Waiting Now As the VIX Coils Its Springs

T2108 Status: 9.3%
T2107 Status: 12.9% (a fresh near 7-year closing low)
VIX Status: 26.1% (high of the day was 27.6, right under the 2012 intraday high
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #8 under 20%, Day #11 under 30%, Day #27 under 40%, Day #31 below 50%, Day #46 under 60%, Day #387 under 70%

Commentary
T2108 closed at 9.3% on day #8 of this oversold period. Traders positioning for the next (relief) rally have been holding their collective noses for a third day now as the trading action continues to stink – to use a technical term. Three out of the last four trading days have ended with T2108 in single digits. Using the historical data I laid out last week, this scenario suggests that this oversold period could reach for a 15-day span…just in time for the next meeting of the Federal Reserve.

While T2108 closed with a marginal gain, the S&P 500 (SPY) struggled mightily to close flat for the day. I am not calling this a bullish divergence because the change in T2108 is so small relative to the size of this bearish trading action.

The S&P 500 (SPY) is struggling mightily to hold support from the August Angst.

As the reality of an extended oversold period has sunk into my consciousness, I pulled the trigger on precious few trades. So now comes the time for waiting: I am waiting for a signal from the volatility index, the VIX. The last element of the T2108 trading rules is to make a move once volatility “spikes.” Given my current aggressive positioning, it makes little sense to continue accumulating until the nature of trading changes in my favor. A spike in the VIX could and should signal the imminent end of this oversold period.

I now define a spike as a move well above the upper-Bollinger Band. The VIX put on such a show during the flash crash of the August Angst. It is a moment when panic and fear ramp to climax levels; the ultimate peak of seller’s exhaustion. I like to buy into such spikes; more conservative traders can wait until the VIX completely reverses the gains from the spike and start accumulating from there. (Note that during the August Angst, the S&P 500 still soon retested its lows after the volatility spike completely reversed).

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

I am scratching my head wondering why/how the intraday high from 2012 is STILL delivering overhead resistance to the VIX.

Incredibly, despite all this persistently bearish trading action, the VIX STILL cannot crack resistance from the intraday high from 2012. This loitering around such an important resistance level makes the VIX start to look like a coiled spring. So now I wait…

As promised, I wrote an update to “made the same argument last night on Mad Money using the work of famed Fibonacci technician Carolyn Boroden. Similarly, she agrees with T2108 technicals that an oversold bounce of notable size appears imminent. This is some SERIOUS bear/bull tension!

After-hours brought a shred of positive news with Netflix (O:NFLX) managing to tack on another 7.2% on top of the 3.7% gain in the regular session. All eyes will likely be on NFLX’s post-earnings trading action. The stock’s ability to hold support at its 200-day moving average (DMA) and then hold post-earnings gains would be baby steps in the right direction. However, NFLX’s relative strength has meant that NFLX’s good fortunes have not necessarily translated into the fortunes of the masses. Needless to say, if NFLX manages to close below 200DMA support, such a move would add yet more anchors to bearish sentiment.

Netflix is one of the few stocks in the market still holding its 200DMA as support.

One sector in dire need of a return to cheer is the solar sector. Late last year, I admired the select bullish setups in solar stocks. Now, First Solar (O:FSLR) is just about the last one left standing without a fresh breakdown. I contrast FSLR with Solar City (SCTY) as an example of the sharp divergences.

The good tidings from the Goldman upgrade did not last long, but First Solar is still holding strong at 50DMA support.

No good tidings for Solar City (O:SCTY) as Chanos emerges victorious once again. Support at the 200DMA gave way to a wicked breakdown in the stock.

Finally, I neglected to acknowledge the bankruptcy of Arch Coal Inc (N:ACI) (ACI) last week. That final collapse brought a merciful end to the trade I described at the beginning of December as “A ‘Last Chance’ Trade on Arch Coal.” A title never rang so true! I am now curious to hear what Soros has to say about this turn of events. His massive bet on the company earlier in 2015 gave coal stocks one last gasp of hope.

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 SVXY shares, long and short UVXY put options, long SSO call options, long SSO shares, short, long SCTY, long FSLR call options

Written By: Dr. Duru