Monday, January 9, 2017

Bearish Trade Stats From Recent Set Up

Click to Enlarge Stats

On December 9th and December 13th a trade set up triggered which has had a consistent and marked bearish skew looking ahead a couple months or more.  I did not remark on it at the time because the technical analysis was pretty clear to me that any immediate pullback was likely to be modest and that further bearish divergence would likely develop.

However, I will now make not that this set up is active and still in a range where it could be acted on,

The scan is as follows:
  • daily MACD position is UP
  • daily MACD lines are both above 0
  • SPY closes up for the day
  • there is a total put/call "sell" signal (5 day average is below 1 st dev bollinger band)
I removed subsequent readings from clusters with multiple signals after the first in a 2 week period.

The stats above are for an ATM put option with 2 months until expiration if purchased at the signal, in this case on Dec 9th.  Past instances show peak expected value at 120% gain on the option, but the 90% gain mark puts the win rate at 67% with only a slightly lower expected value.  So that is the stat shown here.  The stats are nice here, and would suggest that a 226 to 228 strike SPY put could be purchased with a standard february expiration, and then set a limit order of 90% gain to exit.  There would be about 2/3 chance of winning based on the stats, and the expected value is around 26%.

Click to Enlarge Stats

In this case, the equity stats have a strong skew and a nice trade set up as well.  Using the simple methodology I have designed for trading these situations, you enter inverse on the set-up and then set and equal percent stop loss and limit gain order.  If neither are hit (which is MOST common) you exit the trade a predetermined time.  In this case it is a 2 month time exit from the initial entry, which would be Feb 9th.  

The stats shown above would be for a short of SPY and then use a 6.25% limit gain and stop loss or exit Feb 9th.  Basis the SPY etf the expected value would be about 2.25%.  But the stats justify 3x leverage.  And so the theoretical stats there would be about 6.75% expected value.  That is pretty nice for an "equity" play when the market is anticipated to fall.

In this case in you buy a 3x inverse etf like SPXU then the stop would have to be 18.75% away from the entry and the limit order the same.

So these stats are certainly actionable by my criteria for trading.  And I also looked at times when there was a put/call "sell" signal at a new 52 week high, which also was the case in December.  And there was a bearish skew looking out 2 months, which also showed profitable stats using a limit order of 140% gain on the ATM put option.  I simply note this to say that even though stocks are at all time highs, the signal here still seems to be legit.  

And now that some time has burned away and some divergence has developed in the technical analysis, I think there is higher chance of stocks moving down with minimal time decay on the options.  In fact the option price is lower now than at that point, and so the value may be better.

That being said, I think it is likely that SPY could move higher for a couple more days to create an hourly time frame bearish divergence.  If so, that could be a fine tuned entry point.  I have a limit order to enter a position based on a move up to the 228 region in SPY.


Multiple Time Frame MACD Divergence In SP500 - Correction Or Bull Market Top Ahead?

Click on Charts to Enlarge

The charts here are the SP500 cash for the top three (monthly, weekly, daily) and SPY for the bottom chart, which is 60min candlesticks.

The monthly, weekly, and daily time frames are all currently displaying bearish divergence at the recent high on Friday.  Given the confluence and time scale of these divergences, I believe that price may be near a crest.  While tops can be sloppy and drawn out, we have already been seeing that for about 2 years.  

Rather than prognosticate on causes and projections and patterns, what we objectively are seeing is a divergence which truly indicates a "slowing" of the trend.  And the divergences so often occur preceding major changes in direction.  So I imagine that like a ball thrown up into the air will gradually slow before it reaches its peak and then begins to travel back down, the rising market will experience progressive slowing down, until it reaches a peak and turns down.  The smaller time frame divergences, I imagine to help identify the finer timing or reaching of the zenith in price.

So much for theories.  But what has happened in the past under some similar circumstances?

I ran a scan on SPY going back to late 1995 where there was a weekly, and daily time frame MACD bearish divergence concurrent with, or within a month after a put/call ratio sell signal like happened a couple weeks ago in the current market.  I also went through and excludes most days after the first signal day if there were a cluster within a 2 week period.

There result is that there was a negative skew in forward return looking out for a couple months.  It was not real lopsided, but in anycase it does support the idea that stocks may be near a relative top.  From a probabilistic standpoint is the only way we can meaningfully approach it for trading.

The skew is not real strong but is most prominent looking ahead about 3 days and at 1 month.  At 1 month after the past signals, the average closing return has been a mild negative at -0.25%.  And the MAX loss has been about 1.3 times the size of the MAX gain.  The numbers here are not strong enough for me to suggest an inverse trade based on those stats alone.  

So there is not a lot actionable here from the trading front.  But for those who want a larger market context for incorporation into trade selection, hopefully this helps.


Tuesday, December 13, 2016

Further Signs That The Current Rally Is Mostly Done

The last couple sessions have showed what I call a total put/call ratio sell warning.  I have shown the chart many times, but the 5 period total p/c ratio is below the 1 standard deviation bollinger band.
I added several other concurrent filters to the data, and they basically all suggest a negative skew over the next couple months.  It appears most strong looking out about 2 months.

I also looked at time only in December when the signal occurred.  It was less bearish compared to the total sample.  The skew still went negative at the 1 month mark, but was positive for a couple weeks after the signal.  That would fit our current situation where we have no bearish divergence in daily MACD, and Christmas is yet ahead of us and the seasonality is still positive.

I also looked at the signal in December when the weekly MACD was above 0 versus when it was below 0, meaning the market was recently selling off.  When the signal occurred above 0, as it is currently, it was more bearish, but not many instances were present.

The FOMC meeting announcement will be tomorrow.  I think it possible that markets sell off a bit, but then still end up making more new highs.

In any case from my perspective here, I dont anticipate much further price gains in SPY for the next couple months.  Some of the stats that have showed up on the back tests are compelling for an inverse position being established here.  From the option standpoint there are profitable plays as well on the puts, but my personal assessment of the market position is that it will likely be a couple weeks or so until markets are ready to top or start to roll over.


Monday, November 28, 2016

Currently Near Probable Momentum Peak In Stocks

As of today in SPY, the 14 period Money Flow Index turned down from above 85.  Also, the daily lower bollinger band turned up after an expanding move in the recent run up.  Both of those signs are typical of the end of the main trending part of a market move.

From my perspective it seems most likely that stocks will retreat slightly or chop around but still end up pushing to higher highs in coming weeks.

Currently the SPY etf is setting up for a major multiple time frame bearish divergence.  Both monthly and weekly MACD signals are in a bearish divergence at the recent highs.  The daily MACD has not matured to a bearish divergence yet.  The better set up for a possible intermediate top area would be for a mild decline in SPY, followed by a move to new highs with a daily time frame MACD bearish divergence.  The daily weekly/combo of bearish divergence readings in itself has had a forward negative skew in SPY, though not a huge one.

Seasonally stocks have historically tended to hold up into the Christmas/New Year's time frame.  It doesn't seem to me to be a solid bet against the uptrend at this time.  But the recent upwards move seems to be mostly out of steam for the short term.  I do not see any reason to bet on further advances unless there is a compelling short term sell off which occurs over the near term.


Wednesday, November 9, 2016

Still Expecting Some Volatile Chop Ahead For Stocks

Today (including last night futures trading) was a unique event for sure.  I really don't know if backtests are that meaningful on this situation.

My feeling is that despite that big drop in implied volatility, there will still be choppy/volatile type trade in coming days.

For instance here a look at forward MAX gains and losses across time frames following a day where the VIX drops more than 20%.

Click on Chart to Enlarge

There were only 10 instances going back 21 years.  But see that there were some big decliners to follow.  The skew was quite negative.  I had showed the stats on the VIX being down more than 15% in a post a couple days ago.  It showed that about 2/3 of the time prices closed lower 7 trading days later.  Well in the VIX down more than 20% scan here, the average closing price 8 days later was down nearly 3%.  That was helped down by a couple big instances in October 2008 which were in the thick of the most volatile time in history.

Anyway, the reasons for very high volatility and erratic moves in the VIX may be varied.  But on average there were some choppy situations ahead.  And based on the averages and MAX loss values on a closing basis following these signals, it would suggest that prices could trade lower into late next week.

I am not making any further buys or sells at this point.


Tuesday, November 8, 2016

Implications of Persistently Elevated VIX/VXV Ratio 11-8-16

Click on Stats to Enlarge

The VIX is a measure of implied volatility in options with an expiration of about 30 days.  And I have discussed the VIX in relation to the VXV many times on this blog.  The VXV is a measure of implied volatility in options with about 90 days to expiration.

When the shorter term VIX is above the longer term VXV, there is a theoretical imbalance occurring.  This indicates "fear" or increased demand for options which are used as a hedge.  So we see the ratio spike on sell offs in the markets.

Currently the VIX/VXV ratio is on its 4th day in a row above 1.0.  The VXV has limited history only going back to about 2010.  So we don't have a lot of data and information from prior bear markets to assess this ratio in downtrending markets.  But there have only been a few periods where the ratio has stayed elevated above 1.0 for a significant stretch over many days or even a few weeks.

Also, of note yesterday and today is that we are seeing a large rebound in stocks, with a big drop in the VIX, and yet the VIX/VXV is staying above 1.0 as of current readings this afternoon.  Typically after stocks bottom and the big initial few days of rebound occur, the ratio gets back below 1.0.

So I looked at times when the VIX/VXV ratio was above 1.0 for two consecutive days where both days were UP in the SPY etf.  There was a negative skew in forward looking time frames on this scan, though the instances are limited.

Then I added the further criteria that yesterday was up more than 1% in SPY (like our current situation).  So yesterday was up big, and today is up again, and yet the ratio is still maintaining a reading in the "fear" zone.  The results of the scan are shown in the chart above and demonstrate that over the short term, stocks were volatile and had a negative skew.  Basically until the ratio drops back below 1.0, there is not an "all clear" type of return to normal signal for the markets.

So in the current situation, it makes sense that short term hedging demand is increased with the election results still ahead tonight.  But don't be surprised if there are some wide gyrations in coming days or weeks, because this ratio indicates that underlying sentiment has not unwound back to normal yet.

The past area where we saw this type of behavior were after the bulk of a correction was done, but moving forward there was some wild gyrations in the process of retesting a bottom.

So I would expect to see a retest of last weeks lows in the coming week or 2.


Monday, November 7, 2016

SPY Option Trade Exit for 50% Gain

FYI, last week I had noted that I bought a 210 SPY call which expires this Wednesday based on data suggesting a very high probability of a 50% gain in the option prior to expiration.  That 50% gain level was hit today and my limit order filled and the trade was exited.

And I am still holding a Nov 18th expiration 214 strike put as stated at that time as well.  My goal was for the above short term option to create a brief hedge of the expected drawdown which was anticipated in this later expiration 214 strike put.

Now the stats posted earlier today are suggesting that most of the upside potential has likely unfolded in stocks, and it is reasonable that stocks could move lower allowing me to confidently maintain that 214 strike put based upon the intermediate term outlook.