T2108 Update (September 5, 2014) – Close Call As the S&P 500 Avoids Bearish Follow-Through

(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 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: 59.1%
VIX Status: 12.1%
General (Short-term) Trading Call: Hold (Bullish)
Active T2108 periods: Day #303 over 20% (includes day #280 at 20.01%), Day #17 over 40%, Day #14 over 50% (overperiod), Day #2 under 60%, Day #43 under 70%

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)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
Market conditions turned a bit ominous at the close of trading on Wednesday, September 3rd. I was on the lookout for follow-through. Sure enough, the next day, sellers were able to send the S&P 500 (SPY) and the NASDAQ (QQQ) down again, even if marginally. In particular the NASDAQ broke its primary uptrend by closing below the first Bollinger Band (BB). On Friday, the S&P 500 came roaring back from initial selling to close with a fresh all-time closing high. The NASDAQ suddenly found itself slightly under-performing as its comeback did not wipe out the bearish read from Wednesday.


The S&P 500 wipes out bearish tidings in one swift intra-day reversal
The S&P 500 wipes out bearish tidings in one swift intra-day reversal

The NASDAQ's comeback still leaves the index contending with an ominous bearish engulfing pattern
The NASDAQ’s comeback still leaves the index contending with an ominous bearish engulfing pattern

This is what I call a close call. On Friday morning, I was mentally writing an incrementally more bearish stock market update. Instead, I am now writing a mixed piece that maintains the bullish bias in the trading call. There is one caveat: T2108 is still well off its recent high for this cycle.

T2108 closed at 59.1%. It was as high as 65.5% on Wednesday before the market faded. This behavior is not a bearish divergence because T2108 closed with a gain, not a loss. What has my attention right now is T2108 lagging the S&P 500. The lagging takes on more weight with the NASDAQ’s performance and loss of its primary uptrend. It is not likely such lagging can persist for long without the S&P 500 reversing, so I am “on alert.”

Finally, traders must pay closer attention to currency markets if they have gotten in the habit of ignoring them. I wrote a related piece called “The U.S. Dollar Is Strong But…What About Carry?” In particular, the ECB’s push to ramp up liquidity in the eurozone economy provides a fresh source of funds to fuel more trades, more investments, and even less volatility. Weary bears are facing an army with supply lines restocked, re-fortified, and ammunition for as far as the radar can see. I think the resolution of these new battle lines will become pretty apparent in the coming weeks. Stay tuned.


The U.S. dollar index finally breaks out
The U.S. dollar index finally breaks out

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
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: no positions

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.