SPY/SP500 Short Set Up Here 9-8-15

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Based upon the stats shown recently which suggest that stocks will likely have a deep retest of the August lows, and the contracting bias of the action since the August low, it seems like stocks will break up or down out of the contraction in the next day or two.

Looking at the stochastics on this hourly chart above, we see that it is in the overbought region at a LOWER high than the last overbought signal last week.  From a price logic standpoint, if Thursday's high is not exceeded by tomorrow, it would suggest a continuing downtrend. 

So there are a couple options here as far as positioning for a potential move.

1.  Wait for a breakout of this small triangle (probably tomorrow) and possibly initiate a trade depending on the price action.
2.   Get short here, based on the technical signals so far suggesting a possible overbought at a lower high in a downtrend set-up (with trade stats showing that most of the expected rally from recent signals was likely to occur by this week....based upon historical similarities)

I think option 2 is better.  However, a stop above Thursday's high may be asking to get hit, so I think a better stop is above the 8-28-15 high.  The plan would be then to quickly move the stop down if price breaks to the downside.   But giving that wide stop would require appropriate position sizing.  Without regard to stops, looking out 8 days gives the following risk profile and suggested Kelly bet ratio of about 11-12%.

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So from a practical standpoint, I would suggest risking a little less of the account value than suggested here if stopped out.  The trade stats are most negative on day 1 after this signal, with an average close a little more than 1% down on the day following the signal (tomorrow in this case).  The trade stats above are based on 8 days out and will be a little less aggressive on the position sizing.


Hope this helps on the equity side.  Comment if there are questions needed to clarify.  This is a time sensitive trade because stats would include the overnight gap, which in this case of past signals has averages about -0.3% suggesting more likely a gap down tomorrow, which would be in line with the expectations noted above.


Pete