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T2108 Update (June 24, 2013) - Oversold And Still Dangerous

|Includes: AAPL, BIDU, CAT, CNX, FFIV, GOOG, ProShares Ultra S&P 500 ETF (SSO), TPH, VXX

(I am posting my T2108 Update here because the servers on my 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:

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