Thursday, September 29, 2016

MACD Whipsaw This Week - BackTest Results

The daily MACD this week made a couple whipsaw crosses.  It crossed up on Friday, then down on Monday, then up again on Tuesday.  This type of cross in one direction followed the next day by a cross in the other direction is not very common.

Going back to 1995 in SPY I only found 4 instances where there was an up/down/up pattern on three consecutive days.  The back test results did not seem significant.  No major skew in the forward returns, and small sample size.

When I look at just the down/up pattern on back to back days, I found 21 prior instances before this week.  In this case there was a definite bearish skew, with some large decliners in there, and the forward return showed a bearish skew with the forward MAX loss being over twice the size of the MAX gain at time frames from 3 days out to 1 month.

When I filtered the results for the occurrences where the MACD line was below 0, the results were even more bearish (this condition matches the current market) but with only 8 instances.  Only 1 out of the 8 had MAX losses less than 3% in the following month.

When I filtered for the weekly MACD being in a down position instead of the daily being below 0, the results were roughly similar with a pronounced bearish skew.

So, the first couple days since the signal in the last post, have not been typical of the strong negative skew suggested by that small sample size study.  But here again we see a piggy back study with a strong bearish skew, but small sample size.

Anything can happen, but I currently see no really great reason to abandon the previous trade currently.

As a side note, when I reversed the signal order for the whipsaw to up/down on consecutive days, there were only 13 prior instances, and the results were shorter term bearish, but more positive looking forward several months. 

My take away here is still to favor the downside for upcoming weeks.


Monday, September 26, 2016

New Put Option Trade - Stocks Could Decline Dramatically The Next 1-2 Weeks

Click on Table to Enlarge

The table here shows the results of the following back test criteria:

  • daily MACD crosses down today
  • daily 14,3 stochastics crosses down today from above 50
  • weekly MACD is in the down position (fast line below slow line)
A relatively simple scan, but shows the impact of a market that is having shorter term technical sell signals with the larger current pointing down.

Four trading days later all 8 instances closes lower.  The minimum was 0.5% and the maximum was over 10%.  But looking at the MAX gains versus loss over the coming days and weeks, I rarely see anything this strong. 

The instances are not that high, but I don't think that means this sample is insignificant.  Some studies are rare, with small sample size, but are obviously notable events.

I purchased both a 214 strike Nov 18th expiration put as well as a 214 strike Oct 7th expiration put.  Based on the stats, this Friday's expiration certainly could be used as well.  The stats are about par with the 2 week stats as far as option % returns expected.

In this case, the past instances suggest a limit order of 160% gain on the put option would produce a very high expected value and win rate.  While the sample size is small, I am going ahead and placing that limit order.

I am going to wait for a couple days before placing the limit order for the Nov put.  I think the 199 level on SPY could be broken by November.

Trade Idea:
Buy the SPY Oct 7th expiration 213 strike put at the open tomorrow.

Additionally, a short/inverse trade could be entered here.  Using a 7.75% limit gain order and stop loss order (can enter as an OCO if available), would produce the maximum expected value based on the past test.


Very Bearish Set Ups Today - FYI

I have spent some considerable time today and over the weekend looking some back tests which have some similar characteristics as the current market environment.

Without going into all the different angles, if today closes below the open, the technical set up seems to be moving into a strong wave to the downside.

It is possible that today there will be a cross down in the daily stochastics, and the daily MACD, with both the weekly stochastics and weekly MACD in a down position.  This has been very bearish in the short term over the past 20 years.  Possibly when several different technical systems trigger a sell signal on the same day, there creates the possibility for some sharp short term follow through to the downside.

I will exit my UPRO trade today by the close if the close is below the open, and possibly even if it closes above the open.  The 3 day forward returns are so sharply bearish in what I have looked at, that I will make a discretionary exit based upon the new information.

Also, the put option from 1 week, all the way out to 2 months have some favorable outlooks based on the back tests.  The most simple play seems to be buying an ATM put with either 2 weeks or 2 months (or a mix of both) until expiration, and just waiting until expiration to exit.

I will make some final assessments by about 3:00 pm today and possibly post a specific trade recommendation. 


Thursday, September 22, 2016

Update on UPRO and SPY Equity Trade 9-22-16

I recently made a post regarding a bullish ETF trade on UPRO or SPY with the trade stats suggesting an exit at the close of 9/21/16.  That exit came yesterday and was a profitable exit.

However I personally did not exit the position because of new scans suggesting further upside probability.  I looked at a few different angle of the market action, but 1 scan that looked at:

  •  3 closes below the open in a row 
  • with the daily fast stochastics below 30 
  • and the yearly moving average of price pointing up
This produced a forward MAX gain in the next week that was over twice as large as the MAX loss.  There was a highly profitable play of closing the trade 5 days later (in this case at the close of next Tuesday Sept 27th).

So I have kept the same stop and limit sell orders that I originally had placed, but did not close the trade yet.  

I show this as an example of using new market information to adjust trade strategy on the equity side where there is no expiration.

For instance, a certain scan may have a nice forward return on average, but when you look at trades that move sharply in the new expected direction in the first few days, they may have a very profitable forward expected return over the next few weeks or months based upon the back test.  So in these cases, it would make sense to use the newly generated back test information to adjust stops, and continue to hold longer for larger probable gains as a leg up or down appears likely to continue.

If you knew you were in the midst of a probable trending move, there would be no desire to exit.  But you never know.  You have the past information as probabilities, and go with what it suggests.


Longer Term Pattern Analysis on SPY ETF - A Major Top Possibly Forming 9-22-16

SPY ETF is Forming a Possible 5th Wave Up and Creating Longer Term Bearish Divergence
Click on the chart of SPY above to enlarge the image.  But there is a pretty nice Fibonacci type sequence developing here.  I have put labels 1,2,3,4 on the chart with an implied 5th wave up to new highs expected using an Elliott wave interpretation.  And if wave 5 is then 38.2% of wave 1, it would project SPY to 225.50ish (projected up from the September low).  Based on the duration and relations of the other price waves, it would seem that the Oct 6th time frame would be a nearly ideal end to the sequence.

From a charting standpoint, the suggested price move in that time frame would lead to a break above the upper channel line of the April to August highs.  And from a technical analysis perspective it could make a massive multiple time frame bearish divergence in the MACD - monthly, weekly, and daily all in bearish divergence.  I have learned that those set ups are significant.  Even if a major top does not end up forming, I would guess there will be a significant correction after such a set up.

From a smart money perspective, we have seen the smart money become aggressive sellers since the move to new highs in July.  Price has not made much headway since then.  If we continue to see increased smart money selling as prices push higher, and price then breaks below the September low, that would be suggestive that the bearish forces have won this battle.

However, when large short positions are accumulated by the smart money, and the opposing players are able to push price several percent above the valuation/battle zone, it may force a short covering by the smart money.  That scenario can lead to major price gains in the market, and often in pretty steady fashion.

But then the scenario is that once the short covering is complete, the stage would be ripe for a major top.  I highlighted such a scenario in 2011 in the cotton market.  Given the large potential "basing period" since May 2015, a short covering rally could take the market much higher.  So I am not hanging my hat on one outcome.

Any short attempted at a quality set up would need a defined stop loss to protect against such a scenario.

But for now, my expectation is that prices will trend higher for the next week or two before another short/inverse set ups "ripens".


SPY Option Trade Exited for 50% Gain -

In follow up to the last post and recommended option trade for SPY calls, the profit target has been met and limit order filled for all of the different expirations which fell in line with the recommendation and past data.

The 50% limit order for expiration last Friday, this Wednesday, and this Friday have all been reached, so the trade is closed for another nice short term gain.

Currently, I expect SPY to move to new all time highs again, probably by the end of this month.  However, the pattern that I see, I feel could signal a major decline to follow.  I will give a perspective on the set up to follow for a possible longer term high with practical idea of timing a short/inverse trade on stocks as the set up develops.


Wednesday, September 14, 2016

New High Probability Call Option Trade on SPY 9-14-16

As of the close of Tuesday/yesterday's session, another high probability call option set has occurred.

I ran a scan with the following criteria:

  • SPY gaps down between 0 and -1.0%
  • SPY closes down more than 1%
  • The %K 14 period stochastic is below 30
  • 63 day MA is greater than 252 MA (bull market configuration)
So we have a gap down and lower close with the stochastics near oversold in moving average up trend.

There were 80 instances, the results in the table below.

The trade strategy would be to buy an ATM SPY option at the close of Tuesday or the equivalent price.  Then set a limit order of 50% gain to exit the trade.  Let it expire worthless if the limit is not hit.

Now the dilemma here based on my option analysis system is that we are at Wednesday, and the stats are for buying an option with 5 days until expiration.  But we don't have that ability.  We could either buy this Friday's expiration or next Friday's.  I would suggest getting more time rather than less because the stats are still strong for 10 days until expiration.  However, the skew is still very strong for the first 3 days in favor of upside gains.  So either way could be justified.