Markets' Overbought Status Finally Ends As NASDAQ Teeters
Dr. Duru | May 04, 2016 05:50AM ET
T2108 Status: 65.3% (ends an epic 44-day overbought period!)
T2107 Status: 57.4%
VIX Status: 15.6
General (Short-term) Trading Call: cautiously bearish
Active T2108 periods: Day #56 over 20%, Day #55 over 30%, Day #52 over 40%, Day #49 over 50%, Day #45 over 60%, Day #1 under 70% (ends 44 days over 70% – overbought period)
In the last T2108 Update , I feared an imminent end to this extended overbought period. Tuesday was the day. T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), plunged soon after the open and buyers this time were unable to save the day. The close at 65.3% marks the end of a 44-day overbought period and marks the first time I have changed my trading call to bearish in a very long time. I included the “cautious” caveat since the S&P 500 still enjoys support from its 50DMA.
The heaviness of T2108 finally gave way to an end of overbought status for T2108
The S&P 500 is down 3 of the last 4 days and is churning above 50DMA support
The S&P 500 (SPDR S&P 500 (NYSE:SPY)) started the overbought period on March 1st. The overbought period ended with a 4.3% gain over that period. This is about half the expected performance based on the history of overbought periods since 1986 although there are few overbought periods that have lasted as long as this most recent one.
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S&P 500 Performance By T2108 Duration Above the 70% Threshold
Adding to the bearish danger is T2107, the percentage of stocks trading above their respective 200DMAs. T2107 has broken off from its primary uptrend that has defined most of the bullish run of the last overbought period. Although the 20DMA uptrend remains intact for T2107, the break from the primary uptrend is more of a concern with T2108 ending the overbought period.
T2107 is still in an uptrend. Can it hang in there to maintain hope for a fresh bullish run for the market?
The NASDAQ (PowerShares QQQ Trust Series 1 (NASDAQ:QQQ)) has already entered bearish territory with a breakdown below its 200DMA support last Thursday, a 50DMA breakdown the next day, and what looks like a confirmation of that breakdown on Tuesday. This was enough for me to load up on QQQ put options and follow my new bearish trading call.
The NASDAQ is breaking down
Ironically, the NASDAQ broke down just as Apple (NASDAQ:AAPL) FINALLY experienced an up day after 8 straight days of losses. Suddenly, AAPL looks like it is bottoming given the previous two days featured hammer candlestick-like patterns. AAPL provides a sliver of hope for the NASDAQ to survive its growing breakdown.
Is Tim Cook finally putting some of those billions to work on buying back stock?
The volatility index, the VIX, actually could not hold its high of the day and settled close to the 15.35 pivot. It is hard to see the VIX taking off just yet. Still, I decided to load up on call options on ProShares Ultra VIX Short-Term Futures (NYSE:UVXY) as part of my bearish trading call. I do not plan to add any more bearish T2108 trades until the bear call gets confirmed further.
The VIX is still wrapped around the 15.35 pivot. Is it getting ready to launch?
Caterpillar (NYSE:CAT) has not confirmed a bearish turn in market sentiment. While CAT is still trading down from April earnings, the stock remains comfortably above 50DMA support.
Caterpillar, Inc. (CAT) is looking toppy, but sellers have to break 50DMA support before CAT looks bearish again.
As an example of a stock that has fallen from the ranks of contributors to T2107, I show the post-earnings chart of Mellanox Technologies Ltd (NASDAQ:MLNX).
Mellanox Technologies, Ltd. (MLNX) is breaking down and looks ready to fill post-earnings January’s gap up
Another example is First Solar (NASDAQ:FSLR). Fickle solar investors are losing patience again. FSLR cracked 200DMA support following April earnings and has sold off every day since.
First Solar (FSLR) breaks down from 200DMA support.
For those interested in currencies, I strongly recommend seeing my latest posts on the Australian dollar (Guggenheim CurrencyShares Australian Dollar (NYSE:FXA)) and the Japanese yen (Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)). In both cases, I think the market is on the edge of big unwinds of exceptionally large net long positions.
Since I look to AUD/JPY as a currency-based indicator of market sentiment, I am VERY interested in how these dynamics unfold. At the moment, the weakness of the Australian dollar is winning out over the weakness of the Japanese yen. AUD/JPY has broken the April low which confirms my bearishness.
AUD/JPY continues its bearish breakdown
Another interesting development in foreign exchange is the potential blow-off bottom for the U.S. dollar index. Until now, conventional wisdom has insisted that the market needed dollar weakness to support earnings and stocks. Yet, the breakdown and acceleration of losses in the past 4 days has accompanied notable market weakness. The dollar was well below its lower-Bollinger Band (BB) when buyers finally stepped in to provide relief. This looks like a blow-off bottom to me. Needless to say, a new low should take the dollar a lot lower.
Has the U.S. dollar finally bottomed?
I took this moment as a signal to finally take profits on my position in CurrencyShares Canadian Dollar ETF (NYSE:FXC). It was a great run that I wish I had timed a little better!
CurrencyShares Canadian Dollar ETF (FXC) has gone nearly straight up for almost 4 months. Time for a rest?
The accelerated weakness in the dollar has not even helped emerging markets. The iShares MSCI Emerging Markets ETF (NYSE:EEM) gapped down into support at its 50 and 200DMA. My last trade of call options is essentially worthless now. Yet, at this critical juncture, I think it makes a lot of sense to get back to my more traditional play of out-of-the-money call and put options (an options strangle).
iShares MSCI Emerging Markets (EEM) is on the edge of a breakdown
A rebound in the dollar could spell trouble for the great rally in commodities. Already, the iron ore plays have stumbled. BHP Billiton Ltd (NYSE:BHP) gapped down to its 200DMA support. I am still working the iron ore pairs trade here.
BHP Billiton Limited (BHP) has so far topped out with its last report on the business.
The biggest caveat on the looming bearish story is Friday’s U.S. jobs report. I cannot be clear on what scenario creates a bullish response from the market, but I am bracing for a big reaction either way given this important moment for the market. It IS the month of May after all…
For readers interested in reviewing my trading rules for an oversold T2108, please see my post in the wake of the August Angst, “T2108 Resource Page .
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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 call options, long QQQ put options, short BHP, long BHP call options, short AUD/JPY, long EEM call options.
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