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

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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

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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

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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

Implications of Gap Up After 52 Week Volume High

I ran a scan today looking at times going back to 1995 when a 52 week high in volume was followed by a gap up of greater than 1%.

The peak positive return were 2 days and 6 days after the signal day, which in the current case was yesterday.

This is in line with previous stats showing that the max return tended to occur within about a week following the signal day of the big selloff type of day.

When I ran the scan for a 2% or greater gap up, there were 3 instances instead of 8.  The peak gains were also at days 2 and 6.

There were positive average returns from the close of the signal day for up to about 7 days.  After that they began to tip into negative average closing returns.


I also looked at time when the sum of the last 5 days gaps was more negative than -5%.
Similar comments apply with peak positive closing return at days 2 and 5 on average after the signal day.

So to sum up the expectation here, we may see/expect price to push up to fill the gap down at 198 on SPY within the next trading week (5-6 days).  At that point the scales would likely tip in favor of negative future returns and a probable retest of yesterday's low.

If/when we fill the gap, I will give further insight into how to speculate on the probable downside to come.

As of the time of this typing, it seems the easy money was made between yesterday's open and today's gap up open.

Without seeing further upside from here I personally am not ready to speculate on the downside.  I don't know if this bounce will be able to muster the strength to get back up to the 198 level, but that is what the best comparisons suggest has consistently happened over the week following the washout like happened yesterday.


Pete

What Are The Implications of This Continued Massive Sell Off?

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Today I ran a scan that looked at time since 1995 in SPY when price closed down 5 days in a row and the 5th day had a gap down greater than 2%.

There were only 4 instances all shown in the table above.  The next day showed an average gap up of 2%.  The Jan 2008 instance showed a large gap down the following day, but that was a great short term buy.

Note that from the close of the signal day (today), the average 1 week maximum gain on an ATM call option was nearly 300%.  All 4 instances showed 160% or great gains. 

The maximum gains over the next 5 trading days all were greater than 4.6% with the lowest amount being the Jan 2008 instance.  In my opinion, that is probably the closest fit to our early stage bear market/volatility environment.

Looking at the average closing return following those instances, we see that at 4 days, and 8 days, all 4 instances showed positive closes relative to the signal day.  This would suggest that our market currently could have an upward current into Friday.

So we are truly in a rare environment here, but as is the case, the more extreme conditions get, the more sharp and impending the rebound.

Futures are up as I type this evening. 

From past instances it seems likely that the market will make a run back for the 198 level on SPY this week to fill today/Monday's big gap down.  The stats are certainly supportive of that idea given the few instances that are comparable.


Pete

MU Call Option

I purchased a Aug 28 expiration 15 strike call on MU for 0.58 per contract this afternoon.

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The daily charts show a pronounced bullish divergence  in the MACD indicator.  And while the session has not closed yet, so far the probability looks quite high that MU will form a bullish engulfing pattern on the day.

Given the trade stats shown over the weekend on SPY, it seem likely that stocks will continue to attempt a rebound for another couple days at least.  A fill of the last couple unfilled gaps on MU over the next couple days would push the trade to 100% or more profit. 

I am setting a limit sell order @ 1.80 to close the trade on a potential move higher from here.

SPY Option Trade 8-24-15

I bought a SPY Aug 28 expiration 197 strike call at the open with a limit order of 0.70.

Then I exited the trade with a limit order of 2.25 after about 15 min of trade.

I am now setting a limit order of 3.75 to buy a Aug 28 expiration 189 strike call.  This would require a little pull back from the morning thrust and probably a tightening of the spreads.

I would then suggest a 50% limit gain order GTC after that for simplicity unless you have some time during market hours to track a short term indicator to try to time the exit if/when the market rallies.


Pete

A Large Gap Down Monday Morning Could Offer A Nice Short Term Bullish Play

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Tonight I ran some stats as a follow up to the previous post, this time looking at similar set-ups to this past Friday's when the following trading day gap (in this case Monday) gapped down.

The stats are solidly positive again with 80% or more of instances showing gains greater than 50% on the ATM option from the signal day's close.  But the option gain stats above are all relative to the signal day's close.  So if you actually wait and buy on the following day's gap down, then the gains become even bigger.  There were some monster trader wins in this list.

The historical evidence still solidly points to buying a call option with a week until expiration tomorrow morning with the strike price somewhere in the region of Friday's close or Monday's open.

If you go back through the charts and look at the instances when the following day gapped down and then price closed above the open (and the higher the better), it made sense to hold that option for the next 5 days rather than sell right at the 50% gain.  But for simplicity, I would add to the last post that buying a SPY Aug 28 expiration call option tomorrow morning at a strike around Monday's opening price, and setting a limit gain of 50% for the exit, should be a solidly positive expectation trade.

Looking at the following day gap down of more than 2%, every trade out of 7 instances showed a return of 50% or greater gain on the ATM option bought at Friday's close.  And the average close on SPY 5 days later was +4.96%.  Buying at the open of the gap down the following day would have shown an even larger gain obviously.

So the indications here are clear that this gap down into Morning is likely to be an exhaustion of the move.  Something new can always happen, but with a correctly or comfortably sized position, with defined risk such as a call option, I feel that I HAVE to take this trade regardless of how wrong it feels because the market is free falling down.

I will assess this in the morning but likely buy an ATM option with an expiration this coming Friday, August 28th.  Assuming the trade unfolds in a massively positive direction, I would suggest using a 5 minute or 15 minute MACD chart to look for a bearish divergence to exit the trade prior to expiration.

Massive Sell Off Suggests Short to Intermediate Term Rebound in SPY

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The snip above show a study of SPY performance after 3 closes down in a row and the most recent close down being more than 2% as we saw on Friday.  The filter also includes the weekly MACD in the down position.

The stats look at the performance of buying an ATM call option with 1 week until expiration and setting a limit order of a 50% gain after entry.  Any loss assumes 100% loss on the position.

There have been 77 trades going back to 1995.

83% of the trades would have ended up reaching the 50% limit gain before expiration making a hugely profitable trade.  The expected value is over 24% per trade.

Additionally while not shown here, only 4 out of the 77 trades did not show a lower low in the next 5 days.  So it seems likely that next week will have a slightly lower low (at least slightly) followed by a sharp rally.  This makes it sensible to place a limit order to buy the option at or below this Friday's closing price to help solidify the reward to risk picture.

The stats are even stronger for 4 days down in a row which also occurred into Friday's close.  And the stats are even stronger for the 4th day being down greater than 3% which also occurred on Friday.  However the instances are more sparse.  But the optimal play there would be to place a limit order of 100% for the 1 week at the money option.

Out of the 77 instances, 44 gapped up the next trading day.  So more often than not the market gapped higher.  But we also see that almost 95% of the instances a lower low was made in the next week.  So if Monday opens with a gap up, the suggestion would be to wait for price to come down to buy the option.  In other words, if there were a clear indication that Monday was more likely to gap DOWN, then the suggestion would be to buy the option at the open Monday.  But since that has not been the case, simply waiting for a lower low to be made (below Friday's CLOSE, not low) seems to be the best strategy.

Of note also for past stats.....if the next day gapped up 1% or more, and then price fell below the previous day's close within the next 3 days, then 7 out of 9 instances showed 100% or greater gains, which is even stronger than the other stats.  So that suggests that if Monday gaps up, and then price moves below Friday's close, we still want to enter the trade, but switch the limit gain order to 100% for maximum expected value.


So the play here is to buy the Aug 28th expiration SPY 198 call for a limit of 3.50 either Monday or Tuesday.  If filled, then set a limit order to sell the option for 5.25 after entry.

If the order is not filled by Tuesday, I would suggest switching to the next week expiration for trades and re-assessing the action.

From the trade stats of the closest fit scenarios, it seems that SPY is likely to rebound to fill the 8-21-15 gap down (or at least very close) at some point next week.

Stats are available for playing the equity side of this as well.  If you need those, please comment what your question is and I will try to assist.


Pete

Another Rebound Likely In Store Over the Next 1-2 Weeks In Stocks

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This table shows statistics of 2 trade set-ups that are in play as of this past Friday's closing action in stocks.

The left hand column shows trade stats over the next 5 days after 6 consecutive closes below the open in SPY.  The expected value of all trades is 1.24% gain closing the trade 5 days after the trade triggers (Friday's close).

The right hand column shows times in the current and in the prior bull market when a "3 month low" buy signal was triggered in my bottom spotting algorithm.  Now currently the SPY is not triggering the signal, but the DIA (Dow 30 ETF) is triggering it.  So I am suggesting here that using the stats from the SPY trading history will be appropriate for estimating the forward returns.

The expected value of all trades is 2.21% when closing the trade out 10 days after it triggers.  Actually 9 days appears to have an even higher expected value.  So if entering, the trade is planned to close on Aug 20 or 21st.  Also note that the win rate is in excess of 75%.  The average winning trade is 3.4%.  If that average were to occur here, it would put the SPY up to about 215.00 in the coming 2 weeks.


ITM options could be used for some leverage here.  I would suggest SPY strikes 204 or lower and still exit at the same time frame.  If a rally does unfold, a few simple indicators could be used as contingent exits.  I will discuss this as the trade unfolds.

I personally am going with a SPY Aug 28 expiration 204 call on this trade.


Pete