T2108 Update – Scratching At Overbought Levels As Currency Markets Fire A Warning Shot

T2108 Status: 69.1%
T2107 Status: 53.8%
VIX Status: 12.3
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #27 over 20%, Day #25 over 30%, Day #22 over 40%, Day #20 over 50%, Day #15 over 60% (overperiod), Day #97 under 70% (underperiod)

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
So tantalizing.

After crossing overbought territory on Friday, T2108 has inched higher the last two days…and yet has STILL failed to close at or above the 70% threshold that marks overbought conditions.

A tease at the overbought threshold

A tease at the overbought threshold

The S&P 500 (SPY) closed down marginally but overall it is maintaining a bullish bias and perspective.

The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off

The S&P 500 has made an impressive recovery from the September/October sell-off but is still less than 3% above its all-time high preceding the sell-off

As the suspense extends, volatility continues to plunge, seemingly “guaranteeing” that T2108 WILL close in overbought territory at some point soon.

The fear has dissipated almost as quickly as it flared

The fear has dissipated almost as quickly as it flared

I discussed the trading strategy in the last T2108 Update and repeat it here for reference:

“This milestone is “close enough” for trading purposes to initiate the overbought trading strategy. I am keeping it VERY simple.

In the coming week, if the S&P 500 closes below its low from Friday of 2056.76, I will assume some kind of top is in the market – definitely not “THE” top. I doubt I will try to chase the S&P 500 (SPY) lower with ProShares Ultra S&P500 (SSO) put options, but I will stop buying every dip with SSO call options. I will get much more comfortable shorting individual stocks at key technical levels. However, it is VERY difficult for me to get outright bearish on the market at this juncture without a breach of some major technical level, like 2000 or the 50DMA.

If the S&P 500 presses higher into overbought territory, I will assume the market is embarking on an overbought rally. In this case, I think the rally could be quite powerful given all the news recently of more stimulus from major central banks (China and the ECB). My strategy in this scenario will be to continue aggressively buying dips on SSO with call options. I will also lock in profits on select longs in individual stocks. This strategy only ends once a technical topping pattern appears (like a blow-off top) or T2108 drops out of overbought conditions.”

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Disclosure: long SSO shares, long NFLX put spread

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