T2108 Status: 30.5%
T2107 Status: 61.9% (3-month low)
VIX Status: 16.7
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #165 over 20%, Day #21 over 30% (over), Day #3 under 40% (underperiod), Day #9 under 50%, Day #25 under 60%, Day #51 under 70%
Commentary
In my last T2108 Update, I expressed reluctance to switch the short-term trading call from neutral to bearish despite the darkening clouds looming over the stock market. I think Thursday's trading action validated my hesitation.
The S&P 500 (via SPDR S&P 500 (NYSE:SPY)) successfully tested support at the September low.
The NASDAQ (via PowerShares QQQ Trust Series 1 (NASDAQ:QQQ)) follows through on its breakdown below support at its 50-day moving average (DMA). The tech-laden index bounced back from over-extended conditions below the lower Bollinger Band (BB).
The S&P 500 and the NASDAQ both dropped below their respective lower Bollinger Bands (BBs) as sellers followed through on the previous day’s pressure. The S&P 500 retested its September low. As usual, sellers came up short: buyers were able to recover all post-open losses and a little more. These moves formed a type of bottoming hammer pattern. Now the baton goes back to buyers to prove they can follow through. If they succeed, I will assume a sustainable bottom is in place especially for the S&P 500.
T2108, the percentage of stocks trading above their respective 40DMAs, provides a good way to understand today’s action. T2108 dropped as low as 25.5%. The low just barely broke the September low and stopped short of the June (post-Brexit) low. This action brought T2108 “close enough” to oversold (20%).
Similar to what I described as a possibility in the last T2108 Update, this action was “close enough” to oversold (20%) to bring in a rush of buyers. The odds of a bounce were greatly increased with the major indices trading well below their lower-BBs.
T2108 loses ground but manages a small victory with a sharp bounce away from the oversold threshold. Compare to the last two similar visits.
Note that buyers are not yet in the clear. The volatility index, the VIX, held onto a gain for the day and remains above the 15.35 pivot.
The volatility index is still poised for more upside despite the fade from the highs.
With T2108 dropping into the mid-20s, I grabbed a fistful of call options on QQQ and added another limit order in case T2108 managed to drop to or into oversold territory. I am saving a play on SPY call options for a play on official oversold conditions (if they occur). I locked in the profits on the QQQ calls in the middle of the bounce. I am focused on long opportunities until/unless the S&P 500 approaches/retests 50DMA resistance.
At the start of trading, media outlets blamed the selling on rate hike fears and poor data from China. The following screen capture comes from search cache:
Headline writers went to the well to pull out some tried and true explanations for market action.
At the close, with buyers taking the baton, headlines shifted to a rise in oil as the savior of the day. For example, from CNBC: “Stocks slash earlier losses, close well off lows amid a rise in oil prices.”
None of these explanations made much sense given action elsewhere in the market. For example, if the market really feared the poor Chinese export/import data, then the Australian dollar (via Guggenheim CurrencyShares Australian Dollar (NYSE:FXA)) should not have rallied going into the U.S. open and throughout most of it (perhaps it was a leading indicator of the coming bounce?).
Australia heavily depends on exports to China. The 15-minute chart of AUD/USD shows an overnight bottom around 3am Eastern. AUD/USD was off to the races from there until 2pm Eastern. As I type, AUD/USD is taking off again as part of what has become another bounce off 200DMA (up-trending) support.
Did someone say the Australian dollar is selling off because of poor Chinese economic data? Then buy!
Support at the 200DMA was much more important on the day than any fundamental news.
At the close of U.S. trading, the odds of a rate hike in December and subsequent months DECLINED. This drop is hardly the mark of NEW rate fears that could drive more selling. According to the CME FedWatch tool, the odds of a December hike dropped all the way from 69.5% to 65.6%.
Finally, attributing the bounce to oil is essentially attributing the bounce to the closest thing within reach that is also going up. Check out this comparison of the S&P 500 and United States Oil (NYSE:USO) using a 5-minute chart. I cannot tell who is following whom in this picture – not to mention USO flatlined going into the close while the S&P 500 drifted a bit downward.
SPY (black line and grey body) dips at the open and rallies most of the day. USO seems content to trundle alongside except for one large momentary dip in the morning.
Sometimes it is easier to just blame the technicals.
Since China and rate fears were the presumed reason for the selling, I kept checking on commodity-related names all day. Freeport-McMoran Copper & Gold Inc (NYSE:FCX) is of increasing interest. FCX finally closed below its 200DMA for the first time since April. More importantly, the stock is teetering at the bottom of a trading range extending to about March. Once I pull the trigger on more bullish trades, FCX will be at the top of the list as a play back to at least 50DMA resistance.
Freeport-McMoRan Inc. (FCX) is undergoing a very critical test of support after breaking down below its 200DMA.
Teucrium Corn (NYSE:CORN) ignored all the noise of the day and rallied solidly to reverse ALL of the previous day’s gains and then some. This move almost confirmed a bottom is in place and solidified the 50DMA as support. I need to see just one more day of confirmation…
Teucrium Corn ETF (CORN) rallies hard with a 3.1% gain. It finally looks ready for launch.
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 SDS, long UVXY shares and short UVXY call, short AUD/USD, in hedged plays on USO