Thursday, October 29, 2015

Market Conditions Fit With Topping In a Bear Market Rally - 10-29-15

Today I ran a few scan and one simple one that stood out highlighted the time periods below.  They were basically during the last 1-2 weeks of rallies in the last couple bear markets.  The 2002 and 2003 instances were after the bear market low in Oct 2002, but the Nov 2002 high did lead to a major decline and retest of the bear market low.  Only the April 2003 instance failed to lead to a major decline in stocks.

Mid January 2001
Mid May 2001
Aug 1 2001
Mid Nov 2001
Mid Nov 2002
Mid April 2003
Mid May 2008

The scan conditions were:

  • 63 day EMA< 252 day EMA (basically long term downtrend in force)
  • 5/63 total put/call ratio less than or equal to 0.83 (recent put/call complacency relative to trend)
  • VIX closes below 25 (this will exclude rallies that are in major fear/decline environments toward the middle of the bear markets)
Buying an ATM put with 2 months until expiration on this signal led to average return of nearly 200% gain at expiration.

So it is certainly possible that the dramatic sell off in August was a blip in a bull market, similar to the August 2011 sell off, the bull market is in a later stage now and it is possible this is the first major rally of a larger bear market.

A low-low-high time cycle comes in next week on Nov 3rd relative to the August and Sept bottoms on the recent decline.  

The daily upper bollinger band (20,2), is currently sitting at about 210 which is 0.5% above the current highs.  It may be ideal to see a brief sell off followed by poke to new highs and a touch of the upper bollinger band before the rally completes and a significant retracement or leg down starts.  I also feel that program trades are likely to sell or profit take on a touch of the upper bollinger band.


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