SPY Put Options

In reference to the recent post I made regarding the Put/Call ratio sell warning for the S&P 500, my option limit order did not fill on Friday and I have decided to change the order to a limit order to buy the Feb 20th SPY 210 put for 3.65.

So the strike price is changed as well as the limit order.

This is based off SPY rising $2.00 (or almost 1%) further from current levels before topping.  Even the most skewed negative future returns after these signals have seen brief 1-2% rises before peaking prior to a meaningful pullback.

The exit order would be to sell at a limit of 8.00.

Silver Set for Possible Vertical Rally

A week or so ago I posted about silver on TradingView and I did not repost here yet.  However I view this as an exceptional profit opportunity.  It appears likely to me that silver is set to rally for the next several weeks.

I have both in the money $15 strike, and OTM $17 strike calls on SLV.  I would suggest Jan 30 through March expirations as possible time purchases.

Pete

Sell Warning From Put/Call Ratio

On Wednesday the total put/call ratio gave what I would consider a sell warning for stocks.  Going back to the 2007 bull market high, there have been 22 unique instances of these signals. 

The average maximum decline over the next 2 months has been 8.15%.  

Out of the 22 instances 16 have showed greater maximum 2 month future declines than gains.  So the "win %" so to speak, is 72%.

On the successful instances with clearly skewed future results towards the downside, the top in price for the next 2 months has typically occurred from within a couple days to 2 weeks.

Going back to Christmas 2009, the average max decline over the next 2 months on all unique instances is 7.77%.

There have been 4 other instances around the Christmas holiday where signals occurred going back to the 2007 market highs.  They lead to max 2 months declines of -5.52%, -3.87%, -7.22%, and -14.42%.  The biggest decline here occurred in the last bear market.  The other 3 were during the current bull market.

So what's the conclusion?

It seems like the odds favor a pullback over the couple months.  Given the current sizable unfilled gap up on SPY on 12/18/14, that seems like a sensible price target for a typical pullback.  That is at the 202ish level on SPY and would represent only about a 3.5% decline from current levels, so it seems well within reach given that the average max decline even in the bull market so far is about 5.5% for similar signals.

From reviewing past instances, most of the subsequent pullbacks from these signals, made bottoms in the 1st week of a month 1-3 months down the road.  So for put option speculation it seems like a Feb or March expiration at the money put, would be sensible and given solid odds on a 100% or greater return with apparent odds of success at around 70% based upon past instances.

From the close of the day on which the first of a cluster of similar signals occurred in the past, successful near term tops, have often occurred within 1-2% above the first signal day.

Given the current signal and the potential time frame for a pullback, I am putting in a limit order to buy SPY Feb 20th expiration puts, the 209 strike at 4.00.  Then the exit order will be a limit order of 8.00 to sell prior to expiration.  That would necessitate probably only a little less than 4% decline in the next 7 weeks to achieve the 100% return.

Pete

SPY Oversold Going into FOMC Announcement 12-17-14

Click on Chart to Enlarge

As of yesterday's price action, SPY was oversold and showing bullish divergence on the hourly price chart.  Today is the FOMC announcement and so there is the possibility of a news-driven sharp move here.  Given the technical set-up, it seems likely for a rebound attempt.  A major downer would be unexpected here, but could be of longer term significance.

There has not been a bottom reversal signal in my SPY trading system currently, and there has been no bullish divergence to develop in the underlying real money sentiment analysis.  So in the past that has typically meant that we see at least a slightly lower low before a reversal occurs.  If that occurs followed by a reversal bar, we likely will see a signal occur and it so, I will note it with some detail on the significance and how to trade it, if at all.

Additionally, the VIX/VXV ratio has closed above 1.00 for 2 out of the last 3 days before today, and as I have noted repeatedly on this blog in the past, that often occurs just before an important low occurs.  So really, it means that you take any objective long trading signals generated here.  The signals dependent upon your plan and trading method.

Further understand that we are entering into a positive seasonality in the end of year time frame, which would just again be another confirmation that long signals should be acted on.  And a stop is always used in case of a major surprise or trend shift.

Pete

Short Term Stock Market Update

So far on this small decline the last few days, there has not developed a bullish divergence of the type that typically leads to a bottom.  So I expect at least modest further declines here.  My general feeling is that stocks will continue to move at least modestly lower into next week's FOMC announcement at which point the stage may be set for a bounce from oversold conditions at least temporarily.

I may post signals of my personal trading system if any are generated in the next few days.

Also I would like to get a post up regarding some longer term cycles at play here.  But in short the 5th year of a decade, and the current portion of the presidential cycle are both historically bullish.  So while the technical aspect of the market is once again at a multiple time frame bearish divergence indicating a probable correction or consolidation, if prices break to yet higher highs later this month or into next year, it may be that price will enter a very directional period of market gains.

But without getting too far ahead of our selves, the first thing to watch for at this point is a daily reversal bar and also the development of shorter time frame bullish divergences (hourly, 30 min, etc) on SPY or other index ETFs.

Cotton and US Dollar Index

At the suggestion of a reader (Thanks Tim), I recently started doing some charting on TradingView.com  It has a lot of great charting features.  It currently lacks in ability to save many charts and layouts as a free service, but the charting features and ability for ratio charts and custom indicators is a big win for a free service.

Anyway, I will post links here to a couple recent posts that I have made via trading view.  The markets are cotton and US Dollar index.  In short, the US Dollar appear to be topping on this rally and set for a significant consolidation.  Commodities in general appear set to rally.

Cotton and gasoline are 2 markets that I really like the CoT backdrop for forming big rallies to come.  I have already noted the bullish set-up in metals in recent weeks and months, and those markets are generally conforming to expectations as noted here.

Here are links to the TradingView posts.

Cotton

US Dollar

Let me know if there is any trouble viewing this, as this is a new feature for me to use.


Pete