Monday, August 24, 2015

What Are The Implications of This Continued Massive Sell Off?

Click on Stats to Enlarge

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.


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