T2108 and T2107

Posted by downtowntrader | 4/16/2009 11:28:00 AM View Comments

As regular readers know, I follow Worden's T2108 indicator pretty closely as a tool to gauge when the markets are getting overbought or oversold. If you're unfamiliar with the indicator or how I use it, follow this link for a thorough explanation of how I use T2108.

Worden also has a T2107 indicator, which tracks stocks trading above their 200 day moving average. While I don't use this indicator as often, I do track it as extreme moves in this indicator are more rare, and thus may offer additional clues.

One reason I am bringing up this indicator right now is that we have a very interesting situation developing in these indicators. I charted both indicators below to show how T2108 is very overbought right now, with over 90% of stocks trading above their 40 day moving averages. Above 80% signals an overheated market, so we are already at significantly overbought levels. What is interesting to note is that T2107 is still at historically oversold levels. It is still below 20% and readings below this level are quite rare. Beyond that, moves under that level have been short lived in the past. I only have data going back to the 80's and only the 87 crash had anything approaching what we are seeing now. Even then, the indicator only remained under 20% for a couple of months. We are currently in month 7 of that feat right now, which shows how persistent this Bear market has been.

So what does this all mean? We are very overbought in the near term, but there is still plenty of room to move higher in the intermediate term, even while remaining in a longer term bearish pattern. While markets don't go up in straight lines, we were so stretched to the downside that the snap back may end up lasting longer than most expect. Just as markets overreact to the downside they often also overreact on the opposite move. The drop in the latter half of last year lasted far longer than rational, and there is always the possibility that T2108 remains overbought far longer than what would be considered rational by most people. It could remain at high levels until T2107 has a chance to catch up. Of course, I don't think it's likely to stay persistently above 80% or 90%, but it's something to think about if you are trying to short this market or pick a top. I think the more likely scenario is a near term correction that ends up being shallow, or even a sideways time correction followed by higher prices. However, eventually this market needs a deeper pullback or even a low retest if this rally wants to build into something more substantial.

Just my opinion of course,


blog comments powered by Disqus