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Dr. Duru
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Dr. Ahanotu is a graduate of Stanford University with over twenty years of experience doing analytic modeling, executing pricing strategies through price optimization, and implementing, developing, and selling enterprise software. He adds to this industry experience another five overlapping... More
My company:
Ahan Analytics, LLC
My blog:
One-Twenty Two
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  • T2108 Update (June 27, 2013) - Perfect Oversold Bounce Runs Into Perfect Resistance

    (My blogging site www.drduru.com/onetwentytwo remains down for the count. I am in the process of changing web hosts. I hope to be back to posting the technical stuff on my own site by this weekend June 29th)

    (T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

    T2108 Status: 28.4%
    VIX Status: 16.9
    General (Short-term) Trading Call: Sell short-term T2108 trades. Prepare for quick fade opportunities at 50DMA resistance.

    Reference Charts (click for view of last 6 months from Stockcharts.com):

    S&P 500 or SPY
    SDS (ProShares UltraShort S&P500)
    U.S. Dollar Index (volatility index)
    VIX (volatility index)
    VXX (iPath S&P 500 VIX Short-Term Futures ETN)
    EWG (iShares MSCI Germany Index Fund)
    CAT (Caterpillar)

    Commentary
    The current #T2108 cycle is working out like a page torn right out the perfect script. Today, the S&P 500 (NYSEARCA:SPY) rallied for a third straight day, gaining 0.6%. I closed out all my ProShares Ultra S&P 500 (NYSEARCA:SSO) calls shortly after the open. I could not have asked for a better setup. My upside target at the 50-day moving average (DMA) was tagged well ahead of schedule. I was expecting the stock market to thrash around for a week before composing itself enough to make a strong run for overhead resistance. The gloom and doom of high rates and China worries seemed so thick and heavy. As I mentioned in the last T2108 Update, the only thing that would have made this T2108 cycle better would have been more aggressive trades and slightly better timing on my last tranche of SSO calls (I sometimes have to execute multiple tranches because calling exact bottoms is of course quite elusive).

    (click to enlarge)

    If it were not for looming resistance overhead, I would have kept my SSO calls. The current momentum of T2108 is impressive. It soared from 22.4% to 28.4%. In classic form (you have to see it to believe it), the S&P 500 pulled back perfectly from the convergence of a declining 20-day moving average (DMA), the previous bear/bull dividing line around 1623 (I now call it a pivot point), and the still upward sloping 50DMA. This looks like a high hurdle to break. Aggressive traders can fade here with a tight stop above resistance. The only reason I am not fading the S&P 500 here is that T2108 is so low. One steep sell-off could take T2108 right back to oversold territory and put me right back in buying mode. If the S&P 500 manages to CLOSE above this tough resistance, I will also get back into bullish mode. I will treat such a break of resistance as evidence of the bulls winning back momentum from the bears.

    I will be holding all my other bullish trades made during this period. The GOOG calls will not work out (I was overly aggressive in buying weeklies expiring this week!), but I am holding onto FFIV and CNX. I closed out my AAPL weekly put spread as part of the Apple Trading Model (ATM). I find it extremely ironic that a bearish bet on AAPL worked so well during a very bullish bounce in the general stock market. I am assuming fund managers are running like crazy to get AAPL shares off the books for quarter-end and made their final exit decisions on Monday when the stock market still looked ugly; once the big wheels start turning they are hard to stop. If so, AAPL should stop selling off as early as tomorrow (Friday, June 28th), maybe even start a sharp relief rally. With Monday representing the beginning of a new month and new quarter, Friday will be primetime to set myself up for a strong beginning of the week for Apple as it tends to do.

    (click to enlarge)

    Daily T2108 vs the S&P 500
    (click to enlarge)

    Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)

    Weekly T2108
    (click to enlarge)
    *All charts created using freestockcharts.com unless otherwise stated

    Related links:
    The T2108 Resource Page
    Expanded daily chart of T2108 versus the S&P 500
    Expanded weekly chart of T2108

    Be careful out there!

    Full disclosure: long SSO and GOOG calls; net short Australian dollar; long CAT shares

    Disclosure: I am long GOOG, CNX, FFIV, AAPL.

    Additional disclosure: All longs except AAPL via call options

    Jun 27 10:54 PM | Link | Comment!
  • T2108 Update (June 26, 2013) - Classic Oversold Bounce

    (My blogging site www.drduru.com/onetwentytwo remains down for the count on day #2. So once again I am posting this technical review in SA's Instablogging service).

    (T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are highly likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

    T2108 Status: 22.3% (ending a 2-day oversold period)
    VIX Status: 17.2
    General (Short-term) Trading Call: Buy to 50DMA resistance (should already have longs in place - do not chase the market higher or lower, only fades)

    Reference Charts (click for view of last 6 months from Stockcharts.com):

    S&P 500 or SPY
    SDS (ProShares UltraShort S&P500)
    U.S. Dollar Index (volatility index)
    VIX (volatility index)
    VXX (iPath S&P 500 VIX Short-Term Futures ETN)
    EWG (iShares MSCI Germany Index Fund)
    CAT (Caterpillar)

    Commentary
    The S&P 500 (NYSEARCA:SPY) rallied another 1.0% to take the index out of T2108 oversold territory. The oversold period lasted just 2 days - very normal given the majority of oversold periods last just 1 or 2 days.

    (click to enlarge)

    (click to enlarge)

    This has been a picture-perfect, classic oversold bounce. My target and forecast for a retest of the 50-day moving average (DMA) may occur well ahead of schedule, perhaps as early as Friday. As I type, the Australian dollar continues to show resilience and the potential makings of a (short-term) bottom. An end to this slippery slide should support the S&P 500. As I have pointed out numerous times, the Australian dollar serves as a relatively reliable leading indicator for the S&P 500. Its slide in May preceded the June slide for the S&P 500. In the chart below, note how long the lag was this time around. The Australian dollar (NYSEARCA:FXA) began its slide in mid-April, just as the S&P 500 was finding firm footing for a rally well into May. (I used FXA rather than AUD/USD in order to avoid gaps in the chart where forex is trading and U.S. stocks are not).

    (click to enlarge)

    Note the strongest lagged correlation besides the current one occurred over October and November when the Australian dollar rallied while the U.S. swooned over the November, 2012 elections. The steep sell-off in the S&P 500 was not confirmed by the Australian dollar.

    An hourly chart of AUD/USD makes the potential bottoming process more clear. Note how AUD/USD is steadily creeping upward. The big hurdle will be getting over the 0.955 mark although I do not think the currency pair has enough "gas" to make it that far in this current attempt to bottom.

    (click to enlarge)

    Further supporting the oversold bounce is the failure of the VIX to overcome resistance from the level that marks that marks the breakout from the summer 2011 swoon.

    (click to enlarge)

    If the bears still have sting, they will hold the line at the 15.2 pivot just as the S&P 500 is retesting resistance at the 50DMA.

    My trades to play the oversold bounce are a mixed bag, suffering a bit from a reduction in implied volatility (that actually bodes well for further short-term gains). Two main problems: 1) Google (NASDAQ:GOOG) opened strong on Tuesday as I had hoped, but I did not take the gains as I perhaps should have. GOOG faded hard after that open and the call has yet to recover. I added another call for good measure today. We will see whether GOOG has enough gas to get me to at least even before Friday's expiration. The Pro Shares S&P 500 Ultra (NYSEARCA:SSO) calls are doing well overall, but my timing was sub-optimal given my "lowball" order at Monday's lows failed to execute. With the benefit of hindsight, I should have just executed but I was mindful of the bountiful risks that remained for lower prices {explained in the T2108 Update from that day}. I also bought SSO shares yesterday. I am next going to target Caterpillar (NYSE:CAT) for a reload of puts.

    Daily T2108 vs the S&P 500

    (click to enlarge)

    Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)

    Weekly T2108

    (click to enlarge)

    *All charts created using freestockcharts.com unless otherwise stated

    Related links:
    The T2108 Resource Page
    Expanded daily chart of T2108 versus the S&P 500
    Expanded weekly chart of T2108

    Be careful out there!

    Full disclosure: long SSO and GOOG calls; net short Australian dollar; long CAT shares

    Disclosure: I am long SSO, GOOG, CAT.

    Additional disclosure: In forex, net short the Australian dollar

    Jun 26 10:54 PM | Link | 4 Comments
  • T2108 Update (June 24, 2013) - Oversold And Still Dangerous

    (I am posting my T2108 Update here because the servers on my drduru.com/onetwentytwo site are down at the time of writing).

    After several intraday plunges into oversold territory, T2108 finally closed oversold at 16.3. At one point, T2108 was extremely oversold at 13.1. Here are some stats for perspective:

    Since 1986, there have only been 150 trading days where T2108 has closed at a lower level. 110, or 73%, of these days occurred in just four years: 1987 (40 days), 1990 (16 days), 2008 (44 days), 2009 (10 days). There have been 11 such days since 2009: 5 in 2010 and 6 in 2011. In other words, we are in rarefied air.

    These are also times when it is hard to focus on the buying opportunity because so much seems so grim. It is particularly hard to focus during the current sell-off because there are so many negatives in the fundamentals providing plenty of overhang for a market that is just coming off all-time highs. It is much easier to imagine the S&P 500 (NYSEARCA:SPY) going much lower than imagining what a relief rally looks like (heading into resistance at the 50DMA). Indeed, the index still closed below its lower-Bollinger Band, indicating the sellers remain in control.

    So if the stock market looks so dangerous, why continue focusing on the buying opportunities? My answer in these cases is always simple: "rules are rules." My study of T2108 concludes that the odds here are strongly in favor of a bounce, even if it takes a while (the majority of oversold periods last no more than two days). Since brutal sell-offs like the one that seems to be unfolding are typically quick, it makes little sense to chase the market down - only to get caught in a sharp reversal. Instead, fading rallies is the better choice if a trader wants to stay focused on shorting the market. That is, be a contrarian when the market sells off and when it rallies.

    On Monday, I bought another tranche of calls in ProShares Ultra (NYSEARCA:SSO). I also had a much larger order open at much lower prices. Going forward, I will maintain a lowball buy order in the hopes of catching any really big swooshes down. The first selling point is likely going to be at 1600 on the S&P 500 and then the 50DMA.

    The VIX is putting on one of those "you have to see it to believe it" shows. For the third consecutive day, the VIX has closed BELOW the major launching point for the 2011 summer swoon after flirting with that level at some point in the day. With the VIX closing lower than it did after Friday's sell-off, I am wondering whether this is an indicator of slowing selling momentum. Something to watch…and something to analyze at some point soon. I added to my iPath S&P 500 VIX Short-Term Futures (NYSEARCA:VXX) puts in response to oversold conditions.

    Finally, I picked up call options in a few tech names and one coal name on big swoons today. This is consistent with playing for an oversold bounce, and I am hoping by spreading out the bets, at least one of them will rally big enough to make the entire risk worth it. I went after Google (NASDAQ:GOOG) of course - hovering nicely over its 50DMA; F5 Networks (NASDAQ:FFIV) - retesting 2011 lows and a buy for an investment at these levels; Consol Energy (NYSE:CNX) - heading for a retest of 2012 lows after weeks of nearly non-stop selling, today finally looked like a washout as volume surged on news of a pending Obama Administration announcement restrictions for carbon emissions from power plants; and, of course, added to the Apple (NASDAQ:AAPL) calls using the Apple Trading Model (ATM). On the investment side, I packed away a few more shares of Tri Pointe Homes (NYSE:TPH), a homebuilder with a healthy and hefty concentration in California. I also sold my Caterpillar (NYSE:CAT) puts, my favorite way to play the poor fundamentals of rising rates and plummeting commodity prices (I stay in a few shares for the long haul). My Baidu (NASDAQ:BIDU) play took a poor turn with a clean breakdown through 50DMA support.

    AAPL is a special case because I sold my puts last week a day early, and I also started call-buying a day early. The stock is looking extremely vulnerable right now, but at least $400 held for the day. AAPL is even more oversold than the general market as it has somehow closed below its lower-BB for FOUR straight days on increasing volume. That is incredible selling pressure that has to exhaust itself soon. The main question now is whether this will happen now or at the 52-week lows printed right before April earnings.

    Source for all charts: FreeStockCharts.com

    Be careful out there!

    Disclosure: I am long SSO, AAPL, GOOG, FFIV, BIDU, CAT, CNX, VXX, TPH.

    Additional disclosure: Long via a mix of shares and call options; also long VXX puts

    Jun 25 5:42 AM | Link | Comment!
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