T2108 Update – Almost Overbought…Again

(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: 63.5%
T2107 Status: 48.8%
VIX Status: 17.3
General (Short-term) Trading Call: Bearish until T2108 goes overbought AND S&P 500 closes at a new all-time high (for more details see below)
Active T2108 periods: Day #76 over 20%, Day #35 above 30%, Day #15 over 40%, Day #4 over 60% (overperiod), Day #146 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).

Commentary
T2108 teased us again with a close encounter with overbought status. T2108 traded as high as 68.96% before closing at 63.5%. Based on previous experience, I think this is close enough to change the short-term trading bias to bearish. When T2108 last had a close call with overbought status it preceded a small pullback into mid-December (that of course set up the subsequent Santa Claus rally…chop..chop). In this case, the close encounter was followed by a strong fade. It will take overbought status and a fresh all-time closing high on the S&P 500 (SPY) to invalidate this bearish trading bias. The trading bias is reinforced by the S&P 500’s fade at the top of 2015’s trading chop and from its level when overbought status last eluded the S&P 500 (think sloppy head and shoulders top).