T2108 Update – Overbought For A Hot Minute With Breakout Charts Galore

(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 sometimes posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 68.3%
T2107 Status: 53.3%
VIX Status: 12.9
General (Short-term) Trading Call: Hold (bullish positions)
Active T2108 periods: Day #25 over 20%, Day #23 over 30%, Day #20 over 40%, Day #18 over 50%, Day #13 over 60% (overperiod), Day #95 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
The paint has finally dried and the grass has grown. On Friday, November 21, T2108 experienced a brief encounter with overbought conditions (70% or higher). My favorite technical indicator reached as high as 71.3% before settling in for a close of 68.3%.

This milestone is “close enough” for trading purposes to initiate the overbought trading strategy. I am keeping if 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 (SPX) 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.