SPY and Bollinger Bands

Click on Chart to Enlarge

First off, the price of BGZ at 12:30 ET today (the time I said I would use for an exit price) was 77.75 up from 73.63 at entry for a 5.5% gain. Depending on when anyone was able to exit from the time I made the post to the close today, the gain may have been from about 3% to 8%. If unable to exit today, just place a market order tonight to sell it first thing tomorrow.

I wanted to give a little rationale for exiting this trade since my goal is to get into a BGZ trade to hold for a few weeks. When the market is on the verge of a major move there are often multiple whipsaws before it finally takes off. When a major move starts, you should see price be able to accelerate in the direction of the new trend. That has not happened, so it would seem likely to me that another whipsaw move will occur before the market can continue lower. As it stands right now, on any rally followed by a break below the most recent minor low, the potential exists for a dramatic vertical type decline to begin.

The chart above is SPY with standard bollinger bands overlaid which are +/- 2 standard deviations of the last 20 days' average price. The light blue boxes on the chart show times during this bear market when SPY closed 2 or more consecutive days below the lower band on a breakout from a horizontal channel in the bands. Today is the 3rd consecutive close below the lower band. In the prior instances there were 2 to 4 closes below the band followed by a very sharp 1-2 day rally that typically topped near the highs of the second price bar before the most recent close below the band. Currently that would put the S&P at about 820 in the next couple days if the same pattern occurs again now.

Taken together with the recent studies I have referenced and the oversold short-term conditions, this bollinger band pattern would suggest a move back near the top of the recent large gap down (82.75 on SPY) in the 2 or 3 days. If such a move does not occur by the middle of next week, I will begin looking for a decent re-entry into BGZ on a breakout to the downside.

Pete