Saturday, September 5, 2015

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.


No comments:

Post a Comment