An Unconvincing Oversold Bounce
Dr. Duru | Dec 15, 2015 06:00AM ET
T2108 Status: 16.0% (second day at oversold)
T2107 Status: 21.9%
VIX Status: 22.7
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #2 under 20% (oversold), Day #3 under 30%, Day #4 under 40%, Day #8 below 50%, Day #23 under 60%, Day #364 under 70%
Commentary
In my last T2108 Update, I laid out a case for short-term gain as part of an oversold bounce but longer-term pain as part of deteriorating technicals. The action yesterday included a little of both: an overall unconvincing bounce.
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The S&P 500 (N:SPY) managed to eek out a 0.5% gain after trading as low as a 1.0% loss. This qualifies as a very modest oversold bounce. The lows extended well below the lower-Bollinger Band (BB) and formed a great setup for buying into an oversold bounce. At its lows, T2108 dropped as far as 13.4% – a VERY extended oversold condition. At its highs, the volatility index, the VIX, reached as far as 26.8% – just below the 2012 intraday high. Put it all together, traders got a very brief buying signal to trade an oversold bounce, especially as the market started pulling out of this funk. The S&P 500 even provided the psychologically important 2000 level as a convenient pivot point.
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The S&P 500 (SPY) prints a classic “hammer” pattern as it rallies off its low of the day.
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The volatility index, the VIX, stops just short of the 2012 intraday high before ending the day DOWN 6.8%.
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The bad news is that, once again, the poor breadth of the market reared its head. While the S&P 500 recovered for a small gain, T2108 closed with a loss. In other words, while the net result of the trading action left even more stocks in a worse technical condition, a few large stocks helped to push the S&P 500 over the hump. This poor breadth generated an unconvincing bounce which longer term flashes warning signs to me.
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Two of those large stocks powering the index were Amazon.com (O:AMZN) and Netflix (O:NFLX). I traded the two as an offset in another attempt to try something a little different than the typical oversold trading strategy. AMZN ended up on the day with a cool 2.8% gain and only spent a very brief moment of time in the red. NFLX fared a lot worse during its selling but met a swell of buyers off critical 50DMA support.
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As I watched an early morning rally lose steam for AMZN, I decided to try a small and quick short. I watched as the stock eventually lost a quick 10 points…but I decided to hold even as the stock recovered (will likely be another hedge for making more aggressively bullish trades during the oversold period). On the daily chart, AMZN actually looks like it is topping. Before the strong close, the lower Bollinger Bands were creating a channel pointing downward that confirmed the bearishness of the previous day’s gap down.
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Amazon.com (AMZN) is finally looking toppy: three weeks of distribution, a gap down on high selling volume, and aa lower-BB trading channel that is teetering downward.
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Sellers rushed out the stock into a climax of selling volume right before lunch on the East Coast. Buying volume picked up in the last hour of trading to create a small breakout on this 5-minute chart.
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As I watched NFLX plunge, I resisted the typical urge to start loading up on call options as the stock approached critical support at its 50-day moving average (DMA). Instead, I set a trigger to buy my call options once NFLX crossed above a critical level of intraday resistance. I used a 30-minute chart (shown below) to determine a reasonable trigger point. I sold the calls after hitting a 50%+ gain. At the time, I thought the bounce from the lows was already long in the tooth. NFLX continued to rally right into the close.
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Netflix (NFLX) prints a near picture-perfect bounce off 50DMA support. But can buyers keep up the recovery efforts?
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The 30-minute chart reveals a very basic method for playing a bounce off lows.
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An interesting dynamic developed during the day with solar versus coal.
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I have been touting the bullish setups of a few, select solar stocks. I did not think through the potential for solar stocks to pop upon a successful resolution of the climate change talks held in Paris. I also did not think about these talks as a wildcard to the “last chance” trade on Arch Coal Inc (N:ACI). Needless to say, I am even MORE bullish on solar stocks now even with the market’s deteriorating technicals. I am also seeing the writing on the wall for ACI…
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SolarCity Corporation (O:SCTY) makes a VERY important breakout: the rally from lows continues in a well-defined channel, the post-earnings gap down has closed, and the stock has finally recovered back to its price where Chanos recommended shorting the stock.
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Another brief respite fr Arch Coal (ACI) looks ready to come to a calamitous end.
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One trading day and a half before the Federal Reserve gets a chance to set a new course for the market.
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Daily T2108 vs the S&P 500
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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%)
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Weekly T2108
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Be careful out there!
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Full disclosure: long SVXY shares, long SSO call options, short AMZN, long ACI call options
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