resistance and looks very ready to resume a sell-off that started with earnings.
Alphabet (NASDAQ:GOOGL) Inc C (NASDAQ:GOOG) was slammed last week with a downgrade. The stock broke 200DMA support on volume. Buyers are trying their best to keep GOOG form confirming this breakdown.
Netflix (NFLX) continues to disappoint those who bought late into the recycling of the Apple-for-Netflix rumor.
In April, May, and now June, Alphabet (GOOG) broke through 200DMA support. Can the stock recover quickly yet again?
While darling tech stocks falter, commodity stocks are hanging in there in general. One great example is Freeport-McMoran Copper & Gold Inc (NYSE:FCX). I mentioned FCX in an earlier post as a commodity stock to play through what has become a very well-defined trading range.
My first trade was a fade, and it worked well. My second fade will likely not work well – in retrospect I should have waited out Brexit before trying the second round. I am positioning for the next round by Friday…as long as FCX does not break out first.
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 GLD, net short the Japanese yen, long UVXY shares and put options, short UVXY call options, short the British pound (trading in and out long and short until Brexit vote closes), long SSO put options