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

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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.


Monday, October 5, 2015

Quick SPY Update 10-5-15

The rally since early last week has been pretty fierce.  I still feel that it likely is a short covering move in a downtrend.

The daily stochastics is moving up from oversold and is mid range right now.  It appears that it would take about 3 more days to become overbought.  That would be a better technical indicator set-up.

 Click on Table to View Stats

I ran a scan with some key criteria which may show up later this week on a further rally in SPY.
Scan Criteria:

  • 3 month EMA below 1 year EMA
  • Weekly MACD below signal line
  • %K 14,3 stochastics is greater than 80
The stats show a greater than 2 times MAX loss versus MAX gain over the following 2-3 months.  The stat table above shows trade stats on the stated set-up and setting a limit loss of 7.75% and a limit gain of 7.75% or exiting the trade at the end of 2 months if neither is reached.

The stats suggest that a short position would be a profitable play on that set-up using the loss limits and profit targets suggested above.  To be clear, this set-up has NOT triggered this week yet.  It did trigger in mid September and is still an open trade by the orders stated above.

Click on Chart to Enlarge

I have showed similar hourly charts of the VIX many times in recent years on the blog here.  Currently we have a dual time frame Bollinger band set-up occurring in the VIX which suggest that stocks are near a topping point here for at least the short term.  The shorter term bottom Bollinger band is below the longer term bottom band, AND price is closing below the bottom longer term band.  This suggests complacency in he VIX/options market relative to the trend over the last couple months.  From an option standpoint, this is a factor which should be supportive of purchasing puts in the near future on scan conditions which have had a historically profitable profile.


Friday, October 2, 2015

Probably Just a Short Covering Rally Here Before a Break To New Lows

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It seems most likely to me that SPY is still forming an upwards correction off the August 24th low.  I had recently mentioned that a rally was expected after the break of the lows of the 1st week of September.  We did end up seeing a brief 1 day rally initially, but I don't think that was THE rally which would correspond with the past post crash markets.

The current rally has more of the robust feel and look (seems like a legit reversal), which often preceded the break to new lows below the crash low.

Until This week's low is broken to the downside, I think there are other interpretations, but if the timing of the pattern unfolds as I expect it would for the completion of a contracting pattern (E smaller than C, and C smaller than A), then some time between today and Tuesday would likely mark the end of this rally attempt, and we would see a very sharp break down to lower lows.

So as a simple trading strategy here, we could enter short the market on a break of this week's low with a stop above the intervening high.  Then a partial profit exit could be made and stop adjustment made in order to decrease risk and still allow the possibility for a substantial profit on the short.

Another possibility for trade strategy based off the assumption of the above mentioned contracting pattern, would be to enter short early next week with a stop a little above 198.  If price moves above 198ish, then this rally would not longer be smaller than the C wave noted above in the chart.  Then a partial exit could be taken at a 0.5:1 reward to risk level, and then move the stop down to half the original amount at that time as well to create a "no risk" trade.

I don't have any clear cut stats to offer on the option side here, but I will run some scans over the weekend to see if any profitable edge seems apparent.  Also keep in mind that the scan from 9-15-15 is still in effect with the hold time of 2 months (so basically until November expiration).  That scan would argue the legitimacy of re-entering (or continuing to hold) the Nov SPY 198ish puts with the possibility of a break down and a more obvious exit after a break of the August low.


Thursday, October 1, 2015

Final Exit of SPY Call Option

While I still think the odds probably favor some further upside into next week, I decided to exit the final 1/3 of my position today at the 40% limit level of around 4.10 on the Oct 2nd 189 call.

So I ended up with a 2/3 exit at 40% gain, and a 1/3 exit at ~60% gain.

I am still holding the GDX Dec 13 strike calls.