Wednesday, July 29, 2015

Close out SPY trade by the end of the day today

As suggested in the last post, stocks have rebounded from the multiday sell off last week.

Last night I looked at times when stocks closed down 5 days in a row in a bull market which occurred into Monday's close.  There was nothing really different compared to the 4 closes down post I made a couple days ago.  The best short term trade after 5 days down was to close the trade out after 2 days, which would be today again.

So I suggest closing out the current trade by the end of the day today  Long term stats suggest likely further gains, but for the record here, the suggestion was for a short term play on this.


Sunday, July 26, 2015

3 Day Rally Probable Beginning Early This Week

Click on Stats to Enlarge

This past week showed 4 closes down in a row from Tuesday through Friday in the SPY etf.  I sorted data going back to 1995 with 4 closes down in a row and added a couple filters to see what we may expect here.

Additional filters were:
  • that the quarterly moving average was above the yearly, indicating an established bull market
  • The 4th close down was greater than 1% (which occurred Friday also)
The average close 3 days later was up 1.26%.  The stats above show the trade expectancy stats of all the 37 instances.  The win rate was about 75%.

So for an equity trader here, there is a clear bias to the upside through Wednesday's close.  I would suggest that a limit order of 207.48 (equivalent to the large gap fill from 7/13/15) could be used as an entry order, with the trade closed out at Wednesday's close.

The average max gain to max loss shows a bullish skew in all time frames out to 6 months.

 Click to View Enlarged Stats

The table here does not capture quite all 37 instances but does show the averages max gains and loss across the time frames.  This data would fit with the idea that the current market action is a major consolidation in a bull market with the next dominant move to the upside.

From my perspective I believe another move to new highs would be ideal before a new possible bull market top could form.


Exit Short Term SPY Puts/Hedge From Last Week

Last week I made a post suggesting that there was a negative skew to forward price action based upon my analysis of options data and my real money sentiment/trading algorithm.  The suggestion was that a 50% limit order gain be used on an ATM Sept expiry option.

From Monday's close when that post was written, the suggested option (Sept 212 put) is up about exactly 50% and SPY is now at potential support of a large gap up from a couple weeks ago.

So, it seems wise to exit that put option for the time being.

I looked at some comparisons based on last week's sell of, and the data suggests a short term rebound over the next few days.  Beyond that I don't have much to offer other than what I've already posted over the last few weeks.


Time to Cover All Gold Shorts - Massive Rally Likely to Occur Based on Extreme Smart Money Position

Click on Chart to Enlarge

There are multiple factors currently suggesting that anybody short in gold get out as fast as you can.  The move down is almost certainly done or very very nearly done.  How big the rally will be, we shall see, but it could easily be 10-20% in the next 1-2 months.

The chart above shows the extreme oversold MFI14 indicator below prices of GLD.  And note the wide range bullish engulfing pattern on Friday as well.  That is a bottom reversal pattern.  It occurred on heavy volume and an obviously extreme move in price over the last few weeks.  Without knowing anything else about a market, understanding the implications of this candlestick should be cause to exit any short position.

Furthermore, there has been a huge increase in the commercial/producers/smart money positions on the long side of gold.  There was an extreme accumulation of new longs by commercials last week, and going back to 2006 (which is where my data currently ends) the commercial net long position is the highest it has ever been.  On a relative basis it corresponds with the peak net longs which have occurred right at the bottom of other declining phases of this bear market in gold. 

On the flip side the large speculators are the most net short going back the same amount of time.  The total speculative long position of small and large combined is also at the lowest point going back over the stated time frame.  The last time their longs approached the current levels was at the beginning of July 2013 right as a leg down was ending and a pretty swift and large bear market rally occurred.

Lastly, June and July is the seasonally most common time for a bottom to occur in precious metals.  So given the extreme sentiment, technical analysis and historical extreme move into gold by the smart money, this appears to be an exit point for gold shorts without question.

There are various long strategies that could be used here to capitalize on the anticipated rally.  One would be to buy the gold miners ETF on Monday with a stop below Friday's low.  Bullish option spreads or other directional option strategies may be appropriate as well.

Monday, July 20, 2015

Low Panic Levels Suggest Negative Skew Over Next 2 Months

Click on Charts to Enlarge

As of today's close, my complacency indicator shows a reading below 7.0.  The images above show all times in this bull market with readings below 7.0.  Of note is a consistent greater max loss than max gain on all time frames out to 5 months.  The greatest skew to the downside is at 2 months where it is about 1.6:1 in favor of downside.

Looking at the options gains for calls and puts for ATM options with 2 months until expiration, there are about 55 days which meet the criteria and the average max put option gain is about 150%. 

About 8 out of 10 of the instances showed max put gains of greater than 50%.

About 6 out of 10 of the instances showed max put gains greater than 100%.

So those stats suggest a couple obvious trading or hedging strategies by simply buying the put now, and setting the limit exit order.  Of course fine tuning could be attempted as action unfolds.

Now the 14 period Money Flow Index is also currently greater than 70.  When adding that criteria to the filtering process the 2 month max loss and gain show greater than 2.0:1 skew in favor of max loss.  And half the instances showed put gains of greater than 150%.

So I think an ideal situation here would be for some further upside leading to a divergence in the MFI and then to speculate on the puts. 

But for now, a 2 month hedge with ATM puts and a 50% limit order to exit the position seem like a solid odds play to protect for some potential downside into September.

Let me know if there are further details desired in regards to this data.


Monday, July 13, 2015

Stock Index Commitment of Traders Data Suggests Strong Bullish Run Ahead

I took time this evening to review the recent Commitment of Trader's data compiled for the major US stock indexes.  And there has been a large move of smart money into the long side of futures in the last 2 reporting periods.  As of this past week's reporting period this has actually pushed the smart money "hedgers" to a net long position.  They typically are net short and have not gone net long at too many points in recent years.

The last two period of time where they moved from extended net short to a net long total where at distinctly significant lows.
  • August 16th 2011 - Dec 27th 2011 was mostly net long by commercials
  • July 6th 2010 - Sept 14th 2010 was mostly net long by commercials
Those periods both marked the beginning of a couple months of wide range trading as stocks formed a support level and then launched into major bullish runs.

At this point, with significant negative news on the world front and the smart money loading into US stocks, it seems to me that the big move in coming months will be to the upside in stocks.

So there are several ways to play this, but at this time my suggestion is to take only the long side trades from here in US stocks.


July 31st SPY Call Exited

I sold the SPY July 31st 208 call option which I purchased for 2.50 on 7-8-15.  The stats suggested likely retest of lows and lower lows in coming weeks.  I limit exited the option for 3.25 today.  Very modest gain, but the stats were instructive and pointed to the positive skew for a short term move after the 3 month low signal.

At this point the question is whether and when to potentially act of the information in the most recent post suggesting lower lows likely coming.  Currently with prices in the gap area from 208-210, it seems like this is the first resistance test.   And with a gap up today, it may be likely that today's gap up and window is filled at a bare minimum.  There are actually a couple unfilled gap ups from last week right near the lows.

I have no further info to add at this point other than the stats from last post on the elevated total put/call ratio.