T2108 Update – An Unconvincing Oversold Bounce

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 16.0% (second day at oversold)
T2107 Status: 21.9%
VIX Status: 22.7
General (Short-term) Trading Call: bullish
Active T2108 periods: Day #2 under 20% (oversold), Day #3 under 30%, Day #4 under 40%, Day #8 below 50%, Day #23 under 60%, Day #364 under 70%

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).
IBB (iShares Nasdaq Biotechnology).

Commentary
In my last T2108 Update, I laid out a case for short-term gain as part of an oversold bounce but longer-term pain as part of deteriorating technicals. The action on December 14, 2015 included a little of both: an overall unconvincing bounce.

The S&P 500 (SPY) managed to eek out a 0.5% gain after trading as low as a 1.0% loss. This qualifies as a very modest oversold bounce. The lows extended well below the lower-Bollinger Band (BB) and formed a great setup for buying into an oversold bounce. At its lows, T2108 dropped as far as 13.4% – a VERY extended oversold condition. At its highs, the volatility index, the VIX, reached as far as 26.8% – just below the 2012 intraday high. Put it all together, traders got a very brief buying signal to trade an oversold bounce, especially as the market started pulling out of this funk. The S&P 500 even provided the psychologically important 2000 level as a convenient pivot point.