Saturday, November 14, 2015

Short Term Oversold Signals Abound - SPY Analysis 11-13-15

The outline I gave in the last post has followed pretty closely so far in subsequent market action.

Based upon the scan comparisons from the previous post, the current time frame would already have surpassed the final bear market rally highs from previous comparable markets in the cases of major sell offs following the stated scan conditions.  So the Nov 3rd high seems important in that regard.

Currently with stocks down several days in a row, the hourly VIX chart is set up in an extreme that has typically preceded significant rebounds in stocks at least for several days.

The hourly MACD chart of SPY shows no bullish divergence at this time, so it may be premature for even shorter term traders to buy at this time.

Remember from the scan comparisons that the 2 months following previous similar markets were very strong to the downside.  Only very brief rallies punctuated those declines.  At this juncture the good put option purchase opportunity already seems past compared to when I posted those scan conditions 2 weeks ago.  So from here, I am kind of neutral but would suggest that stocks could sell off significantly.  The obvious stop loss point on a short position would be above the Nov 3rd high in SPY.


Thursday, October 29, 2015

Market Conditions Fit With Topping In a Bear Market Rally - 10-29-15

Today I ran a few scan and one simple one that stood out highlighted the time periods below.  They were basically during the last 1-2 weeks of rallies in the last couple bear markets.  The 2002 and 2003 instances were after the bear market low in Oct 2002, but the Nov 2002 high did lead to a major decline and retest of the bear market low.  Only the April 2003 instance failed to lead to a major decline in stocks.

Mid January 2001
Mid May 2001
Aug 1 2001
Mid Nov 2001
Mid Nov 2002
Mid April 2003
Mid May 2008

The scan conditions were:

  • 63 day EMA< 252 day EMA (basically long term downtrend in force)
  • 5/63 total put/call ratio less than or equal to 0.83 (recent put/call complacency relative to trend)
  • VIX closes below 25 (this will exclude rallies that are in major fear/decline environments toward the middle of the bear markets)
Buying an ATM put with 2 months until expiration on this signal led to average return of nearly 200% gain at expiration.

So it is certainly possible that the dramatic sell off in August was a blip in a bull market, similar to the August 2011 sell off, the bull market is in a later stage now and it is possible this is the first major rally of a larger bear market.

A low-low-high time cycle comes in next week on Nov 3rd relative to the August and Sept bottoms on the recent decline.  

The daily upper bollinger band (20,2), is currently sitting at about 210 which is 0.5% above the current highs.  It may be ideal to see a brief sell off followed by poke to new highs and a touch of the upper bollinger band before the rally completes and a significant retracement or leg down starts.  I also feel that program trades are likely to sell or profit take on a touch of the upper bollinger band.


Wednesday, October 28, 2015

Complacency In the Markets As the FOMC Meeting Occurs

Click on Chart to Enlarge

There are a number of shorter term notable bearish divergences occurring over the last couple weeks as stocks have continued to advance.  Also, there are some intermediate term sentiment extremes showing up in the put/call option data.

Today the FOMC released minutes and as occurred at the Sept 17th meeting, the VIX is at a relative low, contacting the lower longer term bollinger band on the chart above.  This indicates complacency in the options market relative to the recent range.  This type of signal occurs frequently near inflection points, in this case possibly with a short to intermediate term top in stocks.

There are several other indications of loss of momentum in stocks here.  I will run some scans over the next couple days to look at possible profitable opportunities in the options and stocks.


Monday, October 12, 2015

SPY Looks Ready to Pullback This Week - 10-12-15

Click on Chart to Enlarge

As a follow up to last post here is the updated hourly chart of SPY showing the lower peaks in the money flow index and a cross of the MFI below its moving average.  This is a picture perfect indicator divergence to signal a top.  Now it seems that stocks are still not ready just yet to decline, so it may take at least another to poke to higher highs before selling comes in.

At this point I have run several scan over the last few sessions, and based on similar moving average and technical indicator set-ups in the past, there is a very negative expectation for the next couple months.  Buying a 2 month until expiration ATM put on SPY here has been a profitable play in similar set-ups over the last 20 years.

So again I like a short entry here with a stop 3-4% above the market based on some previous stats.

Check last post as a further indication of moving average signal to look for confirmation of a new downtrend possible.

Thursday, October 8, 2015

Dual Time Frame Overbought Signal in SPY 10-8-15

Click on Chart to Enlarge

The technical position of SPY is currently showing the classic type of formation in the last stage of an advance - in this case at least on the hourly chart.  The money flow index peaked a couple days ago, and now it has declined and is ready to poke back above its average.  The next cross of the money flow index below its average after a bearish divergence in this position is typically coincident with a top.

Also the daily 14,3,3 stochastics is now basically overbought with %K>80 and %D at about 76.  So there is a clear dual time frame of daily overbought, and hourly time frame bearish divergence in the midst of downtrending long term moving averages (252, 200, 63, 50 day MAs).

I would anticipate a multi day top would be likely be in place by tomorrow.  The gap up at 195 which is unfilled, would be the first obvious target for next week.  

I like the odds and historical expectation stats of entering short/puts here without waiting for confirmation of reversal.  A reversal candlestick today or tomorrow, like a bearish engulfing pattern, occurring right at the resistance level in the 200 region which has been established since Aug 24th, would be a nice daily confirmation signal that a multi day decline may begin.  

Also a 30 minute 8,21 EMA cross down would  be a reasonable lagging indicator to initiate a short with a stop above the intervening high.


Historical Comparisons to Low VIX While Overbought In Downtrend -- Look Out Below

I ran a scan going back to Sept 1995 today which looks at a similar set-up to what is occurring now in the SPY etf relative to real money sentiment.  And this scan is totally lopsided, pointing out the tops of major bear market rallies.

The criteria were as follows:

  • 252 day EMA pointed down
  • 63 day EMA pointed down
  • 14,3 %K stochastics greater or equal to 80
  • 5 day avg. of 14 period Money flow index is greater than 50
  • VIX closes below 30
  • 5 day avg of total put/call ratio is less than 63 day average of total put/call ratio

This is what we are seeing now in our market.  Basically the moving averages are in a bear market configuration.  The daily stochastics has cycled up to the overbought region.  The money flow index is above neutral indicating the market is not in the very early stages of a rally off a bottom.  The VIX is at a low level not typically seen in the early stages of a rally from the bottom of a leg down in a bear market.  The last week of trade has shown less put activity relative to calls compared to the last quarter.  So there is sign of optimism in the options market (despite a downtrend, lower highs, etc).

Click on Table to View Past Instances

There were 5 unique instances or periods where this occurred.  All of them led to massive downside skews over the coming months as bear market leg down quickly ensued.  Not each instance here occurred right at the high of the bear market rally.  A few of the days occurred 1-2 weeks before the top of the rally occurred.  But the forward returns show a 10:1 downside skew even over the next 2 months.  

So the message here seems to be a clear red flag for any stock market bulls.  And it certainly seems like a clear signal to speculate on put options.  Entering short here with a stop 3-4% above the market also seems to be a clear strategy for the equity side.


Wednesday, October 7, 2015

Complacency In a Downtrend Is a Short Set-Up - SPY Analysis 10-7-15

Click on Chart to Enlarge

As of this morning's high in SPY, there is a marked 30 min MACD bearish divergence.  The daily %K stochastics is nearly to the 80 mark indicating an early stage "overbought" signal.

In the chart above I have marked with arrows the times since the Aug 24th low where there was a 30 MACD divergence, and all have been good buy and sell points in the range.

It is possible that a 5 wave type move is completing off last week's low.  And this may be the "c" wave of a flat type pattern up from the Aug 24th low.  Additionally as noted by the red line on the chart, the gap down from the day after the recent FOMC announcement has now been filled, and from a charting standpoint, the fill of a significant gap, with reversal can be a continuation point of the dominant trend (in this case down, as indicated by longer term moving averages).

I ran a scan today which looked at time when the overall market real money sentiment as evidenced by the "complacency" indicator I have developed, is below a certain point in a down trend.

The scan criteria were:
  • 252 day EMA is down
  • Weekly MACD is in sell configuration (MACD
  • Complacency was less than 29.0 (this is pretty low for a downtrend)
  • Looking back only to the 2007 market top (volume is a factor in the indicator, and previous market environments had non comparable average volume)

What we see on this scan is a massively profitable result in the option looking out 2 weeks.  The expected value including losers is ~65% on the ATM put options with 10 days till expiration based upon past similar occurences.  So this type of set-up has preceded some major pullbacks over the coming weeks.  Notably some occurences were right near the highs of counter trend rallies in the last bear market.  The limit order to exit the option in this example is 210% which suggests a big move down.  Based upon this I would suggest the Oct 16th standard SPY put option, 198 strike.  Then use the limit order of 210% as suggested here based on the data.  

A partial profit could be taken at 120% based upon the data if you want a tiered exit.