Wednesday, May 25, 2016

SPY Closes Above Upper Bollinger Band At a Lower High

Very recently SPY was trading down at the lower bollinger band, and I noted how the set-up was probably indicative of a bullish move to come, but not one that I felt had a strong enough profile to put money on.

Now a week later, SPY has rallied strongly up and closed above the upper bollinger band.

An interesting note here is that the price of SPY is below its recent price peak from April 20th.  Now it is not far below, but all the same I think it is potentially significant.

I ran a simple scan that looked back at the history of SPY for times when....

  • SPY closed above the upper daily bollinger band
  • the price high for the day was at a lower high than the price peak for the previous 2 months
We could refine this further, and I added a few other conditions to the scan, but they didn't seem to alter things significantly.

The result was a bearish skew over the next couple months.  As with many bearish set-ups that I test, there were a few huge winners, but not a super high winning percentage.

There were profitable plays in both the equity and options, but neither with the impressive criteria that I would want to put money in play.  Now any time there is a clear profit, it could be argued that the trade could/should be made.  However, what I have found is that the opportunity cost of tying the money up, and the possibility of an even more profitable set-up developing soon are both too high to justify taking a modestly profitable trade.

So that is the scenario here.

That being said, I would not be surprised if this set up led to a huge gain over the next couple months.

My take on this is that this current rebound in stocks is probably a brief rally in a market that is weakening.


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