Monday, January 11, 2016

4 Closes Below Lower Bollinger Band In a Row in SPY - Very Bullish Historically

The stats are phenomenal for a 1 week bullish trade on the indexes after 4 consecutive closes below the lower bollinger band in SPY.  That criteria was met today.  Going back 20 years, there are only 21 days that meet that criteria.  The forward 3 day max gain is 4 times as large as the max loss, so the set-up is great for an equity trade.  Only 4 out of the 21 days have led to maximum option gains of less than 50% over the next 5 trading days if buying ATM options from today's close with 5 days until expiration.

If setting an equity trade with equal profit and stop limit orders, a 12.5% limit combo provided maximum expected value of about 3.35% in 3 days.  Exit the trade after 3 days (in this case by Thursday's close) if the limit orders are not hit.

The option trade maximum expected value is to set a limit order of 130% and buy the weekly ATM call, in this case Friday's standard Jan 15th expiration.  There have been 15 winners and only 6 losers in the historical 21 instances.

Based on the past instances the next day began on average with a gap up, but about half the instances traded below the previous day's closing price.  15 out of the 21 instances experienced at least 0.5% loss after the opening on the follow day.  So these numbers suggest that if you did not get in by today, then setting a limit order a little below the open tomorrow would be a reasonable probability to get filled and still have the lion's share of the move likely to play out to the upside.  Of course, if the gap is very large tomorrow, that could skew the risk reward.

So the pieces are in place for a nice rally here for the rest of the week.

Let me know if there are any questions regarding trading from this analysis.


1 comment:

  1. Also this set up is profitable for a day trade based on the historical stats. The open to close change the day after the 4th close in a row below the BBands, averaged 1.3%. Setting paired limit and loss orders at 8.25% or closing the trade at the close the following day produced an expected value of about 1.25% in the equity side using SPY.