Tuesday, July 12, 2016

More Bearish Studies Triggering Today

I will relink to a post made in April which had the same set-up as occurring today.  An additional set up is also occurring which triggered in April.
Also I added the condition of the day's high exceeding the bollinger band, and the results had an even greater bearish skew.

Also we saw the study which triggered yesterday regarding the VIX and SPY both being up with a low VIX/VXV.  Today the VIX was up slightly even though SPY was up more than 0.7%.  That combination had a negative skew looking forward as well over quite a number of instances.

So my take here based on the objective past history of SPY is that after this little break to new highs on the SP500, there is a strong chance of at least a sell off back into the previous range before the rally continues.

At this time I don't have much perspective on whether the recent break to new highs is necessarily a bullish signal.  Given that other indexes (QQQ, IWM, NYSE) are still below their highs, I think that calls into question the long term strength.

But from a trading standpoint, all we really need is to have solid info that gives an edge and then manage the trade and the risk amounts well to profit all along the way in little bits and pieces.

Let me know if there are questions on specifics of the trade here for your situation.


Monday, July 11, 2016

VIX Up and SPY Up With Low VIX/VXV - New Put Option Trade Indicated

Today's action in SPY triggered a study that I showed back in the first week of June suggesting a short-term bearish skew in the market.  We did indeed see that.

So the basic set-up here is that SPY is up today, but so is the VIX.  And the VIX/VXV ratio is pretty low at the same time.

So the study is:

  • VIX/VXV less than 0.86
  • VIX up more than 2%
  • SPY up more than 0.1%
There are now 10 instances which have occurred in the past which meet this set-up.  And 9 out of the ten showed gains of 40% or more over the next 2 weeks when purchasing an ATM put option with 2 weeks until expiration.

9 out of the 10 instances SPY showed MAX losses of at least 1.25% over the next 2 weeks.

So the trade here is to buy a July 22nd expiration SPY put either 213 or 214 strike.  I would use a limit order equivalent to today's closing value on the option if entering tomorrow.

For equities, the best play has been to set at limit order of 1.25% gain as well as a 1.25% stop loss order.  Then exit after 10 days if the limit or stop have not been hit.


PS - Let me know if there are more specific questions on how to play this.

US Bond Prices Nearing a Blow Off Top

Click on Chart to Enlarge

This chart is the TLT etf which is composed of long term US bonds.  I have highlighted the upper boundary line which has been a resistance line going back several years.  The whole price formation over the decade has the look of a massive ascending wedge or terminal impulse type pattern.

Currently price has slightly overshot the upper boundary line on the chart, and so a top could form in the coming weeks.  A more drawn out bearish divergence pattern on the current leg up may be ideal before a top occurs.  As of today neither daily nor weekly MACD is showing a bearish divergence in the current leg up.  So it seems there could be some time spent forming a divergence in upcoming weeks.

While the focus of this blog is very much on SP500 analysis and the shorter term trading opportunities in that market, bonds and rates are major factors in our economic life and outlook.  My take from this is that the interest rates are hitting bottom, and this current run up in bonds, could well be the last hurrah.  I would suggest rising interest rates and falling bond prices for months, and possibly years to come.  At bare minimum, bonds don't likely have any significant investment potential for gains in the underlying prices given the 0% interest rate bound.  So I would be strongly suggesting getting out of any bonds held in retirement accounts.  The best place for available funds may simply be cash or equivalent short term treasuries at this stage.


Tuesday, June 28, 2016

Major Flip Flop In Strategy Based on Today's Action in SPY

Today the VIX dropped over 20%.  This has only happened 9 other times going back to September 1995.  The forward results showed a very strong negative skew even in the short term of 3 days.  That was slightly lopsided by a couple massive downers in October 2008, but looking ahead 2 weeks, 7 out of the 9 showed greater max losses than max gains.

So the point here is that we have the conflicting study from the last couple days, which suggested a rebound (which we saw already in some significant measure today) that may last several days.  And now we have information suggesting that there is risk of immediate downside with 6 out of 9 instances closing lower 3 days ahead.

So if a call option was established with the expiration at this weekend, my current recommendation would be to exit ASAP, like at the open tomorrow.

I may provide stats on a possible put option trade if the rebound extends further from this level.


Monday, June 27, 2016

Backtests From Many Angles Suggest Probability of a Rebound Over the Next 4-5 Days

I have spent some significant time over the last couple days performing scans comparing the current market status to the past history in SPY.  And from a number of different angles the stage appears set for a rebound in stocks.

The backtests have pretty consistently shown the 4-5 day forward time frame as having the most notable strength.  So there are bullish plays here in both SPY options and the equity ETFs.

Now longer term, the results of the scans were not as consistent looking ahead 1-3 months.

My personal assessment from the technical side is that stocks still will fall a significant amount in the coming months.  So the expectation may be for a short multi day rebound which will punctuate a continuing decline, and also may offer an opportunity to enter a bearish position on the rebound.

The backtests which I have run suggest that if SPY gaps down tomorrow, buying an ATM call option with the expiration at the end of the week would likely be a profitable play.

If there are any questions on specific ways to play this let me know.


Aug SPY 212 Put Limit Order Final Exit Acheived

The SPY 212 August expiration put which was entered at around 5.15 earlier this month, has now moved up in value beyond its 130% limit order which was the highest value given (at entry) as a possible exit limit dependent on position sizing.

So that trade is now closed.  The equity portion of the trade has not quite achieved a 6.75% loss in SPY yet relative to the entry through another 1% decline would fulfill that limit order.  It seems there is a high probability of that occurring.

The market is now set-up for a short term rebound and bullish play, I may offer some further stats on this later today or over the next few days as things unfold.


Friday, June 24, 2016

Big Gap Downs Most Often Lead to Rebounds In The Coming Week

I will provide more stats after we see the close today, but with the big 3% gap down in SPY, a set-up is definitely in play for a rebound into next week.  The backtest stats are good for both equity and option plays with expiration ending next Friday or exiting the equity trade next Friday.

So this is a heads up that a position may be taken before the close today.  If there are immediate questions regarding possible positions, let me know ASAP to do some further back testing prior to the close today.