T2108 Update – An Important Stock Market Turnaround

T2108 Status: 28.7%
T2107 Status: 35.2%
VIX Status: 13.4
General (Short-term) Trading Call: Neutral
Active T2108 periods: Day #192 over 20% (overperiod), Day #3 under 30%, Day #7 under 40%, Day #47 under 50%, Day #64 under 60%, Day #263 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
The market simply could not wait for the U.S. Federal Reserve to give its usual “all clear” signal this time around.

The Fed announces its next monetary decision tomorrow (Wednesday, July 29). The market looked like it was headed into true oversold conditions just in time to let the Fed work its powers of soothing. In the T2108 Update for last Friday, I laid out all the bearish signs that had converged as T2108 hovered above oversold conditions. I was hoping that the S&P 500 (SPY) would retest support at its 200-day moving average (DMA) just as T2108 broke below 20% (oversold): such a combination would trigger my rules to aggressively buy the index. Instead, the index PERFECTLY retested its 200DMA (you can't make this stuff up!) while T2108 stubbornly got only as low as 24%. T2108 did not even crack the low from the previous cycle of fear.

The S&P 500 completes a picture-perfect retest of 200DMA support with a subsequent rally of 1.2%

Although my ideal trading conditions did not trigger, I was still prepared to benefit from a bounce because the volatility index, the VIX, triggered the related “fade volatility” trade. On Monday, the VIX traded above the 15.35 pivot. With T2108 “close enough” to oversold (meaning it is below 30%), I nibbled on some put options on ProShares Ultra VIX Short-Term Futures (UVXY).

I had expected to accumulate MORE puts on UVXY ahead of the Fed. Instead, I ended up taking profits as the volatility index plunged well below the 15.35 pivot.