T2108 Status: 34.0%
T2107 Status: 36.0%
VIX Status: 13.6
General (Short-term) Trading Call: Neutral
Active T2108 periods: Day #203 over 20%, Day #11 over 30% (overperiod), Day #18 under 40%, Day #58 under 50%, Day #75 under 60%, Day #274 under 70%
Commentary
After the soaring rally on Monday, I was preparing to write a T2108 Update called something like “An Opening in the Fog.” I intended to review how Monday relieved some of the bearish conditions I discussed in the last T2108 Update. It was a strange day Tuesday, because China had reported more weak economic data and commodities led the charge with broad and very strong gains. It was a rally out of nowhere and media outlets struggled to explain it. They reached for any good news to be found, so Warren Buffet’s latest toy, Precision Castparts (NYSE:PCP), was crowned as a key driver. Bob Pisani on CNBC had a much better explanation: stocks were very oversold.
I never wrote that piece.
Instead, as I prepared to write some thoughts, news broke of China’s devaluation of the yuan. As I described here, the reaction in currency markets was immediate and pronounced. It made no sense for me to write anything until I could observe the reaction in equity markets. The S&P 500 (via the SPDR S&P 500 (ARCA:SPY)) promptly reversed all its gains from Monday and bounced meekly from support at its 200-day moving average (DMA). I told a friend of mine that Monday’s bullish rally could be the biggest fake-out of the year. He agreed…unless Tuesday’s trading turned out to be the big fake-out. How prophetic!
A second devaluation of the yuan yesterday sent sellers buzzing again. The 200DMA gave way like butter, and T2108 traded as low as 27.6%.
The S&P 500 (SPY) has exhibited large swings in recent days. In the larger context, the index remains in a trading range with amplifying chop.
Trading well below its lower-Bollinger® Band (BB), the S&P 500 was in a classic position for a bounce. With T2108 “close enough” to oversold, it was primed for the exact kind of bounce I love to play. However, I did not get very aggressive – the weakening technicals of the market are now nagging me. I quickly moved to lock in profits on some put options, I loaded up on Netflix (NASDAQ:NFLX) (I should have moved on Amazon.com (NASDAQ:AMZN) too!), and I bought a single put option on ProShares Ultra VIX Short-Term Futures (ARCA:UVXY). Sure enough, as the graph above shows, the market bounced right back.
The 200DMA for the S&P 500 once again proves its mettle over sellers and bears. Leading the way was Apple (NASDAQ:AAPL).
Apple (AAPL) makes a spirited move off its low of the day (below the lower BB), and even tacks on a 1.5% gain on the day
This move on Apple (AAPL) would have been a tremendous winner in the options pits. For whatever reason, I did not make a move…even when I saw AAPL had fought back to even on the day. This lack of action was also a failure of action because I already have a put spread in place on AAPL that covers the downside that I think is yet to come in the stock. I allowed the vicious reversal the previous day to make me too tentative.
AAPL soared with the market on Monday in what looked like the first stage of an attack on 200DMA resistance. The stock gained 3.6%.
On Tuesday’s sell-off, AAPL printed a very bearish gap down and the selling never relented on the day. APPL lost a whopping 5.2% to a fresh post-earnings low as fears ran rampant that China’s apparent economic woes are going to ding Apple’s financial performance.
I chose to hold on to my put spread even though it had become very profitable. These kinds of reversals are so powerful, they typically have immediate follow-through. Not this time! Today’s rally was encouraging for bulls, especially given the strong buying volume, but AAPL remains locked in a downward channel in the middle of a 200DMA breakdown. The bias is downward until buyers can close AAPL above its 200DMA again.
The behavior of the volatility index, the VIX, was also telling. At its high, the VIX was trading above the critical 15.35 pivot, but it was also well above its upper-BB. This over-extension further bolstered the case for a bounce back in the market. It encouraged me to buy the put option on UVXY, but I really should have loaded up in this context. The VIX ended the day yesterday with a complete fade back to Tuesday’s close. The VIX traded with a gain as high as 19%!
A massive fade for the VIX as sellers prove unable to keep the market gripped in fear.
My other important indicator, AUD/JPY, the Australian dollar (via the Guggenheim CurrencyShares Australian Dollar (NYSE:FXA)) versus the Japanese yen (Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)), is looking surprisingly less bearish. By the time U.S. trading opened yesterday, AUD/JPY was trading exactly where it stood at the close of Tuesday’s trading. It crept higher from there.
The daily chart shows that AUD/JPY seems ready to reverse this week’s earlier angst although the 50DMA looms overhead as resistance. A close above that line would make me bullish on the market as a whole, but I am not expecting such an encouraging sign.
The Australian dollar is making a strong rebound against the Japanese yen
Overall, the market is exhibiting signs of increasing instability as it swings in manic fashion from strong rallies to strong selling. The net result of this amplified chop is a vicious stalemate between bears and bulls. However, all the elements seem to be converging for a very large breakout/down. While my short-term trading bias sits at neutral, I am eyeing the bearish case most closely right now.
On Tuesday, Terex (NYSE:TEX) was snagged in an M&A deal that reminded me of Joy Global (NYSE:JOY).
I immediately bought a speculative call option on JOY expiring next year.
Similarly, I looked over the technical condition of Caterpillar, Inc (NYSE:CAT), my favorite hedge against bullishness. I have passed over several opportunities to lock in profits on my current set of put options on CAT. Monday’s rally really killed that position. Tuesday’s selling and Wednesday’s initial selling brought back much of those profits. Given the wild volatility of this amplified chop and CAT’s heavy dependence on commodities and China’s health, I have decided to just hold these puts through next week’s expiration even as CAT’s chart is getting ever so slowly more bullish: the abandoned baby bottom from July 27th is looking increasingly solid.
Caterpillar (CAT) essentially reversed all its post-earnings losses to start this week. The move confirmed the sustainability of the recent bottom. Note the subtle, upward bias through the chop….
On a related note, the iShares MSCI Emerging Markets ETF (ARCA:EEM) has resolved to the downside. The chop that preceded the breakdown wasted time and energy on my positions, so I decided to take the profits on my EEM put options and see what happens. I could not afford to see EEM chop higher with expiration coming up next week. For good measure, I bought a fresh set of call options expiring next month in the midst of Tuesday’s selling. I plan to refresh puts on the next rally.
iShares MSCI Emerging Markets ETF (EEM) is back into sell-off mode as the 20DMA (the dashed line) continues to guide EEM lower
Finally, I have benefited from two particularly gratifying moves this week: Google (NASDAQ:GOOGL) and the SPDR Gold Trust (ARCA:GLD).
Google sprinted higher on the heels of a major corporate restructuring into an entity called “Alphabet.” I immediately closed out most of my call options in what is likely to be my biggest and best trade of the year. I reaffirmed my aggressive bullishness on GOOGL in “Valuations for Internet Stocks Disrupted by Second Quarter 2015 Earnings.”
Google’s (GOOGL) post-earnings celebration begins again with a bang as Alphabet comes into being
While this gap up seems like an over-reaction to the news, it is not so large considering the context. All GOOGL did was return to its post-earnings high. The Alphabet news brought back the earlier ebullience in the stock in one big rush. In fact, it was the prospect of a return to post-earnings high that got me into my call options. Of course, I did not expect things to unfold as they did.
I made a case for a bottom in GLD here. My method of using Google trends as a measure of market sentiment and assessing extreme moves on GLD has once again received validation. Next up for GLD is a very ominous overhead resistance from its 50DMA.
The bottom is in for SPDR Gold Trust (GLD). The 50DMA may determine how long this bottom actually lasts.
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 JOY call options, long CAT puts, long UVXY puts, long AAPL put spread, long NFLX call options, short AUD/JPY, long GOOG call options, long GLD shares and call options