Brexit Relief Bounds From Oversold’s Edge
Dr. Duru | Jun 29, 2016 03:19AM ET
T2108 Status: 35.2%
T2107 Status: 54.0%
VIX Status: 18.8 (fell 21.4%!)
General (Short-term) Trading Call: bearish
Active T2108 periods: Day #95 over 20%, Day #1 over 30% (ending 1 day under 30%), Day #1 under 40%, Day #3 under 50%, Day #3 under 60%, Day #13 under 70%
Commentary
Art Cashin calls the Brexit bottom…
Tired of the Brexit headlines yet? This week is dedicated to Brexit fallout. The drama should become much less salient as the summer wears on and offers new dramas to captivate the market. For now, Brexit remains a hot topic relative to where it was during the massive run-up into the referendum vote…
Over the last 2 days, search interest in Brexit has flattened out but remains higher than interest the day before the referendum.
The stabilization in Brexit interest could be considered a precursor of “turnaround Tuesday’s” major relief rally. It was a picture-perfect bounce form the (quasi) oversold conditions I described in the last T2108 Update. T2108 jumped from the edge of oversold territory (it got as low as 24.5%) and closed at 35.2%, the open of Monday’s gap down.
The S&P 500 (SPDR S&P 500 (NYSE:SPY)) reversed all its losses from Monday with a 1.8% gain. Talk about a seesaw and a whiplash! Just like that, the S&P 500 flipped from a bearish 200DMA breakdown to a bullish recovery which makes the 2000 level look like support and returns the 200DMA to support status.
The S&P 500 (SPY) flips the scrip with a major bounce from quasi-oversold conditions.
Like the S&P 500, the NASDAQ recovers its losses from Monday.
The volatility index, the VIX, took a MAJOR hit. The VIX continued its surprising decline from Monday. It turns out that contrasting weakness was likely the confirming signal that the market was ready to rally Tuesday. While the VIX remains above its 200DMA, it is once again below 20, the level of “elevated fear.”
Get The News You Want
The volatility index, the VIX, suffers another big reversal.
ProShares Ultra VIX Short-Term Futures (UVXY) now looks like it is pivoting its way around its 50DMA downward.
With my trading bias firmly rooted in bearishness, this relief rally was just what the doctor ordered to deliver entry points for my list of short candidates. Granted, throughout the day I wondered whether I should instead hop aboard the bull train and assume that Monday’s close encounter with oversold conditions delivered a classic wash-out of panicked sellers.
A second day of high volume buying confirmed by changing conditions in the currency markets COULD convince me to make a play for a restest of 50DMA resistance. Regardless, my trading call stays at bearish given last week’s sharp tumble form the edge of overbought territory (part of my T2108 trading rules ).
In the morning, I stuck to my trading plan and set several limit orders to buy put options at discounts from wherever they traded at the open. They all filled one-by-one throughout the trading day. Interestingly enough, my order for put options on ProShares Ultra S&P500 (NYSE:SSO) triggered last.
For the day, I triggered the following bearish positions: short BHP Billiton Ltd (NYSE:BHP) to complete the iron ore pairs trade and put options in Splunk Inc (NASDAQ:SPLK), HSBC Holdings (LON:HSBA) PLC (NYSE:HSBC) (doubled down on existing position), First Solar (NASDAQ:FSLR), and even Facebook (NASDAQ:FB).
The Facebook puts actually went green for a bit, but I chose to hold on (per my lesson about locking in profits too quickly). I may have to return to flipping quickly out of positions if the market continues gyrating form day-to-day.
BHP rallies into 200DMA resistance and once again confirms the bottom of the current extended trading range.
Splunk (SPLK) gaps up above 200DMA resistance and rallies right to 50DMA resistance – volume surged.
HSBC gaps up and leaves behind a potential hammer bottom.
First Solar (FSLR) rallies into the top of its downtrend channel.
Facebook (FB) survived the “darling test.” Buyers rushed in and defended support at filling the post-earnings gap up. The stock is still sitting in a downward trending channel.
If you are bullish on the market, you can probably make a bullish case for many of these charts. The bear-bull tug is likely to dominate trading for several weeks going forward.
I also launched a hedged position in Alphabet (NASDAQ:GOOGL) Inc C (NASDAQ:GOOG). If I were not bearish, I would look at GOOG’s chart and declare a hammer bottom good for at least a rebound to converged resistance at the 50 and 200DMAs – similar to HSBC.
On an intraday basis, GOOG managed to lose almost all its gains from the initial gap up before rallying into the close. So, sellers may still have an edge in GOOG.
Alphabet gaps up and leaves behind a potential abandoned baby bottom that traps bears who over-extended the hunt downward.
Although the market rallied big-time, the Japanese yen did not decline nearly as much as I would have expected. This reluctance forms a minor caution flag for Wednesday. I took the opportunity to load up on more put options on Guggenheim CurrencyShares Japanese Yen (NYSE:FXY).
Unfortunately, an implosion of volatility reduced the value of the positions I initiated in the wake of Friday’s Brexit fall-out. I still think shorting the yen is one of the best hedges against bearishness: there is on-going potential for the Bank of Japan to intervene and weaken the yen, and it is hard to imagine stocks rallying much from here if the yen also holds firm.
CurrencyShares Japanese Yen ETF (NYSE:FXY) barely budges in the face of turn-around Tuesday.
On the bullish side, I bought Ciena Corp (NYSE:CIEN) and Cyberark Software Ltd (NASDAQ:CYBR) for what I thought made good setups for a rally day. Neither one closed far from its open, and CYBR attracted weak volumes. CIEN even briefly broke support.
Needless to say I was dismayed by these performances especially in light of the beating I took in a few outstanding bearish positions. I am holding both for at least one more day, maybe the rest of the week.
Ciena (CIEN) had to rally off its lows to hold onto 200DMA support for the day.
CyberArk (CYBR) faded from its highs even as the rest of the market rallied away.
I am hoping I had just a bit of bad luck in these choices and look to these stocks out-performing during the next market rally day.
I am expecting analysts to trim earnings estimates given the incrementally cloudier outlook for the global economy. So far, nothing major. Indeed, Whirlpool (NYSE:WHR) took the initiative by reaffirming full-year guidance and assuring investors that the company is ready to handle any Brexit-related fallout:
“The Company regularly performs risk assessments as part of the operational planning cycle and has prepared for either outcome of the vote. In the past, the Company has utilized a variety of approaches to manage volatility, including financial hedging. The Company plans to execute a previously-announced cost based price increase in the third quarter and expects to continue with strong ongoing cost productivity programs to lower overall costs in the EMEA region.
‘As we have done in the past in all markets, we are prepared to take swift actions to offset the negative impact to our EMEA operations…We will continue to monitor the situation closely to determine if additional actions may be required.'”
It was a great day for reassurances as WHR rode the wave to a 4.3% gain and closed just above 200DMA resistance. Still, the stock triggered one of my setups for a bearish trade.
I expect the stock to resume its sell-off at some point: the stock gapped down in response to previous earnings and did not quite make it into the gap. I have also noted that WHR has set itself up for disappointing investors in a big way in future 2016 quarters: EMEA will not be the only market under pressure.
Whirlpool (WHR) rallied to reclaim 200DMA support.
In currency markets, the Australian dollar (Guggenheim CurrencyShares Australian Dollar (NYSE:FXA)) is still caught in its downward trending channel versus the Japanese yen (FX). I will be watching this pair closely to gauge sentiment.
AUD/JPY still warns of bearish tidings for financial markets.
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 UVXY shares and put options, long put options on FXY, SSO, WHR, SPLK, HSBC, FSLR, and FB; long put spread on GOOG; long calls on GOOG; short AUD/JPY; long shares in CYBR and CIEN
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