Wednesday, October 7, 2015

Complacency In a Downtrend Is a Short Set-Up - SPY Analysis 10-7-15

Click on Chart to Enlarge

As of this morning's high in SPY, there is a marked 30 min MACD bearish divergence.  The daily %K stochastics is nearly to the 80 mark indicating an early stage "overbought" signal.

In the chart above I have marked with arrows the times since the Aug 24th low where there was a 30 MACD divergence, and all have been good buy and sell points in the range.

It is possible that a 5 wave type move is completing off last week's low.  And this may be the "c" wave of a flat type pattern up from the Aug 24th low.  Additionally as noted by the red line on the chart, the gap down from the day after the recent FOMC announcement has now been filled, and from a charting standpoint, the fill of a significant gap, with reversal can be a continuation point of the dominant trend (in this case down, as indicated by longer term moving averages).

I ran a scan today which looked at time when the overall market real money sentiment as evidenced by the "complacency" indicator I have developed, is below a certain point in a down trend.

The scan criteria were:
  • 252 day EMA is down
  • Weekly MACD is in sell configuration (MACD
  • Complacency was less than 29.0 (this is pretty low for a downtrend)
  • Looking back only to the 2007 market top (volume is a factor in the indicator, and previous market environments had non comparable average volume)

What we see on this scan is a massively profitable result in the option looking out 2 weeks.  The expected value including losers is ~65% on the ATM put options with 10 days till expiration based upon past similar occurences.  So this type of set-up has preceded some major pullbacks over the coming weeks.  Notably some occurences were right near the highs of counter trend rallies in the last bear market.  The limit order to exit the option in this example is 210% which suggests a big move down.  Based upon this I would suggest the Oct 16th standard SPY put option, 198 strike.  Then use the limit order of 210% as suggested here based on the data.  

A partial profit could be taken at 120% based upon the data if you want a tiered exit.


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