T2108 Status: 66.0%
VIX Status: 15.0
General (Short-term) Trading Call: Short (fade rallies)
Active T2108 periods: Day #179 over 20%, Day #25 over 60% (overperiod), Day #3 under 70% (underperiod)
Commentary
It was late Thursday night (March 20). I debated typing out a quick T2108 Update. I chose sleep instead. I am glad I did. What happened in Friday’s trading action is even more significant than what happened on Thursday.
First, rolling back the tape, the S&P 500 (SPY) essentially made a complete recovery from Wednesday’s post-Fed selling – the classic fade the Fed and then fade the fade move. As I mentioned earlier in the week, I expected this to and fro. However, T2108 surprised me: my favorite technical indicator actually took a deep plunge to start the day and just barely managed to close near flat on the day. The move looked almost looked like a bearish divergence. At least it seemed to generate non-confirmation for Thursday’s rally.
Second, on Friday, the S&P 500 punched out a new all-time (intraday) high. T2108 even crossed the overbought threshold (70%) yet again. According to my rule, I faded the move with a barrage of fresh put options on ProShares Ultra S&P 500 (SSO). In the back of my mind I pondered the possibility of an extended over-bought rally launching. I did not have long to wring my hands. Eventually, the S&P 500 began to weaken. It managed to fade 17 points to close with a fractional loss (-0.29%) that is small in size but looms large in significance. A fade that occurs from a presumed top looks like a confirmation of that top. Volume surged on the day, raising another yellowish red flag. No doubt options expiration had a lot to do with the upward thrust, but it is a signature mark for a climactic type of top. The charts below show a close-up of the daily action on the S&P 500 and T2108.
The S&P 500 fades from all-time highs and resistance at evening stars. With high volume along for the ride, it is looking like a firmer top is forming.
T2108 fades up and then down. Net results? Higher likelihood of confirming a top at the overbought threshold (70%)
I used the weak close to unload all my fresh SSO puts and lock in profits. I will be looking next week for confirmation of this new weakness in the market. As usual, I am bracing for quick churn up and down, and looking to fade rallies on the S&P 500.
The volatility index of course made a strong comeback from its lows on the day. It remains under the 15.35 pivot point, it has plenty of room to zoom higher on an increasing market risk profile.
The VIX has churned around and near its pivot point for over a month
I have also noted a LOT of toppy looking charts in stocks that have served as momentum favorites for months. I will post those in a separate cornucopia of chart reviews. Suffice to say that I took the opportunity to chase some of these stocks lower. These new positions gave me additional motivation to lock in the profits on the SSO puts.
In foreign exchange (forex), I am looking most closely at the Australian dollar versus the Japanese yen (AUD/JPY) for advanced sign of trouble or at least confirmation. AUD/JPY is still failing to oblige. The currency pair managed to close marginally higher and rests comfortably smack in the middle of its extended trading range.
AUD/JPY still not showing signs of trouble
Finally, I want to note that I think the market over-reacted to Yellen’s press conference on Wednesday. So, I am definitely not including a read on the Fed for my trading call. To the extent the market is reacting to the Fed, then I am reacting. Otherwise, I am keeping a keen eye on the tea leaves…and they look ready for a tumble to oversold conditions…Stay tuned for the big chart review.
The breakout for SBUX continues to unfold…
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 SSO puts, long UVXY shares; net long the U.S. dollar