Wednesday, May 4, 2016

Probable Trade Exit Today on Recent Inverse ETF and Put Option Purchase

SPY is trading at about 204.70 at 9am EST today.  And any further push lower is likely to trigger the limit orders suggested in the recent trade recommendation post.  And again the put/call ratio sell signal was timely particularly in conjunction with the MACD daily time frame divergence and stark breadth divergences, etc.

It is possible that the ordered suggested would already have triggered the exits depending on how perfect the entry was after last post.  But I am using the opening price on 4/20/16 as the reference prices.
So the SPXU opening price on 4/20/16 was 27.10.  And a 7.5% gain (~2.5% loss in SPY) would be a limit exit of 29.13 on SPXU.  And the May standard 209 strike put opening price was 2.68 on 4/20/16.  So the 100% gain limit order would be 5.36.

Those order seem very likely to trigger with any slight break of last week's low.  And that is were SPY is trading currently.

From the hourly chart technical analysis, it looks to me like SPY may move down to 203 before having any short term support.  So it may be possible to get better gains than those listed above.  But for simplicity either just stick to the orders above, or exit half the position at those orders and adjust the other half for the equivalent of a SPY @ 203.00 exit.

Comment if there are any specific questions on this.


Wednesday, April 20, 2016

Put/Call Ratio Showing Sell Warning For Stocks - 4-19-16

Click on Chart to Enlarge

I have shown this chart many times in recent years, and it provides relevant context for the position of the market time and time again in my experience.

In this case, the 5 day average of the total put/call ratio is below it 1 standard deviation band on both the 20 period and 126 period time frames.  So there is a type of dual time frame extreme here demonstrating complacency in the options market.

However, note that this is occurring with prices NOT making new highs for the bull market.  So a 2 year low in the moving averages of the put/call ratio is occurring, and yet prices are not making new highs.  To me this suggests a market that is ripe for a significant top to be made.

Arguably the biggest weight pulling the market down has been energy and commodity related issues.  And this may be true, but the Commitment of Traders data on crude oil futures shows that the rally over the last couple months in crude oil has been a typical short covering rally.  Overall positions declined.  Shorts declined, but also longs did as well.  So the net buying was the covering of short open interest.  That is not a pattern in the big money players which is typical of healthy leg up in a bull market, or of new speculative interest coming into oil.  This suggests that oil will likely still see yet lower lows in its bear market.  And so my point here is that it doesn't appear that the weight of the energy sector's pull on the market has run its course. So my guess here is that we see the oil rally fizzle out and move to new bear market lows, and that stocks take another leg down in the process. It would not surprise me if this next move down in stocks was a big one and broke the support around 1800 in the S&P 500.  Understand that as prices move lower there is increased volatility typically, and the possibility that some related companies bankrupt from the leverage they have in play in the market which is moving lower.  And that type of context tends to cross barriers into other sectors of the market and "trickle" down.  So that is possibly the rationalization of the next big move down in stocks if it does come here before new bull market highs are made.


Tuesday, April 19, 2016

Trade Stats for Bearish Set Up in SPY 4-19-16

 Click on Stats to Enlarge

So based upon the trade set up posted earlier for SPY, the maximum expected value for the equity side of this set-up based upon my simple trade method, would be to enter short SPY and set a limit order of 2.5% gain on the short position and a corresponding 2.5% stop loss on the position.  Then IF the orders are not filled in 1 month, the trade is exited at the market (after 21 full trading days).  The expected value of the trade is 1.48% on SPY, so this suggests a ~4% expected value over the next 1 month using the 3x leveraged bear ETF.

Seeing as the past stats on that system are so positive, the stats justify use of 3x leveraged funds with 100% allocation of the account.  That would still be well below 1/2 Kelly Bet on the risk.

Now SPXU is a 3x inverse fund to SPY, but understand that it won't trade perfectly in sync.  So I always suggest using SPY as instrument to track and slightly tweak the orders on the leveraged ETF to create the suggested risk reward profile.

Click on Stats to Enlarge

The MAX reward play on the options is as suggested in the last post.  Buy the May standard expiration at the money put option (209 strike) and set a limit order of 100% to exit.

The Kelly Bet % on the 15 historical instances is 33%.  So a 1/2 Kelly Bet of about 16% would be sensible for the money set aside for options trading.

Let me know if there are specific questions of how to apply this analysis to your situation.


Intermediate Term High Likely Completing In SPY 4-19-16

I ran a pretty simple scan today on the history of SPY (going back to fall 1995).  The criteria were as follows:

  • VIX high is less than 15
  • 5/63 day total put/call ratio less than 0.85
  • Daily MACD is in bearish divergence position
The forward returns showed a nearly 2.4 times greater MAX loss versus MAX gain over the coming month.  And buying a 1 month until expiration at the money put option on SPY had a 2 out of 3 chance of at least doubling in price prior to expiration.  So that is a very profitable speculative opportunity to buy the put here and simply set a limit order to exit at 100%.  Let it expire worthless if it loses.  There is no stop.

Also there is a dual time frame (hourly and daily) MACD divergence on today's highs in SPY.  These types of set-ups have been highlighted many times on this blog and often nearly pinpoint a significant turning point for multiday or multi week changes of direction.

So the point here is that SPY is at a lower high than the last intermediate term high in November, and SPY is displaying the type of set up which indicates a completed rally.  So the easy money has been made.  The expected returns for the next several weeks are likely to be flat or negative based on what I have looked at.  

Let me know if there are any questions or specific scenarios you want further info on here.


Monday, April 4, 2016

QQQ Low Volume Warns of A Coming Correction in Stocks

QQQ Volume is Relatively Low Indicating Probability of  Correction Soon
The chart above is a daily QQQ volume chart with a moving average and standard deviation band.  In this case we see the moving average is about as low as it has been in the last 2 years.  The previous times it hit this low level were right near intermediate term peaks in stocks.  Also note that the moving average is low relative to the standard deviation bands.

This would imply that the power of this rally is fading.  I believe that CoT data suggests a non sustainable rally here as well.  I am not saying that stocks could not move to new highs, but given some of the factors I have noted recently, it appears that at least a sizable short term move to the downside will occur before prices could reach to new highs.


Wednesday, March 30, 2016

Daily Time Bearish Divergence in Money Flow Index and MACD - SPY 3-30-16

SPY and Money Flow Index
SPY Overbought Money Flow Index with Bearish Divergence
This daily chart of SPY shows the 50 and 200 day moving averages which are in a longer term downtrend currently (50 day below 200 day) as well as the 14 period money flow index with a 14 period moving average of the MFI.

What is apparent is an overbought MFI with both the raw MFI and the 14 period average in the extreme region.  And now, after a small pullback and MFI (brown line) dipping below its average (blue line), price has moved to a new high, but the MFI is at a lower high creating a classic bearish divergence pattern on this indicator.  This type of pattern has occurred very near to the final price highs before significant pull backs in SPY over the last couple years.

In an up trending market, I'm sure that the end results could be uneventful.  However, given the moving average downtrend configuration, I believe that this signal should be respected as an exit signal for longs.

I don't have a strong opinion on whether the bull market is complete, and a major decline will take place, though given the Commitment of Traders data on the rally up since February, it seems reasonable that this whole rally has been a short covering move with no big money new interest taking place on the long side.

I will look at speculative opportunities on the downside possibility to come from these levels.


Thursday, March 17, 2016

VIX Bollinger Band Sell Signal on Stocks at SPY Gap Fill

VIX Hourly Chart with Bollinger Bands Giving Sell Warning for Stocks
Today the rise in stocks coincided with a dual time frame VIX sell signal which I have highlighted many times here on the blog, with basically all being timely early warnings that a rally in stocks is ending.  The easy money is made, and the downside risk outweighs the upside potential in the near term.

As noted above the hourly VIX closed below its lower bollinger bands on 20,2 and 126, 2 settings and the 20, 2 lower band was below the 126,2 lower band.  What this means in short, is that the VIX is at an extreme low level relative to the longer term trend.  This typically lead to some mean reversion or some type of smart money activity understanding the imbalance, and price halts its directional move.

SPY gap down at 204 is now filled with extreme short term complacency in the options market
Today's action in SPY filled the open gap down at 204 on SPY.  This is the open gap down level which I had discussed a few times as the obvious target for the rally.  Now as a side note, after observing action of individual stocks at support and resistance levels around large gaps, I have observed that a common mode of price action is for the gap to be completely filled prior to the final counter trend price move high or low being in place.  So what often happens, is after the gap is filled, price reacts briefly (in this case it would likely lead to a brief sell off in stocks) and then price moves to a new extreme for the counter trend move which creates a more classic divergence pattern in the technical analysis and a more likely final high or low.

So in our case, this would suggest that SPY may briefly sell off here, and then rally up to new high for the move which would likely be in conjunction with stark daily time frame divergences in the MACD and other indicators.  This would also, likely allow time for the weekly stochastics to cycle up to an overbought reading and create a dual time frame signal with weekly overbought, and daily overbought with bearish divergence which is a great sell set up in technical analysis.

I don't have a real strong opinion here as to whether the bull market is over or not, but there are multiple signs that the current trending move to the upside is about to stop and lead to some choppier action if not an outright downside reversal.

I will update with stats in the near future.