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T2108 Update (June 26, 2013) - Classic Oversold Bounce

Jun. 26, 2013 10:54 PM ETSSO, SPY, FXA, VXX, GOOG, CAT4 Comments
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(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 (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.

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 (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).

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.

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.

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 (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 (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 (CAT) for a reload of puts.

Daily T2108 vs the S&P 500

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

Weekly T2108

*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

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