Friday, August 21, 2015

Massive Sell Off Suggests Short to Intermediate Term Rebound in SPY

Click on Chart to Enlarge

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.


No comments:

Post a Comment