This Key Indicator Indicates Now Isn't the Time to Turn Aggressively Bullish

It has been just over six weeks since I shared a chart of the T2108 indicator on TC2000 and suggested swing traders and active investors begin paying attention. As you may remember, the T2108 indicator measures the percentage of stocks trading above a 40-day moving average. There’s nothing too fancy about this indicator, but it has proven helpful over the years at identifying when stocks are too oversold or too overbought. The caveat is, a weak market stays weak for longer than you expect. The same can be said about a bull market.

When I posted a chart of the T2108 indicator on the morning of June 17, the Invesco QQQ Trust (QQQ) had just closed at a new (and still its most recent) bear market low, and the percentage of stocks closing above a 40-day moving average registered an anemic 10.5%. While no one should ever credit this or any indicator with triggering a rally, it provided strong evidence that the time to be pressing shorts had long passed. As discussed in mid-June, I consider stocks to be oversold beneath 20 and overbought above 70.

As of the Aug. 1 close, QQQ is up a bit more than 16% from its June 16 close, and as you can see on the chart above, the T2108 is registering a reading of 71 after touching 70% on Friday.

Again, while the chart of T2108 alone should not have you liquidating your long positions or initiating new shorts, it at the very least should support the idea that turning aggressively bullish at this time carries a high degree of risk.

My view is simple: QQQ is nearly 5% above its 21-day exponential moving average, and unless you believe we’ve embarked on a new, rip-roaring bull market (which I do not), a 2% to 4% dip or extended consolidation makes a lot of sense. While I’m only guessing, I suspect some chop or a moderate correction would allow the number of stocks trading above their 40-day moving averages to drop back into the 50% range.

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