Stock Chart Worden's T2108

Stock Chart Analysis Worden Indicator T2108

As regular readers know, I follow Worden's T2108 as one of my indicators for gauging how oversold or overbought the markets are. The indicator tracks the percentage of US stocks trading over their 40 day moving averages. The key levels I watch are readings below 20% for an oversold market, and reading above 80% for a market that is getting overbought. I also don't use this indicator to make immediate decisions on my trades, it only serves as a warning that the markets are starting to move to one extreme. As such, I start to get more protective of my open positions as the easy money for that move has been made. I wrote about T2108 signaling that the markets were overbought earlier this year, and it did a pretty good job of warning us of the impending pullback. I also wrote on how exaggerated the move down in T2108 was last year, as the markets were getting destroyed. The markets stayed oversold for a very extended period of time last year, showing why indicators should only be used to supplement price data.

T2108 has recently fallen back under the 20% level, and that usually signals an oversold market. One of the reasons I like using this indicator is that it accounts for a much larger number of stocks than any market average could. Notice how moves under 20% are typically followed by rallies strong enough to push the average back to typical levels near the median. The question is whether we are entering another period of extreme weakness like experienced last year, or are we returning to a more typical reaction. With the VIX well below the prior highs, my guess is that fear levels are returning to more typical levels and that we will not see an extended move below 20% on this move lower.


Good Trading,

Joey