SPY Call Option Exited - 50% Gain

The limit order of 50% was reached today for the SPY call (201 or 202 strike with Dec 18th expiration) which triggered entry at the end of the day Friday or during the session Monday.

Also the gap down is filled from last Friday which is really the short term chart target.  So this trade is closed for another high probability short term option profit opportunity.


Pete

Bullish Option Opportunity From Friday's Action 12-14-15

I ran some scans over the weekend based on Friday's market action.  I found a few simple scans with very high winning percentages and short term profit opportunities with solid trade expected value.  Here is one of the scans (data only goes back to late 1995).

• Gap down more than 1%
• Close down more than 1.9%
• Close in bottom 1/5 of range
• Day's high to low range is less than 3%

Trade stats are solid with 107 instances and a win rate of 88%.  Limit order is set at 50% gain with a 1 week until expiration at the money call option.

That option was entered today with the standard expiration option for this week at a 201 call on SPY.

Pete

Update on a Few Recent Scans - Call Option Opportunities

I have run a couple scans over the last 4 weeks which I did not take time to post on here.  But I wanted to show a couple recent simple scans which identified short term option opportunities which worked beautifully.  Also there is scan I ran last night highlighting a short term call option opportunity.

The last post I made on 11-13-15 noted a bullish short term technical set up and suggested that stocks may see a short term rebound.  I ran a scan of past similar conditions as follows:

• 3 days in a row closed down
• today's close was down more than 1%

Trade Stats for Scan

Based on my option pricing model there was a 74% win rate in buying an ATM call option with 1 week until expiration and setting a limit order of 50% to exit the trade.  That limit order ended up being hit the net day on a big rebound in stocks.

I ran another scan on 12-3-15 after a big 2 day sell off.  The scan looked at past times with the following criteria:

• 2 days in a row closed down more than 1%
• 63 day EMA was pointed up (to filter for intermediate uptrend rather than during a more oversold market)

Trade Stats for Scan

The past results showed only 15 instances, but ~73% win rate when exiting with a limit order of 69% on an ATM call with 1 week until expiration.  That limit order was hit the next day again on a big 1 day rebound last week.

Currently we have a some what similar set up occurring, where SPY has closed down 3 days in a row.  The intensity has not been as dramatic, and yesterday was only a 0.78% loss.  But I ran a scan with the following conditions:

• close down 3 days in a row
• today closes day more than 0.75%
• Daily MACD is down
• Weekly MACD is up
• Daily MACD is above 0
• High-Low range is less than 2%

It is a more detailed scan but helps to weed out times when the market was more oversold and in a predominant downtrend, often associated with higher volatility conditions than currently would be expected.

Trade Stats for Scan

The data on all these scans only goes back to last 1995, but there are still plenty of instances to get a look at how markets behave in similar instances.  In this case there were 24 instances with ~79% win rate when setting a limit gain of 50% to exit the option (ATM with 1 week until expiration) relative to Wednesday's close in this case.

So the implication is that the market may rebound in the short term.  However I don't like the technical analysis set up as much here.  I would rather see some further oversold or bullish divergence develop on the hourly MACD. 

The chart pattern on the daily SPY chart is a contracting triangle, with price at the lower boundary.  So maybe stocks are set to rebound from here.  And a contracting triangle typically has a significant price break to follow.

It may not be fruitful to over analyze here, but hopefully these stats and the associated short term technical analysis will be helpful for trade decision here or over the coming few days.

Pete

Short Term Oversold Signals Abound - SPY Analysis 11-13-15

The outline I gave in the last post has followed pretty closely so far in subsequent market action.

Based upon the scan comparisons from the previous post, the current time frame would already have surpassed the final bear market rally highs from previous comparable markets in the cases of major sell offs following the stated scan conditions.  So the Nov 3rd high seems important in that regard.

Currently with stocks down several days in a row, the hourly VIX chart is set up in an extreme that has typically preceded significant rebounds in stocks at least for several days.

The hourly MACD chart of SPY shows no bullish divergence at this time, so it may be premature for even shorter term traders to buy at this time.

Remember from the scan comparisons that the 2 months following previous similar markets were very strong to the downside.  Only very brief rallies punctuated those declines.  At this juncture the good put option purchase opportunity already seems past compared to when I posted those scan conditions 2 weeks ago.  So from here, I am kind of neutral but would suggest that stocks could sell off significantly.  The obvious stop loss point on a short position would be above the Nov 3rd high in SPY.

Pete

Market Conditions Fit With Topping In a Bear Market Rally - 10-29-15

Today I ran a few scan and one simple one that stood out highlighted the time periods below.  They were basically during the last 1-2 weeks of rallies in the last couple bear markets.  The 2002 and 2003 instances were after the bear market low in Oct 2002, but the Nov 2002 high did lead to a major decline and retest of the bear market low.  Only the April 2003 instance failed to lead to a major decline in stocks.

Mid January 2001
Mid May 2001
Aug 1 2001
Mid Nov 2001
Mid Nov 2002
Mid April 2003
Mid May 2008

The scan conditions were:

• 63 day EMA< 252 day EMA (basically long term downtrend in force)
• 5/63 total put/call ratio less than or equal to 0.83 (recent put/call complacency relative to trend)
• VIX closes below 25 (this will exclude rallies that are in major fear/decline environments toward the middle of the bear markets)

Buying an ATM put with 2 months until expiration on this signal led to average return of nearly 200% gain at expiration.

So it is certainly possible that the dramatic sell off in August was a blip in a bull market, similar to the August 2011 sell off, the bull market is in a later stage now and it is possible this is the first major rally of a larger bear market.

A low-low-high time cycle comes in next week on Nov 3rd relative to the August and Sept bottoms on the recent decline.  

The daily upper bollinger band (20,2), is currently sitting at about 210 which is 0.5% above the current highs.  It may be ideal to see a brief sell off followed by poke to new highs and a touch of the upper bollinger band before the rally completes and a significant retracement or leg down starts.  I also feel that program trades are likely to sell or profit take on a touch of the upper bollinger band.

Pete

Complacency In the Markets As the FOMC Meeting Occurs

Click on Chart to Enlarge

There are a number of shorter term notable bearish divergences occurring over the last couple weeks as stocks have continued to advance.  Also, there are some intermediate term sentiment extremes showing up in the put/call option data.

Today the FOMC released minutes and as occurred at the Sept 17th meeting, the VIX is at a relative low, contacting the lower longer term bollinger band on the chart above.  This indicates complacency in the options market relative to the recent range.  This type of signal occurs frequently near inflection points, in this case possibly with a short to intermediate term top in stocks.

There are several other indications of loss of momentum in stocks here.  I will run some scans over the next couple days to look at possible profitable opportunities in the options and stocks.


Pete

SPY Looks Ready to Pullback This Week - 10-12-15

Click on Chart to Enlarge

As a follow up to last post here is the updated hourly chart of SPY showing the lower peaks in the money flow index and a cross of the MFI below its moving average.  This is a picture perfect indicator divergence to signal a top.  Now it seems that stocks are still not ready just yet to decline, so it may take at least another to poke to higher highs before selling comes in.

At this point I have run several scan over the last few sessions, and based on similar moving average and technical indicator set-ups in the past, there is a very negative expectation for the next couple months.  Buying a 2 month until expiration ATM put on SPY here has been a profitable play in similar set-ups over the last 20 years.

So again I like a short entry here with a stop 3-4% above the market based on some previous stats.

Check last post as a further indication of moving average signal to look for confirmation of a new downtrend possible.

Dual Time Frame Overbought Signal in SPY 10-8-15

Click on Chart to Enlarge

The technical position of SPY is currently showing the classic type of formation in the last stage of an advance - in this case at least on the hourly chart.  The money flow index peaked a couple days ago, and now it has declined and is ready to poke back above its average.  The next cross of the money flow index below its average after a bearish divergence in this position is typically coincident with a top.

Also the daily 14,3,3 stochastics is now basically overbought with %K>80 and %D at about 76.  So there is a clear dual time frame of daily overbought, and hourly time frame bearish divergence in the midst of downtrending long term moving averages (252, 200, 63, 50 day MAs).

I would anticipate a multi day top would be likely be in place by tomorrow.  The gap up at 195 which is unfilled, would be the first obvious target for next week.  

I like the odds and historical expectation stats of entering short/puts here without waiting for confirmation of reversal.  A reversal candlestick today or tomorrow, like a bearish engulfing pattern, occurring right at the resistance level in the 200 region which has been established since Aug 24th, would be a nice daily confirmation signal that a multi day decline may begin.  

Also a 30 minute 8,21 EMA cross down would  be a reasonable lagging indicator to initiate a short with a stop above the intervening high.

Pete

Historical Comparisons to Low VIX While Overbought In Downtrend -- Look Out Below

I ran a scan going back to Sept 1995 today which looks at a similar set-up to what is occurring now in the SPY etf relative to real money sentiment.  And this scan is totally lopsided, pointing out the tops of major bear market rallies.

The criteria were as follows:

• 252 day EMA pointed down
• 63 day EMA pointed down
• 14,3 %K stochastics greater or equal to 80
• 5 day avg. of 14 period Money flow index is greater than 50
• VIX closes below 30
• 5 day avg of total put/call ratio is less than 63 day average of total put/call ratio

This is what we are seeing now in our market.  Basically the moving averages are in a bear market configuration.  The daily stochastics has cycled up to the overbought region.  The money flow index is above neutral indicating the market is not in the very early stages of a rally off a bottom.  The VIX is at a low level not typically seen in the early stages of a rally from the bottom of a leg down in a bear market.  The last week of trade has shown less put activity relative to calls compared to the last quarter.  So there is sign of optimism in the options market (despite a downtrend, lower highs, etc).

Click on Table to View Past Instances

There were 5 unique instances or periods where this occurred.  All of them led to massive downside skews over the coming months as bear market leg down quickly ensued.  Not each instance here occurred right at the high of the bear market rally.  A few of the days occurred 1-2 weeks before the top of the rally occurred.  But the forward returns show a 10:1 downside skew even over the next 2 months.  

So the message here seems to be a clear red flag for any stock market bulls.  And it certainly seems like a clear signal to speculate on put options.  Entering short here with a stop 3-4% above the market also seems to be a clear strategy for the equity side.

Pete

Complacency In a Downtrend Is a Short Set-Up - SPY Analysis 10-7-15

Click on Chart to Enlarge

As of this morning's high in SPY, there is a marked 30 min MACD bearish divergence.  The daily %K stochastics is nearly to the 80 mark indicating an early stage "overbought" signal.

In the chart above I have marked with arrows the times since the Aug 24th low where there was a 30 MACD divergence, and all have been good buy and sell points in the range.

It is possible that a 5 wave type move is completing off last week's low.  And this may be the "c" wave of a flat type pattern up from the Aug 24th low.  Additionally as noted by the red line on the chart, the gap down from the day after the recent FOMC announcement has now been filled, and from a charting standpoint, the fill of a significant gap, with reversal can be a continuation point of the dominant trend (in this case down, as indicated by longer term moving averages).

I ran a scan today which looked at time when the overall market real money sentiment as evidenced by the "complacency" indicator I have developed, is below a certain point in a down trend.

The scan criteria were:

• 252 day EMA is down
• Weekly MACD is in sell configuration (MACD
• Complacency was less than 29.0 (this is pretty low for a downtrend)
• Looking back only to the 2007 market top (volume is a factor in the indicator, and previous market environments had non comparable average volume)

What we see on this scan is a massively profitable result in the option looking out 2 weeks.  The expected value including losers is ~65% on the ATM put options with 10 days till expiration based upon past similar occurences.  So this type of set-up has preceded some major pullbacks over the coming weeks.  Notably some occurences were right near the highs of counter trend rallies in the last bear market.  The limit order to exit the option in this example is 210% which suggests a big move down.  Based upon this I would suggest the Oct 16th standard SPY put option, 198 strike.  Then use the limit order of 210% as suggested here based on the data.  

A partial profit could be taken at 120% based upon the data if you want a tiered exit.

Pete

Quick SPY Update 10-5-15

The rally since early last week has been pretty fierce.  I still feel that it likely is a short covering move in a downtrend.

The daily stochastics is moving up from oversold and is mid range right now.  It appears that it would take about 3 more days to become overbought.  That would be a better technical indicator set-up.

 Click on Table to View Stats

I ran a scan with some key criteria which may show up later this week on a further rally in SPY.
Scan Criteria:

• 3 month EMA below 1 year EMA
• Weekly MACD below signal line
• %K 14,3 stochastics is greater than 80

The stats show a greater than 2 times MAX loss versus MAX gain over the following 2-3 months.  The stat table above shows trade stats on the stated set-up and setting a limit loss of 7.75% and a limit gain of 7.75% or exiting the trade at the end of 2 months if neither is reached.

The stats suggest that a short position would be a profitable play on that set-up using the loss limits and profit targets suggested above.  To be clear, this set-up has NOT triggered this week yet.  It did trigger in mid September and is still an open trade by the orders stated above.

Click on Chart to Enlarge

I have showed similar hourly charts of the VIX many times in recent years on the blog here.  Currently we have a dual time frame Bollinger band set-up occurring in the VIX which suggest that stocks are near a topping point here for at least the short term.  The shorter term bottom Bollinger band is below the longer term bottom band, AND price is closing below the bottom longer term band.  This suggests complacency in he VIX/options market relative to the trend over the last couple months.  From an option standpoint, this is a factor which should be supportive of purchasing puts in the near future on scan conditions which have had a historically profitable profile.


Pete

Probably Just a Short Covering Rally Here Before a Break To New Lows

Click on Chart to Enlarge

It seems most likely to me that SPY is still forming an upwards correction off the August 24th low.  I had recently mentioned that a rally was expected after the break of the lows of the 1st week of September.  We did end up seeing a brief 1 day rally initially, but I don't think that was THE rally which would correspond with the past post crash markets.

The current rally has more of the robust feel and look (seems like a legit reversal), which often preceded the break to new lows below the crash low.

Until This week's low is broken to the downside, I think there are other interpretations, but if the timing of the pattern unfolds as I expect it would for the completion of a contracting pattern (E smaller than C, and C smaller than A), then some time between today and Tuesday would likely mark the end of this rally attempt, and we would see a very sharp break down to lower lows.

So as a simple trading strategy here, we could enter short the market on a break of this week's low with a stop above the intervening high.  Then a partial profit exit could be made and stop adjustment made in order to decrease risk and still allow the possibility for a substantial profit on the short.

Another possibility for trade strategy based off the assumption of the above mentioned contracting pattern, would be to enter short early next week with a stop a little above 198.  If price moves above 198ish, then this rally would not longer be smaller than the C wave noted above in the chart.  Then a partial exit could be taken at a 0.5:1 reward to risk level, and then move the stop down to half the original amount at that time as well to create a "no risk" trade.

I don't have any clear cut stats to offer on the option side here, but I will run some scans over the weekend to see if any profitable edge seems apparent.  Also keep in mind that the scan from 9-15-15 is still in effect with the hold time of 2 months (so basically until November expiration).  That scan would argue the legitimacy of re-entering (or continuing to hold) the Nov SPY 198ish puts with the possibility of a break down and a more obvious exit after a break of the August low.


Pete

Final Exit of SPY Call Option

While I still think the odds probably favor some further upside into next week, I decided to exit the final 1/3 of my position today at the 40% limit level of around 4.10 on the Oct 2nd 189 call.

So I ended up with a 2/3 exit at 40% gain, and a 1/3 exit at ~60% gain.


I am still holding the GDX Dec 13 strike calls.


Pete

Exited SPY Call Option 10-1-15

I exited 2/3 of my Oct 9th 189 SPY calls this morning at 4.59 and 4.10 respectively.

I have an order to exit the last 1/3 at 4.95 which would require a move to ~193.00 during today's session.


Pete

Limit Order to Exit SPY Call Option Bought Yesterday

The 40% limit order on the option suggestion from yesterday seem likely to hit this morning with an indicated gap up and the possibility of at least a little bit of follow through after the open.

It seems to me that the ideal exit order here may be to set the limit order at 70% based on closest fits, which are a more narrow comparison than the stat table I showed yesterday.  But again as noted in yesterday's comments under the post, a scaled exit may be wise.  A third of the position could be exited at the 40% mark, and then set another third or even the final 2/3 to exit at the 70% limit.

I personally have chosen to place a 70% limit order for today's session for the entire position.  By my estimates using an option pricing model, it would take a move to about 192.25 on SPY today to hit the 70% limit order.  That would require a roughly 2% intraday gain.

Additionally from a charting perspective, the gap down from Monday's session is not filled.  Its level is 192.85.  And from comparable charts to what showed up in yesterday's scan, many of the corresponding gap down were filled within about 5-6 days, or sooner.

So the point is that I feel from both a chart standpoint and from a comparison of the most similar markets, that the 70% limit order has a good chance of being reached this week.

I have a limit order to exit the option I bought yesterday at 4.95.


Pete

Short Term Option Profit Opportunity in SPY - Brief Rebound Likely Within the Next Week

Today I ran a scan for the following conditions going back to 1995:

• SPY closes down more than 2.25%
• SPY gapped down at the open
• Daily and Weekly MACD are in the down position

This describes Monday session.  If we add the condition that the next day gaps up, then the results are even stronger.

But this shows a very profitable short term option play by buying 1-2 weeks of time on the ATM option and setting a limit exit order at 40%.  The Kelly Bet fraction is very high at nearly 60%.  The win rate is very high at about 88% over the last 20 years.  This data is based on a model of option prices with some reasonable and maybe slightly conservative assumptions built in.  But the data shows a positive short term gain in the equities over the next 1-2 weeks.  And the average max gain over the next week is 4.7% in the equity and 6.2% over the next 2 weeks.

So the odds suggest high volatility, with a strong chance of at least a brief rebound which would produce a profit within the next 5 days.

I have an order a little below the market to buy the Oct 9 calls at the 189 strike price.  Then the limit order would be 40% to exit.  


Pete

Waiting For Some Divergence To Anticipate a Rebound In Stocks

Currently as I review the MACD charts on SPY time frames from 15, 30, 60 minutes, there is no classic bullish divergence on any of those time frames.  So that leads me to suspect that the short term down trend may not be complete.

Today stocks are set to gap up, but I would not be surprised to see price fails to rally in a significant fashion before another push to lower levels is made.  That being said, IF price does push to a slightly lower low with some bullish divergence and price then reverses higher, I would anticipate a brief rally attempt which may meet resistance in the 195-196 region, which would be a pretty sharp move likely.

If SPY gets hammered down today with another major sell off after then open, then it would seem more likely to me that the August lows could be tested this week.  So in short, I would not go long the equity side here yet, until at least a bullish divergence is present and price confirms a little upside with a bullish cross (moving average, MACD, etc) on one of those lower time frames.


Pete

Nothing New To Offer Currently on SP500 9-28-15

Currently stocks seem to be following relatively closely to the post stock "crash" pattern that I have mentioned several times recently.  Currently the SPY price is still about 3.5% above the August intraday low near 182.50.  However, the SPY price is less than 1% above the August daily closing low on 8-25-15.  It would not be surprising to see a quick sell off over the next couple days to break the August low.  That would basically fit the pattern expectations from past instances.

Note however multiple time frame stochastics oversold set up here with all time frames daily and lower being oversold on the 14,3,3 slow stochastics. So we may see some program buying/short covering kick in at any time.  The weekly stochastics however, has crossed back down and is not yet oversold.  So if a brief relief rally occurs from right at this level, while likely sharp if it occurs, may offer an opportunity to short with expectations of a very dramatic decline to follow, with the indexes headed to likely lower lows below the August low.

Currently I would not initiate a new trade in either direction.  I feel a partial scale out of a short position is sensible here, however, I really think that the odds favor a break of the August low before a major rally attempt occurs.

I will be looking for a bullish option trade set-up shortly after a break of the August lows if/when it occurs.  I think the scans will show a high odds play on a few scenarios once that low is broken.


Pete

Modest Rally Expected Here - Continuation Of Downside Is Expected After That

Click on Chart to Enlarge

With the little rally yesterday and today, the hourly stochastics has cycled back up to the overbought area at a lower high than the previous signal.  Additionally yesterday's low clipped the 9-1-15 low before reversing.  From a chart standpoint this is very common in my experience.  From my perspective, if you are short, the safe stop level is above the high of 9-17-15.  That high should not be exceeded at this point from my assessment of where we are in the post "crash" pattern.  If Thursday's low is broken to the downside, I believe the stop on a short position could be moved down to above whatever intervening high occurs.

Given the most comparable market environments in the past 20 years, it would be expected for a brief 1-2 day rally (maybe 3-4 days) after the break of that minor low.  Then the expected outcome would be for a very sharp break down to retest (and probably break) the August low.

This being said, the daily stochastics is now nearly oversold, and so from an indicator standpoint, there are some cross current that may indicate a few days or more of "sideways" or upwards action before a more ideal situation for a sharp downward move to continue.   In all the instances highlighted in that comparison post, a rally occurred very soon after the break of the "crash" low.  I don't really expect it to be different here.

If the bull market has topped, and a larger and faster decline than any in the bull market were to occur, price of SPY would have to decline to about 166 by the week ending 10-23-15.  That would make the decline larger than the 2011 decline.  Obviously that seems unlikely at this point and I don't expect that.

The next important time frame for an inflection point I believe to be in the 2nd or 3rd week of October, possibly near the options expiration on the 16th.

Pete

Another Scan Suggesting Profitable Opportunity for Buying Puts 9-18-15

Click on Stats to Enlarge

I ran a scan tonight looking at times since Sept 1995 in SPY similar to our current market indicator set up and trend.  The filters were:

• 63 day EMA is down
• 252 EMA is down
• Weekly MACD is below signal line (sell configuration)
• Daily % D stochastics is greater than 75
• Today is a cross down of %K below % D in the daily stochastics (14,3,3)

Looking at the 2 month future results, the MAX loss was greater than 2 times the MAX gain in SPY.

And in the options, buying an ATM put option and holding until expiration would have been a winning play with a few real big winners which basically occurred in the context of bear markets, where a rally had occurred and stocks sold off hard in a continuing down trend.

The EV of the 2 months ATM puts was 45%.  So this fits right in line with the recent scan I showed where the stochastics was overbought in a downtrend.  

So basically from the stats there seems to be a roughly 50/50 chance of a substantial sell off.  If there is a sell off, it may be substantial.

In follow up to the recent comparison of our markets to past "crash" markets over the last 20 years, there has been a pretty consistent time pattern of the post crash retest of the crash low.  And it has occurred in about 5-7 weeks in the 5 instances I highlighted in the linked post.  That time frame would put us in mid October, right around options expiration.  And that time frame would fit with an ideal seasonal bottoming time frame.

Given the technical indicator set up, it may be expected for a sell off to new lows below Aug 24th in SPY, followed relatively quickly by a rally attempt.  I would anticipate the 177 level on SPY as being a Fibonacci support level if 8-24-15 low is broken.

Pete

Rebound In SPY Likely Complete 9-17-15

Click on Chart to Enlarge

As suggested in yesterday's post, the multiple time frame momentum set-up in SPY was ripe for a decline and it appeared that a complex corrective pattern abc-x-abc had complete yesterday in price and time.

This morning's gap down is supporting evidence.  The blue rectangle shows the price and time box of the most recent "c" wave.  After a pattern completes, the psychological price logic/evidence is confirmed by a complete retracement of the most recent trending move in LESS time than it took to form.  We very nearly met that guideline on the gap down opening this morning.

Also note that the gap down today broke the uptrend line of the whole move since Aug 24th.  This is pretty common of a breakaway move.

So any upwards price action from here would be expected to be minimal (maybe a back test of the broken trendline in the 198-199 range).  So using short term stochastics to time a short entry would probably be wise.  A 5 minute overbought stochastics would be my recommendation.  Any stop on a short currently needs to be above yesterday's high in my opinion.  Profit potential based upon historical comparisons may be to about 177 on SPY.  The would be about a 127.2 retracement of the rebound since Aug 24th.


Pete

Multiple Time Frame Set Up On SPY 9-17-15

All stochastics from 5 minutes up to 60 min have bearish divergence at the current time frame Thursday afternoon.  This is in conjunction with the daily stochastics overbought.

This appears to be a very mature set-up for a top of a counter trend rally since August 24th.  A confirming move in price is not yet apparent, but all the signs are in place.  Given the options scan I posted earlier this week, it seems a November expiration put would be an appropriate play here based on profitable stats over the last couple bear markets.

The structure of the correction also appears to be complete in form and time as of today.  A cross of the 30 minute 8 EMA below the 21 EMA would be a reasonable price confirmation signal to initiate a short trade with a stop above the intervening high.


Pete

Time For a Grand Slam Swing - SPY Puts 9-15-15

I ran a scan today based upon current market action and found data suggesting an opportunity for a profitable play in index puts.  Data only goes back 20 years (to Sept 1995).

I may provide more detail later, but the scan had the following criteria:

• 63 daily EMA is pointed down
• 63 daily EMA is below the 252 daily EMA
• 14,3,3 daily %K stochastics is greater than 75
• Daily MACD line is above the signal line
• Today's gap up is greater than 0.25%

Buying an ATM put option with 2 months until expiration and holding until expiration resulting in an average expected value of 59% gain including losers.

So a simple play here is to buy a November put option and hold until expiration.  If a high quality bottom reversal signal comes prior to expiration, the trade could be exited as well.  Such a signal will not likely come from my algorithms unless the August low is broken.

So the simple set-up here is that stocks could fall hard and cause a big move in the puts.  But a loss would be expected to lose the whole option premium.  So the Kelly Bet fraction was only in the 20-22% range.  Out of 28 instances, there were 11 instances which ended up in a profit position.

Click to Enlarge

Pete

SPY Multiple Time Frame Stochastics Short Set-Up

Click on Chart to Enlarge

Currently SPY has broken out of the small triangle shown in yesterday's post.  It appears set to test the 198.40 harmonic zone.

As I type, there is a developing multiple time frame stochastics set up which appears to be setting up an ideal short as price reaches this harmonic zone.

• 5 min overbought
• 15 min overbought
• 30 minute overbought
• 60 minute likely overbought later this afternoon
• Daily nearly overbought today; possible overbought tomorrow

So if signs of bearish divergence on the 60 minute and under time frames show up without last Wednesday's high being exceeded, that seems to provide a low risk entry for a short position with a possible stop above Wednesday's high.

Even if Wednesday's high is exceeded, the multiple time frame analysis still suggests that the short term is basically overbought within a weekly time frame downtrend where stochastics has not yet become oversold.

Remember the FOMC announcement tomorrow.  This will likely bring some volatility into play tomorrow afternoon and beyond.  

Pete

Sideways Sloppy Trade in SPY

As somewhat expected in the days preceding a FOMC announcement with potential volatile responses, market action has been muted today.

Click on Chart to Enlarge

The two key levels I see in the short term as market resistance are 196.15 and 198.40.  The 196.15 area is roughly the center of a contracting symmetrical triangle occurring on this 15 minute chart.  The 198.40 level is a harmonic level for the completion of an upwards ABC pattern off last Thursday's low.

Price breaking last Thursday or Friday's low will likely be a bearish trigger I think.

A move above this morning's high, would very likely push price to test the harmonic zone at 198.40, I think.


I still favor the downside as the next significant move here.  Last Wednesday's high is the clear stop point based upon the short term price logic and a classic bearish engulfing candlestick.

Bearish Short Term Pattern Set-Up - SPY 9-11-15

Click on Chart to Enlarge

Currently the short term picture of the market is indecisive.  Wednesday's high is certainly a key point on the chart.

The chart shown here is a 15 minute of SPY.  What we see is that there is a perfect fibonacci confluence at 198.40 for a possible bearish reversal of an upwards ABC pattern.  Any time the subdivisions in a pattern have a perfect overlap of fibonacci ratios like this I take notice.  These tend to be key areas.

There are a few comments I would make here:

1. Stocks are likely to rise to that level before reversing lower
2. Given the other factors I've posted about, I would anticipate a move lower from that area
3. Failures of a key confluence zone to hold often are followed by a significant continuation

So for the short term trader, a clear set up would be for a 15 minute indicator set up of bearish divergence above Thursday's high and below Wednesday's high.  Likely a 30 minute stochastics overbought signal would occur in conjunction providing a dual time frame set up of 30 min overbought and 15 minute bearish divergence to look at a short entry.  A stop could be set above Wednesday's high.

From the time relations of the pattern, it appears that Monday will be the day at which price is likely to test the resistance area.  At least a mild pullback from the resistance area of a confluence zone like this almost always occurs, in my experience.  However, if that is followed by a break to yet higher highs, there could be follow through.  So having the stop in place to protect is very important.  There is no "safe" stop below Wednesday's high.

The FOMC is scheduled to report next week, so it would seem likely that the market will remain relatively quiet until mid next week.  

SPY Short 9-9-15

If you took a short position in SPY over the last 1-2 days based upon information from the blog here, please comment below with entry price and any questions in regards to trade management.

With the bearish engulfing pattern today, it seems likely that today's high should hold in the short term for an established short position.

I  would guess that we are headed to retest the August low from here.  From past comparisons I still am not convinced that price is ready to break the low and hold.  If I had to choose here, I would suggest a scaled exit strategy taking one part of the position off at a modest profit, rather than hold the whole part expected sustained weakness.

I will update as the action unfolds and any bottom reversals occur (assuming price does decline from here of course.



Pete

Short Term SPY Pattern Analysis 9-9-15

Click on Chart to Enlarge

While the focus of trading is on objective signals or occurrences that lead to a profitable expectation based upon historical testing, the use of more qualitative patterns, is intriguing to many of us, and is certainly valid to some extent as a filtering process for trade selection.

Based upon the overlapping market action since the Aug 24th low, it seems very apparent that a correction/consolidation has been occurring rather than a trending move to the upside.  The simplicity of this should alert us to the probability that there will be a further move to the downside after the consolidation is complete.

From a "wave" perspective I would make a couple observations here.  The upward moves since the low have a generally shortening or contracting bias implying weakening.  It seems possible that a small complex correction abc-x-abc is completing either today or tomorrow.  Since the upward moves are contracting, it may be a rising wedge/triangle pattern abcde.

In either case, the bulk of the move is done, if not complete at this morning's high.  From the 15 minute MACD, it appears ideal for another push to a yet higher high later today or tomorrow before a top occurs.  That would also create a probable bearish divergence in the hourly stochastics and create a situation where all the times frames from 15 min to 240 minute stochastics are overbought.  On a short term pattern like this, that would seem to be an ideal conclusion.

Any move below Tuesday's low would seem to break the uptrend since August 24th and likely indicate at least a short term top and probable retest of the August 24th low.

If the pattern is a double correction abc-x-abc, we should expect a rapid move back below the 191.60 low from 9-4-15.  And that move should take less time than the last "c" wave takes in order to provide confirmation from the price logic standpoint that a new downtrend has begun.

So there are a number ways to play this if not already short.  Here are a couple ideas.

• Short on a cross of the 8 EMA below the 21 EMA on the 15 minute chart (stop above the highest point of the pattern.
• Use a sell stop to short on a rapid break of the recent "b" point.

My mind doesn't like to sell after a decline.  I prefer to sell as a top seems to be forming with bearish divergences, and use chart resistance or statistics in order to establish a stop level.  This method will often allow a quick movement of the stop down once there is an initial break or indicator action suggesting a top has occurred.

Trade Management Example:

-Short SPY at 198.00.  Place the stop at 203.00

-Exit half position at a limit of 195.50.  Move stop down to 200.50 (or lower).

-Then continue to manage the trade with a stop adjustment technique using an indicator or moving average channel.

-Exit the trade at the next 15 min MACD bullish divergence if not stopped out.

SPY Update 9-9-15

Click on Charts to Enlarge

These charts show some of the best comparisons to the current market environment.  The blue arrows show where I believe is a corresponding region in the pattern to our market right now.

Some of these instances broke above the initial reaction high briefly.  Other only retested it before a break or deeper retest of the "crash" low.

From the qualitative comparison as well as the stat scan that I have run, it seems likely to me that some short term weakness is ahead.  

Further Details On SPY Short Set Up 9-8-15

Click on Stats to Enlarge

I ran one more filter on the data from today's short set-up, and this made a huge difference suggesting a more pronounced downside, and lasting further into the future.

The additional filter I added to the scan was that the close of today's session was in the upper end of the day's range (above the 80% mark of the day's range).  So the gap up was followed a strong close.

Again this was in addition to a daily MACD "down" and the >1.5% gap up.

There were only 17 instances of this with the closing returns 7 trading days into the future shown above.  (Data only goes back 20 years).

The MAX loss versus MAX gain was greater than 2:1 in favor of the downside in the time frames out to 10 trading days ahead.  And the average closing return jumped from 0.5% profit on the short to ~2.5% profit on the short at 8 days out.

So if SPY closes strong here, as it look likely to as of 3 pm EST, then that would argue for even greater downside expected over the coming days.

For disclosure, I purchased an Oct 196 put this afternoon.  There is not a clear option limit target here, I will likely place an OCO order for stop and a limit gain after I see a few days of action.  But I am prepared for the possibility of a 100% loss on this trade, even though i do not expect to take it.

Pete

SPY/SP500 Short Set Up Here 9-8-15

Click on Chart to Enlarge

Based upon the stats shown recently which suggest that stocks will likely have a deep retest of the August lows, and the contracting bias of the action since the August low, it seems like stocks will break up or down out of the contraction in the next day or two.

Looking at the stochastics on this hourly chart above, we see that it is in the overbought region at a LOWER high than the last overbought signal last week.  From a price logic standpoint, if Thursday's high is not exceeded by tomorrow, it would suggest a continuing downtrend. 

So there are a couple options here as far as positioning for a potential move.

1.  Wait for a breakout of this small triangle (probably tomorrow) and possibly initiate a trade depending on the price action.
2.   Get short here, based on the technical signals so far suggesting a possible overbought at a lower high in a downtrend set-up (with trade stats showing that most of the expected rally from recent signals was likely to occur by this week....based upon historical similarities)

I think option 2 is better.  However, a stop above Thursday's high may be asking to get hit, so I think a better stop is above the 8-28-15 high.  The plan would be then to quickly move the stop down if price breaks to the downside.   But giving that wide stop would require appropriate position sizing.  Without regard to stops, looking out 8 days gives the following risk profile and suggested Kelly bet ratio of about 11-12%.

Click to Enlarge

So from a practical standpoint, I would suggest risking a little less of the account value than suggested here if stopped out.  The trade stats are most negative on day 1 after this signal, with an average close a little more than 1% down on the day following the signal (tomorrow in this case).  The trade stats above are based on 8 days out and will be a little less aggressive on the position sizing.


Hope this helps on the equity side.  Comment if there are questions needed to clarify.  This is a time sensitive trade because stats would include the overnight gap, which in this case of past signals has averages about -0.3% suggesting more likely a gap down tomorrow, which would be in line with the expectations noted above.


Pete

Large Gap Ups In a Downtrend - Weakness Likely Ahead For Stocks

In follow up to the weekend post, obviously SPY is not gapping down this morning. 

Actually SPY is set to gap up about 1.8%. 

I ran a scan looking at gap ups greater than 1.5% and the stats consistently show weak returns with risk profiles skewed to the negative over the next several days.

When I filter the scan for a couple other factors which are occurring right now (MACD daily is down, and the previous trading day there was a 1% or greater gap DOWN), then the results were even more pronounced to the bearish side.

The returns are by no means a landslide win for the short side, but there are very few instances where the average closing returns are consistently negative.  In the current case, the forward average closing returns are negative out to 8 days.

 Click on Stats to Enlarge



The risk profile for short term options is not really attractive in that there were a number of instances where this type of action happened near a bottom, but in a few instances the returns were huge.


My opinion from the comparisons that I have highlighted here, is that stocks are likely to retest and probably break the August low.  I think given the seasonal tendency for September and October to be the sell off months, that the re-test will probably occur by October option expiration.  That seems to fit very well with the closest fit instances from the past as well as known annual cycle tendencies.

I am planning to wait for things to trade for a while early this morning, and then purchase an Oct. put option at some point.  Closest fit past instances suggest that if price can even make a new high above the recent reaction high on 8-28-15, that area should be resistance on a scenario as I have suggested here.


Pete

Possibility of Back to Back 1% Gap Downs on Monday

Click on Stats To Enlarge

First off this stat profile is NOT currently active.  It is looking ahead to the possibility of a 1% or larger gap down on Monday in SPY etf.

The stat sheet shows the instances of back to back 1% gap downs in SPY going back 20 years.  Note that it does not include the action from the recent sell off in August, though they fall in line with these stats.

There are about 30 instances and there is a clear bias to the upside in the short term.  There is about a 2.5:1 max gain to max loss ratio in the first 3 days (after the close of the second 1% gap down day).  That skew diminishes moving forward to where it is almost at par at 1 month ahead.

The strongest opportunity from the stats occurs within the first 3-4 days after the second gap down.  And there is a clearly positive options play using a 1 week to expiration ATM call option.  The maximum expected value would occur with a 40% limit order to exit the trade according to the past data.

I just wanted to get this out ahead of time so that we can anticipate this potential opportunity next week and be ready to take action at Monday's close or possibly intra day if there appear to be an intraday reversal likely to occur based upon short term divergences.


For the equity trader, the indication is clear that a positive long trade set-up would occur in this scenario.  And I would suggest a 15 minute or 30 minute chart for analysis and trade signals.  Also a trailing stop technique would be used.  And exit would be ideally upon a bearish divergence of the same time frame used for entry.

Note that the scenario highlighted here would be totally consistent with the previous posts regarding the closest fit historical instances with a retest of the low followed by a sharp price rally at least briefly.

As we see the indicated gap down from the futures activity on Sunday night and Monday morning, I will follow up on this post possibly.  If there are questions, please comment below the post.



Pete

Stock Market Update 9-4-15 - What I Expect Based on The Best Historical Fits

Click on Chart to Enlarge

This chart shows the SPY etf daily chart with a proposed future path of price action based upon similar instances of price action in 2008 and 2011, as well as 2000.

The market has a way of making a whole bunch of price movement in a short period of time, and then just when everybody "knows" the trend, it chops around and creates trendless volatility, which functions in the market ecosystem to destroy the weak and leave only the strong.

The closest fit past instances to the recent market plunge consistently show a choppy retest of the "crash" low, followed by another reaction rally as the low is retested.

From the stats that I have looked at in the past few days, as well as the chart comparisons, I would project a further retracement towards the low, followed by another sharp buying rally.

Option expiration occurs Sept 18, and I think that could be a factor in seeing prices stay range bound until expiration.  I think with the August expiration occurring on the 21st, and then the big gap down and plunge the following Monday, option buyers were likely to be active in days since the plunge.  However, the in the options market, it is the sellers that are the long term winners.  And in the mysterious ways in which the market behaves, I think that the sellers will win the battle until expiration.  Basically the closer the price action expires to middle of the range since Aug 24, I think that would likely punish the near term option buyers.

So from my standpoint here, the next key trading opportunity will arise as price retests the recent low.

I think the 15 minute or 30 minute charts will have to be used to get any reasonable reward to risk ratio on the ETF side of trading.

I do feel that short term option plays will present themselves as we continue to move forward.


Pete

SPY Call Option Profit Limit Hit Today

Basis the SPY Sept 11 192 strike call from Tuesday's closing price, the 70% limit order was hit today.  So the trade is closed as far as my recommendation and tracking here on the blog.

I think a nice put/short opportunity will arise if price is able to push back up above today's highs with in the next couple days.   If price rallies modestly tomorrow, I may enter a bearish option position going into the weekend.

From the stats posted earlier this week about 3% down days, there was a clear tendency for a short term rebound, but the future returns turned overall negative as time moved forward.  And at 3 weeks out, the average closing price was about 4% lower than the average close 1 week out.  So since price has rallied a bit already, it would seem that looking out a couple weeks, we could see a pull back.  That is totally in line with the closest historical fits from the charts, and is backed up by the objective historical stats.


Pete

SPY Call Option Follow Up - Exit Plans

The suggested ATM SPY call options from earlier this week should be entering the exit zone today.

So based on the stats we looked at, setting a 40% limit order should be a very high probability of success trade.  That limit order looks like it will hit this morning.

I had suggested using a 70% limit order to exit the trade.  If price moves up a little further into the gap down from 198ish, that order will likely hit.  So, I don't have anything new to offer other than possibly suggesting a scaled exit taking part of the position off at 40% gain, and then using the 70% limit order for the rest of the contracts.


Pete

SPY Call Option Limit Order Suggestion

I would suggest placing a limit order of 70% gain from today's closing value in order to exit the suggested option strategy mentioned today (Sept 11 ATM call option).

This takes into account some other criteria not shown earlier today.  For this order to fill, it would take a rally back well into the gap area from today.


Pete

Today's Action In Context - SPY Down 3% After a 2% Gap Down

Click on Stats to Enlarge

This table looks at previous instances of days when SPY gapped down 2% and then closed down greater to or equal than 3%.  Data goes back 20 years and does not include August of this year (which wouldn't change it).

What we see is consistent/profitable bullish opportunities on average.  In this case, the stats look at a 5 days hold, which is the maximum closing return on average.  77% close higher 5 days later, with the average gainer up more than 4%.  The average total expected value, including the losers, is 2.7%.

The few instances that were losers were basically in the waterfall declines preceding sharp bounces. So they still had 3-8 days before bottoming out in the short term and putting in a sharp rally.

So the stats here don't add that much to the earlier post.  If tomorrow gaps down, I would expect an even stronger stat profile, but obviously instances are getting fewer as well.

Again this is short term info in the context of a probable continuing downtrend.


Pete

SPY Gap Downs of Greater Than 2% - Short Term Bullish Option Play

Today SPY gapped down over 2%, and so I looked at other times when SPY gapped down over 2% while the weekly MACD was down.  The short term stats show a clear upside bias for about a week.  The peak closing gains in the short term were 6 days out.

Looking at the options part of the assessment, based on my pricing model, an ATM call option purchase with 2 weeks until expiration would provide the maximum value play.  The maximum expected value would be to enter the trade and set a limit order of 160% gain to exit.

Local maximum expected values occurred at 40%, 80%, and 160% limit orders.  The stats below show the overall trade stats.  Given the current market environment, I feel that the 40% or 80% limit order would be more appropriate for the market overhead resistance.

Which ever the case, they are positive EV plays, and the position sizing would vary depending on the exit limits.  The Kelly Bet % will give guidance on that.  And psychologically, an 80% win rate trade like the 40% limit order is nice in that it gives frequent wins and reinforces sticking to solid trades and planned exits.

This shows the stats for a 2 week till expiration ATM call exited with a 160% gain limit order.  This gives the maximum expectation at 30% per trade.

This shows the stats for a 2 week till expiration ATM call exited with a 80% gain limit order.  This has a higher win % at 66% but a little lower expectation.

This shows the stats for a 2 week till expiration ATM call exited with a 40% gain limit order.  This gives the maximum win rate at 80% but a lesser expected value of 12-13%.

I personally took the trade and have the 40% limit gain order in place to exit, which would happen on only a partial fill of today's gap down within the next couple trading days.

SPY Is Testing Broken Support - Resistance Is Expected Here For a Continued Downtrend

Click on Chart to Enlarge

This is a SPY daily chart showing the action for the last 1 year or so.  The red lines were the clear horizontal support levels that were established in the uptrend.  In past market tops, when support is broken, there is often a rally to move above the price levels of the bottom support level.  And that general area is the region where the best shorting opportunities have occurred.

And currently that is where SPY is situated.  From the shorter term charts (15 and 30 min) it would seem ideal for another push to a higher high for the rally today or tomorrow.

But basically the rally has run its expected course in both price and time.  I am now looking to speculate on the downside and have some put option orders which would likely fill on a push to yet higher highs above last week's high.

If the rally does stall here quickly, past similar scenarios would suggest a sharp deeper than 50% retracement of the rally which occurred from low to high.  That may be just the first attempt at a retest of the lows, and it may not last.

But tomorrow seems like the ideal topping time to me.  So my suggestion is to be totally prepped for the exact signals you look for to enter a short trade.  Also, I would advise a scaled exit on this trade.

For instance, once the trade is entered and stop placed, set a limit order to exit half the position at a profit of 0.5 units.  Then, if that is hit, move the stop down to half of its original amount.

Another similar option, is to set a half position exit at 1.0 unit (compared to stop loss amount), and then just maintain the stop until an exit signal is generated.


Pete

A Note on the VIX/VXV Ratio - Declines Probably Still to Come

Interestingly on the recent massive sell off in stocks, the VIX/VXV ratio has spiked and remained elevated above the 1.0 level which is a theoretical extreme high level.

The last time we saw a massive sell off similar to the current one was in August 2011 in which case the VIX/VXV stayed elevated above 1.0 for the waterfall decline and the initial rally off the 8-9-11 waterfall decline low into the 8-17-11 high after which a sharp couple days decline occurred and retested the low.

The VIX/VXV then remained above 1.0 until right at the peak of the following rally into August 31, 2011 where price immediately rolled over again.

So the point here, is that the current elevated VIX/VXV ratio shows fear in the market, and with price rallying hard without the ratio dropping back to more normal ranges, the stage appears still set for a volatile re-test and or break of the lows in the coming weeks.


Pete

Initial Rebound From the Waterfall Decline Likely Near Complete

Click on Chart to Enlarge

SPY has advanced basically as suggested by previous comparable instances highlighted in recent posts.  And the peak short term gain in the past instances was in the 5-7 day range on a closing basis from last Friday.  So today is day 5.  Additionally, there has been no divergence, even short term at the recent low, suggesting the psychological phase of this downward move is unlikely complete.

Looking at the 15 minute chart above, SPY has been advancing in a rising wedge type of pattern off of Monday's low.  With a poke above yesterday's high, there will be a pronounced bearish divergence on the 15 minute chart which may highlight the end of this initial reaction to the massive sell off.

From previous instances, it seems that a greater than 50% retracement of this week's rally is likely even if the bottom holds for the intermediate term.

I would again re-iterate that any long position be taken off currently in stocks.  Depending upon your time frame, and method for trading, I would suggest that some short-term downside is likely.  I think the gap up from Thursday has to be a minimum target for any short term halt to the uptrend.


Pete

GDX Call Option - Gold Stocks Set to Rally Big

Click on Chart to Enlarge

This chart is GDX, the gold miners ETF.  It is showing a very strong bullish divergence in the money flow index, which at significant bottoms tends to be a leading indicator.  See the green circled areas for the last 2 set-ups in the money flow index like this.

Additionally, doing any quick searching on gold seasonal price movements shows the September time frame as a positive trade, and gold is generally strong from Sept through December.

Additionally, the smart money has recently moved to a historically extreme bullish position, suggesting a price support level has been hit at the recent lows in gold.

I plan to enter a December 13 call option on GDX tomorrow.  I am placing a limit order of 1.90 initially.  Currently the ASK is at 2.00.

Once entered I would set a limit order to exit of 6.00 or 300% gain from entry price.

Exit SPY and MU Call Options

If you took any of the trades suggested in the comments earlier this week, the SPY trades should be up in excess of 100% currently and I would recommend exiting today rather than wait for tomorrow.

The MU calls are also in a modest profit of around 50% and I would suggest exiting them with a market order currently.

My feeling is that we will see another pullback and retest of this week's bottom relatively soon, but I don't have the definite stats to suggest any trade here currently.


Pete

6 Days Down In a Row in SPY - What Next?

Looking back at past instances of 6 days down in a row in SPY, there have been a few nice bottoms which have been caught within the next trading day or so, but overall the downside momentum was very strong and the rallies to follow were often brief and not as consistent as would be nice to take any type of trade.

We are in such rare territory here, that there are not enough instances to get a strong data set from.

At this point I would think that the October low in SPY has to be a target before a more lasting multi day rebound occurs.  Most of the prior instances of the washouts we looked at filled the big gap down within 1-2 days.  SPY didn't manage to do that here suggesting at least short term weakness I think.

It seems best to just hold tight here, another more obvious trade opportunity will likely arise int he coming few days to couple weeks I think.


Pete