T2108 Update – The S&P 500 Makes A Feeble Return To Overbought Conditions

(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: 72.4%
T2107 Status: 65.7%
VIX Status: 11.7
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #209 over 20%, Day #29 over 30%, Day #28 over 40%, Day #26 over 50%, Day #20 over 60%, Day #2 over 70% (overbought, period ended 4 days under 70%)

Commentary
The S&P 500 (SPY) quickly returned to overbought status, but it crept its way above this threshold in an unimpressive style. T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed on Friday at 70.4% and on Monday at 72.4%. This entry into overbought conditions pales in comparison to the impressive breakout that launched the last overbought period.

The S&P 500 (SPY) weakened slightly post-Fed but still sits inside the upward trend channel defined by the upper Bollinger Bands (BBs)

When T2108 entered overbought conditions on Friday, the S&P 500 actually closed for a slight loss which represents a bullish divergence. I was not willing to flip the short-term trading call from cautiously bearish to cautiously bullish until I observed the follow-through. The follow-through barely registered with a mere 0.2% gain for the S&P 500. However, I decided to respect what is likely to be benign trading over the holiday period and switch the short-term trading call to neutral. I also hope to avoid getting churned with a market falling in and out of overbought conditions. Moreover, this move keeps the trading call consistent with the trading strategy for overbought trading where the short-term trading call does not go bearish until the end of the overbought period or upon a pullback from a climactic top pattern.