Tuesday, September 8, 2015

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.


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