SPY at Lower Bollinger Band

I ran some back test scans today focusing on times when SPY had touched the lower bollinger band during the day's trade action.  I looked at reversals from the lows after touching the bands.  I looked at returns following 3 or 4 gap downs in a row.  I looked at similar instances combined with elevated put/call ratios, etc, etc

I found some mixed results.  One factor which seemed significant is that when the VIX was lower, it was more likely to see negative forward returns.  When the VIX was higher and put/call ratio was higher, there were short term rebounds expected which provided bullish trade opportunities.

Looking ahead tomorrow, if SPY has a big down day and closes below the lower bollinger band, then there will be a set up in play which has been profitable for a 1 week at the money call option purchase.

Three or 4 gap downs in a row, with the current day closing below the open or below the lower bollinger bands are both set-ups with bullish short term skews.  So this should be on our radar.

Click on Chart to Enlarge

Here again we see a VIX bollinger band set-up which has been very timely showing short-term imbalances in the past which have preceded rallies.

From the visual look of the chart of SPY and the VIX set-up I feel that the upside should be favored in the short term, but there is not really a concrete back test which is extremely supportive of putting money in play here.  But again, if tomorrow is another big downer, then we may be at a point to try to catch a brief rebound attempt.


Pete