T2108 Status: 54.1%
T2107 Status: 48.2%
VIX Status: 14.2 (a 20% jump!)
General (Short-term) Trading Call: Start selling bullish positions. Aggressive bears can open fresh shorts.
Active T2108 periods: Day #35 over 20%, Day #33 over 30%, Day #30 over 40%, Day #28 over 50% (overperiod), Day #3 under 60% (underperiod), Day #105 under 70%
Commentary
“I am bullish yet even *I* am surprised to see the S&P 500 (ARCA:SPY) already printing a fresh all-time high. Just two days ago, I was bracing for bearish follow-through selling to a topping pattern. Instead, sellers absolutely failed to capture the imagination of the market as buyers went right back to work snapping up early holiday season ‘bargains.'”
This is how I began the last T2108 Update. It turns out that the bears are not going away THAT easily after all. The stubborn bears have come a-knocking again – this time with even more convincing insistence.
Trading this week started with many more ominous signals than I saw last week. As a result, I am more wary than ever about the sustainability of the market’s current momentum. Let’s dive right in with the charts.
T2108 closed at 54.1%. This was a significant loss of 4.5 percentage points in a move that confirms T2108’s failure to sustain overbought levels. As a reminder, I consider such a rejection “good enough” to flag topping conditions in the market.
It’s starting to look like September’s topping conditions all over again
It is a good thing we have T2108 to give us the early warning signal. Without it, the current sagging and waning of momentum in the S&P 500 (via SPDR S&P 500 (ARCA:SPY)) may not appear ominous at all. The 20DMA still holds as an uptrend line, and the market has yet to follow through on its closure of the gap up from the surprise China rate cut. Moreover, the index only lost 0.7% and is similarly just that far away from a fresh closing all-time high.
The S&P 500 is losing momentum even as the 20DMA holds as an uptrend
A huge 20% jump in the volatility index is adding to the warning bells:
A major push off recent lows
I sometimes pounce on these kinds of volatility spikes to start a fade when I am bullish. But I stopped short because of the accumulation of bearish signals. When the VIX was up 10% on the day, I made the following observation:
It suddenly occurred to me that this was one of those RARE moments where I observed an inefficiency before the market resolved it. I rushed to buy call options on ProShares Ultra VIX Short-Term Futures ETF (ARCA:UVXY). Sure enough, they ended up about 61% on the day as UVXY closed with a 7.2% gain. As an example of my wariness, I did not take the quick profits even as my trading rules for options typically dictate taking such profits right off the table. I cannot imagine UVXY sustaining momentum all week though, so I doubt I will be holding the position past this week.
UVXY awakens again but remains trapped in a very familiar downtrend trend
Another example of my growing wariness? Caterpillar (NYSE:CAT) hit my downside target at $95, and I did NOT close out my put spread. This put spread is a hedge on my overall bullishness, and it delivered bigtime yesterday. The position still has another month of life, so I can afford to be a little more patient. CAT made a VERY bearish extension of its 50DMA breakdown. It has now effectively closed its post-earnings gap up from two months ago. It is also well below its lower-Bollinger Band®. I will not be surprised to see a (dead-cat) bounce (pun sorta intended). I have no problem sitting on the put spread right through such a move.
Caterpillar Inc underlines the growing bearish undertones of the market
Quick sidebar – at the time of writing, I saw the following tweet that gave me even more urgency to get this T2108 Update published. It certainly bodes poorly for stocks like CAT in the Tuesday trading session! If CAT extends lower, I will sell the put spread as additional upside becomes too small to be worth the risk of holding.
So those bearish signals are STILL not enough for you? Let me introduce you to my other reliable friend the Australian dollar (via Rydex CurrencyShares AUD Trust (NYSE:FXA)). In overnight trading, the Australian dollar extended its breakdown against the Japanese yen (via Rydex CurrencyShares Japanese Yen ETF (ARCA:FXY)). As a reminder, AUD/JPY has served as relatively reliable leading indicator or confirming signal on the way up and down. It is warning of more downside immediately ahead just as it refused to confirm the last S&P 500 all-time highs.
An ominous breakdown from recent highs continues for the Australian dollar versus the Japanese yen
Even if I could find some charts of encouragement, I would not post them. I do not want to get distracted with “hope” right now. This is a time to process what is directly in front of the trading screen.
I am still holding my long-standing shares in the ProShares Ultra S&P 500 ETF (ARCA:SSO). I will have to exit if the S&P 500 closes lower as it would confirm the end of the immediate momentum. Aggressive bears can already start fresh shorts here. Stops can be placed a little higher than all-time highs so as to avoid whiplash (notice that new highs have come on very marginal moves lately). Bulls should be taking SOME profits as a “just in case,” especially if you are not hedged. Note well, that I am NOT suddenly turning bearish. Let’s call it “protective.” I am still expecting a lot of chop from here until year-end. A major breakdown, for example below the 50DMA, will force me to reassess.
I conclude with some other charts that have me worried or at least are not helping my mood: Apple(NASDAQ:AAPL), Best Buy (NYSE:BBY), Baidu (NASDAQ:BIDU), Tesla (NASDAQ:TSLA), and Alibaba (NYSE:BABA).
Apple is not far away from confirming a topping signal
I took AAPL’s earlier “flash dip” in stride and assumed this would prove to be a blip on the way to ever higher prices. The continued weakness is concerning and leaves AAPL just a hair away from confirming a topping signal with a close below the low of the flash dip. I went into Monday with an active call option position and I happily took the discount at the opening to add to the position. When it paid off with a small gain in rapid order, I closed out the new position. The image of watching profits fade from last week’s flash dip buying is simply too fresh. The sale proved timely as later in the day a limit order at lower prices triggered. The Apple Trading Model (ATM) is marginally predicting upside for Tuesday. I will be wise to close out this position if the market cooperates with the model.
Best Buy fills its post-earnings gap up and manages to bounce back in a sign of relative strength on the day
BBY SHOULD be an encouraging chart given the upward trend supported by the 50DMA. However, with a different lens, I see it as another stock that is proving it cannot sustain current heights. The fill of the earnings gap is bearish, and the reflexive buying changes little. I am watching to see whether BBY can hold its 50DMA support long enough to resume upward momentum.
Baidu (BIDU) attempts to comeback from a bearish breakdown of its 50DMA
I went into this week bullishly expecting BIDU to bounce from its 50DMA support. Instead, it took a deep plunge below this important line of support. The stock made a spirited comeback into the close that has formed a bottoming hammer pattern. I normally would be encouraged by this action, but now I need to see some follow-through buying. I am also seeing a growing downtrend between the lower Bollinger Bands® that have developed from December 1st’s breakdown below the 20DMA.
Tesla Motors (TSLA) is starting to print a classic topping pattern: a break lower from a head and shoulders below the 50 and 200DMAs….
I was actually prepared for the breakdown TSLA is now confirming. The stock has enjoyed nearly unquestioned support from a technical standpoint, but the breakdown that began last week was ominous. Volume rose on the double breakdown from the 50DMA and 200DMA, and it rose yesterday on the confirming follow-through. The damage can of course be repaired by a rally that takes the stock above the 200DMA again. Until then, this is looking like a broken momentum stock and adds to the bearish signals looming overhead.
The downtrend from all-time highs extends, putting a retest of $100 in play
The downtrend from all-time highs has extended further on BABA. This stock continues to be an avoid until that downtrend breaks or MAYBE on a retest of $100 and/or the nascent 50DMA. Needless to say, the Ali Rah Rah pop is losing steam even as the S&P 500 has out-performed BABA for the past month.
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
Disclosure: long SSO shares; long put spread on CAT; long call options on BIDU; short TSLA; net short the Australian dollar; long UVXY put options