Probably Just a Short Covering Rally Here Before a Break To New Lows

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It seems most likely to me that SPY is still forming an upwards correction off the August 24th low.  I had recently mentioned that a rally was expected after the break of the lows of the 1st week of September.  We did end up seeing a brief 1 day rally initially, but I don't think that was THE rally which would correspond with the past post crash markets.

The current rally has more of the robust feel and look (seems like a legit reversal), which often preceded the break to new lows below the crash low.

Until This week's low is broken to the downside, I think there are other interpretations, but if the timing of the pattern unfolds as I expect it would for the completion of a contracting pattern (E smaller than C, and C smaller than A), then some time between today and Tuesday would likely mark the end of this rally attempt, and we would see a very sharp break down to lower lows.

So as a simple trading strategy here, we could enter short the market on a break of this week's low with a stop above the intervening high.  Then a partial profit exit could be made and stop adjustment made in order to decrease risk and still allow the possibility for a substantial profit on the short.

Another possibility for trade strategy based off the assumption of the above mentioned contracting pattern, would be to enter short early next week with a stop a little above 198.  If price moves above 198ish, then this rally would not longer be smaller than the C wave noted above in the chart.  Then a partial exit could be taken at a 0.5:1 reward to risk level, and then move the stop down to half the original amount at that time as well to create a "no risk" trade.

I don't have any clear cut stats to offer on the option side here, but I will run some scans over the weekend to see if any profitable edge seems apparent.  Also keep in mind that the scan from 9-15-15 is still in effect with the hold time of 2 months (so basically until November expiration).  That scan would argue the legitimacy of re-entering (or continuing to hold) the Nov SPY 198ish puts with the possibility of a break down and a more obvious exit after a break of the August low.


Pete