Short-Term Update and BGZ Trade Modification

Click on Chart to Enlarge

The chart above is SPY (S&P 500 ETF). There are several notes on the chart with some potential short-term bullish implication. First, the green line represents the previously unfilled gap up from November 24th. That gap is now finally filled. Major gaps like that often will provide at least temporary support in a case like this.

The light blue line represents last Friday's closing price before Tuesday's large gap down. In the last post I had mentioned that >2% gap downs tend to have prices close above the opening price of the gap down within 3 or 4 days. Today I saw a similar historical study looking at 3% or greater gap downs (like Tuesday). There were 12 instances of this in the last 20 years or so. In every case except the Crash of 1987 (market lost 25% in one day), prices came back up to the closing price of the day before the gap down within 6 days. The average was 3 days.

This would suggest a strong possibility of prices rising to 82.76 or higher on SPY within the next few days. I will show the corresponding price levels for BGZ in a moment. As I mentioned last post, this would suggest having a little patience with entering the second half of the BGZ trade until prices can work back into that gap.

The final note on the chart is that today marked the second consecutive close below the lower bollinger band on SPY. When this occurs after a channeling price movement with declining volatility, it often is a breakout move to the downside. I am not suggesting that the market will continue down the next few days, but I would take this as an indication that a downtrend is beginning.

Click on Chart to Enlarge

This chart is a 30 minute chart of BGZ. The green line represents the closing price the day before the 3% gap down. That price is roughly 67.50. The study above would suggest that BGZ may fall down to this price level in the next few days. If it does, that would be where we would want to enter the second half-trade on BGZ. The pink horizontal channel represents the "breakout" zone on BGZ which I would expect to be re-tested over the next few days at a bare minimum.

In addition to the info above, the short-term S&P 500 model is oversold, suggesting short-term downside may be limited. Also, several of my own indicators looking at gaps, put/call ratios, and inverse ETF volumes, have moved to statistical extremes within the last few days. Taken together, I think a decent little rally is likely in the next few days. But I would use that as an opportunity to enter bearish trades. With that in mind.......

Here is a slightly modified recommendation for entering the second half-trade on BGZ:

Place a GTC limit order to buy BGZ (half the dollar amount typically devoted to a trade) at 67.50 instead of 69.00 which was suggested in the last recommendation.

Pete