Another Overbought Period Bites The Dust For The S&P 500
Dr. Duru | Jan 27, 2017 05:56AM ET
T2108 Status: 67.3% (ended 1-day overbought period)
T2107 Status: 68.8%
VIX Status: 10.6
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #235 over 20%, Day #55 over 30%, Day #54 over 40%, Day #52 over 50%, Day #3 over 60%, Day #1 under 70% (underperiod, ended 1-day overbought period)
Commentary
For the fourth time in 6 weeks, T2108 , the percentage of stocks trading above their respective 40-day moving averages (DMAs), dropped out of an overbought period. This time around, the overbought period lasted just one day.
In my last T2108 Update, I noted that I flipped the short-term trading call to “neutral” to avoid further churn until the S&P 500 (via SPDR S&P 500 (NYSE:SPY)) delivers new technical news. As a result, I am not flipping the trading call to bearish as the T2108 trading rules dictate when an overbought period ends.
From here it will take a close below 2280 to move the trading call back to bearish. As a reminder, the combination of constant churn in overbought status combined with an extremely low volatility index (VIX) means that I do not plan to set the trading call to bullish if the S&P 500 breakout continues.
The S&P 500 disappointed by lacking follow-through to the recent breakout, but the loss on the day was very minor.
The lack of follow-through on the S&P 500 did not stir the VIX. In fact, the VIX lost yet more ground.
Complacency seemingly knows no bound as the VIX dropped to a fresh 2 1/2 year low.
In an earlier T2108 Update, I noted that I am watching post-earnings behavior to see whether bulls and buyers continue to consider dips for any reason as fresh buying opportunities. This is particularly true on Trump-related trades. AK Steel Holding Corporation (NYSE:AKS) was in focus earlier this week. So far, buyers have shown little interest in “bargain shopping.” The post-earnings breakdown continued for AKS and a lasting top is looking more and more likely.
Get The News You Want
Ak Steel (AKS) continues its post-earnings slide. At least the downward momentum has slowed.
Traders and investors did not react well to earnings from commodities play Freeport-McMoran Copper & Gold Inc (NYSE:FCX) (think copper, oil, natural gas, and gold). The high-volume selling continued on Thursday.
This time the selling was strong enough to close FCX at the bottom of the gap up that looked like a very bullish breakout ahead of earnings. I have my finger hovering over the buy button in case the selling momentum abates and the gap holds as support.
The post-earnings reaction to Freeport McMoran (FCX) closed this week’s pre-earnings gap up and reversed the related bullish breakout.
U S Concrete Inc (NASDAQ:USCR) is another Trump trade (think infrastructure spending and big walls). USCR recently bounced neatly off 50DMA support. Thursday, the stock punched higher on more news about Trump’s proposed wall for the U.S.-Mexican border but ended the day with a 2.8% loss.
This pattern is a bearish engulfing pattern, typical of tops. The high trading volume further underlines the possibility of a top. I am watching this trade very closely now.
Did U.S. Concrete (USCR) print a top just as talk of a big wall on the U.S.-Mexico border heats up toward a potential reality?
Whirlpool (NYSE:WHR) had another poor post-earnings performance. A loss of 8.6% plunged the stock through 50DMA support. Support at its 200DMA managed to hold at the close.
I decided to buy a single call option. This could be the first part of a hedged trade. If WHR cracks through 200DMA support, I will add put options to the mix in anticipation of a major rollback of post-election gains.
Will the market’s persistent bargain shoppers jump into the breach created by the very poor post-earnings performance from Whirlpool (WHR)?
Facebook (NASDAQ:FB) continues to perform exceptionally well. This is easily my biggest missed trade of 2017 so far. As a reminder, I pointed out Facebook’s bearish technical breakdown last month and guessed that FB could be the target of buyers in 2017.
The buyers wasted no time and went right to work on the first trading day of the year. The buying has taken just four days of very brief rest since then. I should have at least jumped on the bandwagon at the breakout point above the convergence of the 50 and 200DMAs.
Facebook (FB) has soared in 2017 to a 15.4% year-to-date gain. The uptrend channel defined by the upper-Bollinger Bands (BBs) has guided FB right back to a near test of the all-time high set last October.
Finally, I am keeping a close eye on my call options on iShares US Home Construction (NYSE:ITB). The good earnings news on home builders continued to roll in, but buyers were not able to close out the day in strength. The steep fade from the highs puts me on notice for potential topping action. I will look to lock in profits if the selling gets follow-through. Per the seasonal strength in home builder stocks, I will buy into the next dip.
The iShares US Home Construction (ITB) barely hung on for a gain on the third day of a bullish breakout and confirmation of converged 50/200DMA support.
(In other trade news, I sold my small number of shares in SDS as planned. I also finally cut bait on my AUD/JPY short.)
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 FCX, long WHR call option, long USCR call option, long ITB call options
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