Sunday, January 17, 2016

Bullish Set-Ups Continue Based on Historical Data

SPY prices broke below the late September low on Friday, as well as below the August closing low.  This may mark a point where a short covering rally begins by the smart money.

Stats for gap downs greater than 2% show a profitable 1 week call option purchase at the close of the 2% gap down day.  The win rate is about 66%.  Kelly bet % is around 20%.  The limit order to exit the trade for maximum expected value is 70% gain.

The equity set-up is also bullishly skewed.  Paired stop loss and limit gain orders of 6.5% show a 5 day expected value of 1.39% on historical data if exiting at the close 5 days ahead if the orders are not hit.  Kelly Bet stats justify full 3x leverage on the bullish trade.  So the expected value with full 3x leverage would be about 4% for the upcoming week.

Based upon the pattern develop here in stocks, I think stocks could rally from here and then meet resistance in the 199-204 level on SPY.

Let me know if there are any questions on this analysis or your specific trade situation.


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