Monday, August 14, 2017

Current Stock Market Set-Up Could Lead to a Sharp Decline 8-14-17

The recent post I made regarding the total put/call ratio sell set up, portends a probable sell off during this seasonal time frame into September or October.

Then on a big down day last Thursday, the VIX rose by over 40% on the day.  I ran a scan to look at past times where that occurred, and all of the unique instances I found (only about 6 or 7) had short term rebounds in stocks, and were great short term call option speculation points, with an ATM call option with 5 days until expiration rising 100% or more in all instances.

I looked at some other similar set-ups to what occurred on Thursday and Friday of last week, and the overall picture was a clear bullish short opportunity.

HOWEVER, with today's rebound, that short term bullish potential has been mostly realized, and I have run some scan which show that stocks could be in a brief rebound before a sizeable short term sell off.

The scan criteria which shows the basic idea is:
  • daily and weekly MACD are both down (MACD
  • both daily and weekly MACD signal lines are above 0
  • %k and %d slow stochastics are less than 25
  • VIX declines more than 5%
  • SPY gaps up 0.4% or more
So basically stocks are early in a possible downtrend but have sold off recently per the low stochastics reading.  Then a pop occurs with a decent size gap up and some drop off in the VIX.

There were 6 instances that my scan picked up going back to 1995.

4 out of the 6 instances occurred between mid July and mid August.

There was ~4 times greater MAX decline compared to MAX gain at all times frames forward up to 1 month.  So this a a really big skew.  3 out of the 6 had MAX declines of 3% or more in the next 2 weeks.

So what we are seeing right now could be a brief little blip before another round of intense selling over the next couple weeks, and even greater over the next 2-3 months.

Since this is a shorter term study in the context of a larger study regarding the put/call ratio sell signal, I am taking this as another entry zone for that study.

Monday, July 31, 2017

Total Put/Call Ratio Sell Warning Suggests Negative Returns Ahead

For longer term followers of the blog, you may recall my repeated notes on times when the total put/call ratio drop relative to its intermediate range.  The following chart shows the way I have tracked it for years.

Click on Chart to Enlarge

The 5 day average of the total put/call recently dropped to its lower 1 standard deviation band.  This indicates relative complacency compared to the recent range.

Now there is a seasonal tendency to lower put/call reading in December, though they still may be significant.  But today I looked at past instances where the reading came in the doldrums of the year - in this case either July or August.

It is well known that there is a seasonal tendency for increased volatility in the Sept/October time frame, and that many major sell offs historically have often been in Sept and October.  So I wondered if the current signal would reflect a tendency for subsequent market sell offs.

So I looked back through my data going back to 1995 and looked at all similar set-ups on the total put/call in July or August.  I removed any clustered signals after the first in a series so that all readings are "unique".

The short of it is that past signal did indeed lead to average poor performance and negative skews to forward price changes in SPY.

From the 1 month to 5 month forward looking time frames the average MAX loss was greater than 3 times the average MAX gain.

My options trading model shows the following data, suggesting a 200% limit order on an ATM put with 2 months until expiration would be a great option strategy.  And even better according to the past instances (only 9 instances), would be to buy an ATM put option with 2 weeks until expiration and hold until expiration.  In this case that would be basically August standard expiration.  Personally I would rather buy time into September because that is historically the most negative month for stocks.

Click on Table to Enlarge

Some additional data on the equity/ETF side of things.......
At the 1 month forward mark, 7 out of the 9 instances had maximum declines of 2.6% or more.

And at the 4 months forward mark, 8 out of 9 instances had maximum declines of 3% or more.

And using my trading strategy of an OCO limit sell order and stop loss order on an inverse ETF, the MAX return scenario would be to set an 11.25% limit gain per the SPY etf and an 11.25% stop loss.  Then exit at 4 months if neither order is filled.  That would be approximately November 24th.

Now the stats on the past instances justify using leverage of 3x or more on this move, in which case you would take the percentage numbers above for SPY, and then triple them for orders if using an ETF like SPXU to try to capture the anticipated move.

Let me know if there are questions or clarification needed here.  Volatility makes its seasonal lows around this time of year, so understand that it pays to position yourself for the times of year when the odds of a significant move are higher.  It may take a little time to unfold, but feel the indications are clear that downside risk is higher than upside potential here.


Beware The Blowoff In CryptoCurrencies 7-31-17

Currently there is much buzz regarding the major gains in cryptocurrencies like Bitcoin and Ethereum.  I have noted a significant email buzz and ad buzz recently marketing the hype and gains of these digital currencies.

In short, please understand that by the time this is occurring, the easy money has been made, and the unaware last buyers/suckers are going to be drawn in.

I have no expertise in this area of cryptocurrencies, so my comment here is not in regard to that.  My comment is in regard to the herd mentality and recognition of what is occurring on a investment/trading psychology level.

I recall back in 2011 as gold was really nearing its peak, that I began to see a quick change an uptick in the marketing of gold buying.  I specifically remember one video marketing piece hit my inbox laying out about how to buy physical gold, and all this stuff with the idea that you can do this and make money.

And I remember seeing it and making some commentary of it in a post or video here on the blog with the suggestion that this alone, despite all indicators and technical analysis, was a great sign that the bull market was peaking.  And in fact the timing was great, as the bull market was right near its peak in retrospect.

And currently, the change and uptick in the cryptocurrency marketing I think is a similar level of mass psychology at work, and shows a trend near its end and bubble ready to pop.

In fact, in the years that I have been following markets and the few "bubbles" I have seen in oil, gold, commodities, housing, and (more recently I think in bonds), it seems like the "public", which may well include you and me, often become aware of and take action in the market AFTER the peak already occurs.  So they/we are not just late with little gains left, we don't even get in until all the gains have been made, and there is only down to go.

So just keep this post in mind if you are part of the investment crowd and are seeing or continue to see emails and headlines hit you about the digital currencies.

Probably better to wait and watch this deflate for a couple years, and then consider whether to now buy low, or not.


Wednesday, July 26, 2017

Breakout of Falling Wedge on GDX (Gold Miners ETF) - Probable Continued Price Advance in Coming Weeks

Click on Chart to Enlarge

In my last post I gave some perspective that gold and gold stocks would likely move higher in the near term.  And prices have done just that for the last couple weeks.

Currently on the GDX etf (shown above), price has moved up and touched the falling boundary line of a falling wedge chart pattern, which I have labeled here as an a-b-c-d-e triangle type pattern.

I'm sure some Elliott wavers would view this progression as an a-b-c-i-ii pattern with the current move up being the early stages of a wave iii, which would be anticipated to be strongly uptrending for a few weeks.

I have put a blue box on the chart to help gauge continued development of post pattern price strength and "price logic".  The idea here is that after a pattern or phase of market action completes, the objective signal of that a new phase has begun is that the last price segment is totally retraced in less time than it took to occur.

In this case the blue box represents the price and time consumption of the d-e move as I have it labeled.  So if that did indeed complete a contracting triangle/falling wedge, then the logical implication is that the current move up will rise above the top of the box BEFORE the right side of the box is reached (in this case that is August 10th).

Now I can't know that it will or won't do that.  But since the price is at a resistance line on the chart and beyond the midpoint of the box, it seems likely that a breakout will occur from the wedge very soon if my perspective is accurate.

It is not uncommon for price to back test a broken wedge line after the breakout occurs.  In this case say price moves up out of the boundary lines of the wedge this week.  Price may come back down to the approximate price level at which the boundary line was exceeded before moving notably higher.


Thursday, July 20, 2017

Gold and Silver Prices Finding a Bottom? Based on CoT Positions I Think So - July 2017

Click on Chart to Enlarge

The chart here is a chart of gold prices and the Commitment of Traders data for the last couple years.  This is produced on

What is notable here is that the red line, which is the "smart money" commerical traders, is showing the highest reading going back until the bottom of the bear market in late 2015.  Basically with prices where they currently are, these producers are not seeing the necessity of hedging much.

Also, it is rare for the red line to ever cross above 0 as it did at the bottom of the last bear market.  Basically the commercials are totally unhedged and are in a small speculative long position when that occurs.

The other side of the commercial position is the large speculators.  And you can see they have the lowest net long position since the bottom of the bear market.

I am making note of this here, because it seems very possible that these levels are significant enough to form a corrective bottom in gold and lead to a significant advance.

If prices are able to break below this month's low, I would expect that commercials would continue to support prices and the chop may continue.

Wednesday, July 12, 2017

Gold Stocks Possibly Completing Major Basing Pattern 7-12-17

Click on Chart to Enlarge

The chart above is GDX which is the major gold miners ETF.  I will provide here a brief summary of some key factors for analysis but without taking time for further charts.

1.  Commercial traders are the most net long (actually least net short) at any time since near the lows of the gold bear market and at prior lows of legs down in the bear market.  This suggest the potential of a bottom here in prices in a continuing bull market in gold.

2.  The June/July time frame is the annual/seasonal low point for gold historically, and then some of the strongest seasonal move historically is the late summer.  So from this standpoint, it makes sense to look for a low here.

3.  Since early 2016, the CRB/SP500 ratio has been at the lowest point on the chart since 1995.  The prior major trough was in early 1999, after which a major commodity bull market ensued.  So the valuation of commodities to stocks is historically low, and on a longer term basis, could argue for a commodity bull market to be in the works.

4.  I have placed a pattern labeling scheme on the chart of GDX above, which in this labeling scheme, would be the maximum complexity pattern for a correction which can occur in Elliott Wave terms.  Another interpretation that is still bullish would allow for some further decline but without breaking the December low.  On this note, a contracting triangle in wave theory would be common at the end of a complex move as the selling loses steam and a base is formed for a new move.

5.  The bullish engulfing pattern on Monday occurred right at horizontal support and this is a classis bottom reversal candlestick.  This does not suggest the length of any rally, but is further confirmation that a bottom of some degree cold well have occurred on Monday.

I entered long on Tuesday on NUGT which is the 3x gold miners ETF.

The stop is below Monday's low, and I plan a stop movement technique using a moving average channel if prices rise.

Out of individual gold stocks, I really like the pattern on ABX best.


Thursday, June 29, 2017

No Clear, Consistent Forward Bias Is Evident Currently In My Backtests - SPY 6-29-17

For the last couple weeks stocks have traded sideways which the scans I ran at the time had suggested there would be limited upside.  Then this week a little selling has returned in choppy fashion.

I ran some various scans today looking at current price movements, indicator formations, and real money sentiment.  Most of what I looked at showed forward returns that were somewhat neutral, certainly not tradable from the criteria I like to see.

So currently I am deferring to the last significant studies I noted which were late May and again around the June 9th high in SPY which both suggested a notable bearish skew for 1-2 months.

Despite today's selling the NYSE TRIN indicator dropped substantially which is not a typical pattern of rising on a sell off.  The Nasdaq TRIN is showing a more typical rise the last few days.  I don't know if this oddball reading on the NYSE TRIN adds weight to the idea that a low is not yet at hand.

The VIX chart shown here is showing a pretty typical configuration for a long in an uptrend.  We see a spike of the VIX above the longer term bollinger band while the shorter term bollinger band has risen above the longer term band.  I have shown this indicator overlay many times in recent years, and if you want more info on it you should be able to find related posts using the search bar for the blog.  Search VIX and Bollinger Bands.

Now the VIX has been at an historical extreme low, and so that has figured in to the recent scans indicating a bearish skew for SPY.  So there is some conflict here, but be aware that the short term set up is looking like a buy.

Wednesday, June 14, 2017

Intermediate or Long Term Climax Point In Nasdaq?

Click on Chart to Enlarge

In the past years I have made some note of key points when markets were at an apparent highs as evidenced by a break above one or multiple trend channel lines.  Coupled with divergence patterns at the end of a parabolic type price movement, such breaks may be key inflection points.

The last time I recall making a mention of this on a larger scale was March 2015 in the Dollar Index.
That did prove to be a key market high.

Currently, the Nasdaq chart above has some similar qualities in the strong run up since January 2016.  Over the last week, price did break above a couple high to high trend lines connecting key highs over the last year and a half.

However, price is still 10% or so below a major high to high trend line connecting the key tops since the 2009 bear market lows.  So, this may have some to blow off longer term to the upside.

But given the wide range bearish engulfing pattern at the recent highs, it seems likely to me that this week could be an intermediate high.  The weekly price action formed an outside down day last week in the Nasdaq, and this is a classic top reversal bar.

Speaking of the US Dollar Index, which has trended lower recently as stocks have trended higher, the UUP etf made a major jump in volume today on a decent size gap down, and made a multi month low for the year.  However, price reversed and traded to close near to the highs, forming a belt hold candlestick pattern.

This is couple with clear bullish divergence in the technical analysis of the US Dollar Index and I think indicates that the mid point of the year may be a turning point higher for the US Dollar.  Commitment of Traders data show that the commercial "smart money" traders are more bullish than any time since near the lows prior to major rallies in 2014 and 2016.  So there is still some room in that data before it becomes as extreme as those prior bottoming points, but my point here is that it appears close to a bottoming point and to be alert for long set ups if this is a market you trade in.

Back to the stock market for a moment.......I have looked at the recent charts of the CoT data of the index futures contracts and noted on a few of them, what from my experience and study is a pretty classic blow off move which signals a high.  Basically, the commercial traders usually get more short on market rallies and the speculators get more long on rallies.

But currently over the last couple months, the opposite has occurred, indicating that the speculators "won" and forced the commercials into a short covering rally at which point the speculators have now cashed out rather than continued to follow the trend.

And from my study of the CoT data, this is the historical norm for the speculators to "win" at the end of key trends.  So in actuality the speculators as a whole may be the "smart" money.  Meaning that research into the topic, shows that speculators actually make the profits from the trading in the futures market.  The commercials, are indeed experts in their market, but are using the futures as "insurance" and thus are essentially in the long hull, "losing" money akin to paying an insurance premium for their underlying business.

This pattern is notable currently on the Nasdaq futures contract, which adds further weight to the perspective that the recent top reversal type action in the Nasdaq is legitimate and may hold for several weeks or even months.


Thursday, June 8, 2017

Expanding Triangle or Diagonal Top Appearing on SPY - Probable Move Down to 232-235 in Coming Few Weeks

Click on Chart to Enlarge

Currently stocks have been moving higher but with notable weekly time frame bearish divergence in MACD on the SPY etf as well as bearish divergence in the breadth.  So fewer stocks are hitting new highs or advancing relative to previous price peaks.

This is classic type technical signals of a topping of a leg up in prices.

I had noted some recent scans which suggested a likely higher downside risk to upside potential.  However, we have seen mostly upside since then.  Though with the low volatility it has not been a big advance in percentage terms.

The 60 min chart of SPY is now again at a point of notable bearish divergence, and so if a multi week top is to form, it could do so here over the next day or so.

On the chart above I have put a pattern labeling scheme.  I put this here because the pattern in play appears to fit the back tests of price and sentiment studies suggesting downside risk over the coming weeks or couple months.  And clear price patterns can give some refined targets or expectations that may help a trader manage the trade more effectively than a purely mechanical or statistical method.

If this move is a "terminal" move then the implication is for a rapid move back to the starting point of the pattern around 232 on SPY.

If this move is a "B" move then it may be a less explosive downwards move back to the 232-235 area as support, but not necessarily back to the 232 level.

From my perspective of observing market price action relevant to price patterns and key support areas, if prices do correct and move below the 232 level, I think that would likely be a temporary climax point where stops would be run under support, and then prices would begin a rebound of some extent.


Thursday, June 1, 2017

Triple Time Frame MACD Bearish Divergence in SPY - Probably Close to A Significant Intermediate High

As of this morning 6-1-17 the technical analysis of the SPY etf shows weekly, daily, and hourly chart bearish divergence on the MACD.  What does this mean?

The weekly time frame divergence is the longer signal showing both "overbought" levels and new price highs with less "momentum" or rate of change at the newer highs.  This is a longer term signal that often is present at the end of bull markets and often at the end of major advancing phases of a bull market prior to a deep correction (say 10-20%).

The daily time frame basically then shows that there is loss of momentum occurring in the most recent leg up to new highs.

And then the hourly time frame shows that there is loss of momentum in this final little move occurring on the last daily push to new highs since the last cross down on the daily MACD.

So taken together, it is like a multiple waves of different frequencies all coming together at once and reaching a crest.

In my observation for the last 12 years, these points are often significant and should alert to the possibility the market will experience a major correction over the coming weeks/months.

Certainly at times, these signals may be in the middle of a major move up, and the results ends up only being a temporary range bound market before continuing higher.  But factoring in a number of indications of sentiment and breadth, it seems likely to me that stocks will stall and correct a bit quite soon.

It appears unlikely to me that this will be a bull market top.  Particularly with the Nasdaq not displaying any bearish divergence on the weekly MACD, it seems more likely to me that the current position is nearer to the momentum peak of this portion of the bull market, but it could take months and some small to intermediate corrections and breaks to new highs, before a more long term high could be set.


Friday, May 26, 2017

Further Signs of Intermediate Term Topping and Probable Downside to Come For Stocks 5-25-17

Click on Table to Enlarge

Last week I showed stats from past instances where there was a 1.5% decline in SPY the day after a 52 week high.  And the average displayed a notable bearish skew for the next couple months, though about half of the instances rebounded back to near the highs after that initial big sell off day.

This rebound scenario is what we have seen in the current market.

I have run a couple scans over the last few days, and it still appears that similar past markets have had a notable bearish skew looking forward a few months,

The chart above shows the forward MAX gains and losses from a scan including bearish divergences in VIX, total put/call ratio, volume, MACD and stochastics on daily and weekly time frames.  So basically just an across the board price and real money sentiment bearish divergence.  And the bearish skew is notable for the first couple months.

Another scan criteria looked at unique instances when there was both daily and weekly bearish divergence in the MACD when the VIX closed below 11.  The results were similarly bearish.

There are good trading opportunities here based upon my method and the data at this point.
Based upon past SPY data, shorting here and setting a limit order to cover at 5.75% gain while also setting a 5.75% stop loss would provide a roughly 2.25% expected value over the next month.  The trade would be exited after 21 trading days if neither stop nor limit was filled.

Any where in the 4% to 6% paired limit and stop orders basis SPY would be very reasonable plays.  And 4% the ratio of the risk to the expected value is the lowest, and after that there may be higher expected values with wider orders, but the risk rises more than the expected value increase does.

I am electing to purchase SPXU here and use 12% limit and stop orders.  The simplest way to do this is with an OCO, one cancels the other, order where one order is a sell stop and the other order is a sell limit.  Then set a time reminder to exit on June 26th if neither order is filled already.

For the options side of things, a 130% limit gain order from the closing price yesterday on a 241 strike June expiration put option, would provide a very positive expected value with about a 66% win rate based on past similar instances and the calculation of my algorithm.  For this trade, there is no stop on the option.  It could expire worthless, but a limit gain GTC is set immediately after entry.


Thursday, May 18, 2017

1.5% Decline in SPY the Day After a 52 Week High - Bearish Implications for Coming Weeks

Click on Table to Enlarge

The above table shows instances in the history of SPY going back to 1995 where a 52 week high was followed the next day by a loss of greater than 1.5%, which is what we saw yesterday in SPY.  This filter also look for only times where there was MACD bearish divergence on the weekly chart at the 52 week high.

From the closing value of the day of the 52 week high, every single instance lost at least 4.8% over the next month of trading. 

Even taking out the filter of the bearish divergence on the weekly chart, the results were that 11 out of 12 previous instances declined at least 4.8% over the next month.

So this adds further weight to the outlook I posted earlier today based on the more subjective qualitative price pattern and a general view of conditions.

So given this back test, it is putting us on alert that stocks are likely to fall a few more percent in coming weeks.  And a few of the past instances led to sizable corrections of 10-20%

About half the past instances showed an approximate 1 week rally to back near the highs after the first 1-3 days of decline, before then selling off strongly again.

The other half of instances basically had no substantial bounce after the initial big down day.

If there are questions about how to make a trade with stops and limits here, comment.  But the idea is that after a little further decline over the next 1-2 days, stocks rebound for a few days, and that may be an ideal time to use an inverse ETF to try to capitalize on probable further sell off.


Stock Market Expectations 5-18-17

Yesterday saw an oversized sell off in stocks compared to the recent low volatility trading.  But as mentioned in the last post a couple days ago, there were indications that a high was to be expected and that stocks were ready to correct.

So the question now is really what the probable future course of action will be.

I have run some backtest scans comparing the current market position to the past trading history of SPY, and I would have to conclude that there is not a clear directional bias based on the past tests.

Obviously the sharp sell off yesterday has a short term bullish perspective when looked at on its own.  But some of the other recent comparisons I've made have shown consistent muted upside for a couple months after the recent really low volatility type readings we've had in the last couple weeks.

Click on Chart to Enlarge

This is an hourly chart of SPY.  And the pattern here, from my perspective would suggest that there is a downside bias through June, with a possible low forming in late June.  And that would fit with a typical correction in stocks.  Historically, a median correction in the SP500 is about 6 weeks and about 11%.  This is for corrections that last greater than 1 month from high to low.

So given that we are in the seasonal "sell" time frame, and the time and structure of the pattern here near the recent high, couple with the technical analysis of weekly time frame divergence on the recent poke to new highs, I will proceed with an outlook that the downside risk still is greater than the upside potential for the next few weeks.

Looking at the MACD in the hourly chart above, we can see that it is "oversold" but with no bullish divergence yet.  I would certainly expect that a divergence will form on this time frame before a nice rally could ensue.  So, it appears that price still have at least some work to do here to the downside before a multi day low could form.


Tuesday, May 9, 2017

SPY At Bearish Divergence and Probable Intermediate Topping Point - Gold and Bonds Probably Set to Advance 5-9-17

Click on Chart to Enlarge

I have not posted much the last few months as it was apparent since the last post in mid February that stocks were running pretty hot and were likely to cool a bit, but there was no weekly time frame bearish divergence on the MACD in the indexes and the time duration of the leg up was relatively short for a completed leg up and expected sizable correction.

However the current time frame is a different situation.  The leg up is now 6 months long, which is mature, and at 15% the gain in the SP500, while below historical averages for a completed leg up, is certainly substantial enough to be a completed/completing move.

Currently while the SP500 cash has barely poked above the winter high, the SPY etf is slightly below still as of today.  However since the cash did move to a new high, I am treating this current region as a new high.  And now the MACD on the weekly time frame is in a bearish divergence which is really a more clear warning sign that a correction is more likely to arrive soon.

The chart above shows an hourly chart of SPY and also shows a bearish divergence today.  the daily time frame does not yet have its own bearish divergence since the April low, but I still view the current area as a time that a high could be made.

Seasonally, there is the old sell in May and go away adage, which also is coming into play now after a classic strong November through April in typical season fashion.  So that is another reason here to view the upside as quite limited for the next few months.

In term of market correlation the bonds and gold have been selling off substantially during this last 3 week run up in stocks.  And the inverse correlation in recent weeks (and technical analysis to confirm) suggest that bonds and gold could make a rally for a few weeks.  That would suggest that stocks may begin selling off as of this week.

On a longer term basis, this is a mature bull market, and the 7th year is the classic topping year on a decennial cycle.  And so from an investment standpoint, it seems imperative to have a clear exit strategy or stop trailing technique in place for long trading.

I personally am keeping GDX and gold mining etfs on the radar because the seasonality in the past is for a late spring or early summer bottom.  And the correction in gold stocks looks mature, though could certainly make lower lows into June.

Monday, February 13, 2017

Expectations Tipping To Short Term Sell Off - A Day Trade Perspective 2-13-17

Currently stocks have been rising on low volatility and hitting new 52 new highs for a few sessions in a row.  This post will look at a set-up which is occurring today that can be used as a day trade, but also gives further clarification as to what may occur during this week.

I made a scan this morning looking at the past performance of the following set-up:

  • new 52 week high
  • yesterday gapped up and closed positive on the day
  • today's price opened outside of the upper bollinger band
  • today gaps up more than 0.2%
So the idea here is a market that has been strong and hits a new 52 week high on a modest (or larger) gap up.

The short of it is than the intraday downside risk was about 4 times as big as the upside potential after the open (which would be today in our example).  And the average open to close change was -0.6% roughly, with data going back to Sept 1995 in SPY.

So plugging this into a trading strategy it is pretty simple to see that shorting or inversing at the open had a positive expectation in the past.  My method for the trade involves looking at not just the open to close change, but also the drawdown and run up during the open time of the trade.  In this case the expectation was increased by setting a profit limit order of 1.75% to 2.5% gain.

Also the average forward returns were negative on a closing basis for the 3 days beginning with the trigger day/today.  10 out of 16 instances showed 1% or greater max losses over the next 5 days after the CLOSE of the trigger day/today.

So from today's opening value it appears that the downside risk is predominant throughout the remainder of the week.

As a side note, with stocks gapping up today and moving up a bit in the morning after the open, the VIX has not followed its normal pattern of declining.  In fact it was up nearly 5% in the opening hour of trade today.  I have showed in the past that when the VIX pops higher, while the SPY also rises, the forward returns have been skewed to the negative in past instances.  

The skew in MAX loss to MAX gain has been about 2:1 over the following 2 weeks after a signal like this.  Currently the day hasn't closed, so I am not saying the study is active, but it has that look to it so far.  

But a simple and profitable trade strategy in the past would have been to enter short/inverse and set a limit profit order basis the SPY etf of 1.25% gain and a stop loss of 1.25% loss.  Then exit at the end of the time period in question if the trade had not filled an exit already.  The maximum profit on a closing basis would have been at 8 days forward of the signal day, or next Thursday's close.

Now the stats on these etf trade are such that a large amount of leverage could be used correctly based on performance stats, so a 3x inverse etf or a deep in the money option are other possibilities to take advantage of the set-up here.

I know this is looking at short times frames and low volatility moves, but the example shows how profits can be potentially made with consistency when the time is right.  We will see what happens.


Thursday, February 9, 2017

Put Option Trade Opportunity in SPY, 2-9-17

Click on Table to Enlarge

Currently with today's action I have run some scans and there is a significant opportunity here, though with a smaller sample size on the past instances.

The scan criteria was:

  • SPY at 52 week high
  • VIX closes less than 15
  • VIX closes down 5% or more on the day
Only 11 instances show up, but the skews over the next couple weeks are negative and provide profit opportunities.  8 out of the 11 past instances showed gains of 80% or more over the next 5 trading days, when buying an ATM option with 5 trading days until expiration.  This is based on the model I have programmed, NOT on actual past contract data.  But the model is probably slightly conservative on average in the theoretical returns calculated, because almost the entire time value of the option is stripped out of the result.

So a simple trade opportunity here on the options would be a SPY 231 put option with a Feb 17th expiration.  Limit order for entry 1.00.  Exit limit order 1.80 after entry.

All 11 instances in the back test traded higher the next day relative to the closing value.  So expect there to be at least a very small drop in the option value tomorrow relative to today's close.

Another point of note here, even a couple instances on the list where the decline was only about 0.5%, showed a 80% gain in the option value.  So the implication is that with the VIX this low, even a small drop could pop the VIX a few points.  And by the numbers on it, SPY would have to decline less than 0.5% to reach the break even point.  7 out of the 11 past instances declined over 1% which would be ~100% gain or more on the option.

The ETF side of trading also shows a profit opportunity but the volatility being so low, the absolute return expected is rather marginal over the short term.  Looking out 2 months though, given that the downside risk is anticipated to be greater than upside potential, a conservative play here would be the inverse ETF play.

Basically, setting a 3.25% limit gain on a SPY short along with a 3.25% stop loss on it, and exiting at 2 months from the open of the trade if not already exited by the limit orders, would produce about a 1% expected value on SPY.  Using a 3x leveraged ETF may increase the expected value by around 3 times, but the stop and limit orders would have to be adjusted by 3x% as well.

But let's say the market does falter 3% in the coming couple months, the 3x ETF could rise 9-10% while the market turns negative.  That would be a very nice swing in an account versus just holding.

Let me know if any other info is desired here.


Put/Call Ratio Analysis Helps to Identify Stock Price Tops and Bottoms

Click on Chart to Enlarge

The chart above is a slightly different version of one I have shown many times over the past several years.  This chart is a 7 day average of the total put/call ratio with some standard deviation bands around it.

The interpretation of the chart is pretty standard for technical analysis.  I like following this data because it is not looking at price.  It looks at a measure of underlying "sentiment" as evidenced by large scale options transactions.  So price is an effect of other underlying causes in the crowd.

I have made a mental construct over the years which likens the movement of market prices to physical movement.  Once a direction is set, there is an inertia, and other than UFOs, we typically see a process of slowing or momentum changing prior to a shift in direction of the object.

That "slowing" before a change of direction is evidenced by divergences.  So we have a situation where the direction of the market in this case is still "up", but the put call ratio is showing a marked divergence indicating that the underlying sentiment or driver of prices higher is actually slowing down.

As noted on the chart with red and green lines, the general idea here is to look for an extreme data reading, outside the bollinger bands indicating that the trend may not be sustained at that rate.  These extreme points are typically NOT final highs or lows.  The actual end of a move, will most often occur after a divergence develops, with new price extremes, but often markedly non-confirming put/call ratio readings.  And the reading at the end of the move are usually well within the deviation bands, and so do not appear significant on their own.

My point here is to give a little perspective but to make note of the classic divergence pattern here in the sentiment which has put me on alert that we are near the end of this rally since November.  And we are likely to see at least a minor correction occur of the uptrend.  It has been ~2 months since the extreme reading in the put/call ratio occurred.  And my observation of this types of divergences is that a trend often persists for several weeks after the extreme before a final price high or low.  If I had to make a guestimate of the average, it would be about 6 weeks.  So here we are at about 8 weeks since the extreme, and I believe that markets are likely to peak any day now.


Thursday, January 26, 2017

More Signs That a Sell Off Is Looming in SPY - 1-26-17 Stock Market Update

With the break to new highs in SPY, there are now some intermediate term bearish divergences which are prominent.  My perspective here is that stocks have more downside risk over the next couple months in comparison to upside potential.  With that said, the most comparable environments that are showing up in my scans are environments where stocks may spend more TIME in a general uptrend, but there may be a rapid sell off which more than wipes out the lazy gains which occurred preceding it.

Click on Table to Enlarge

The table here shows the results of a scan with the following filters:

  • New 52 week high
  • Close > upper bollinger band
  • VIX high is < 12
  • VIX close is < 11
Then subsequent readings (3 of them) which occurred in clusters after the first reading were removed.  This left us with basically 2 past market periods.  
  1. Very late 2006 into early 2007 - which resulted in the very sharp sell off right at the end of February and into mid March.
  2. Mid 2014 from late June to July - which was followed by a somewhat similar brief, but sharp drop into August 2014.
Looking at the table shows a strong downside skew over the near term, however, with volatility being so low, that does not really portend a big move.  Even looking out to 2-3 months the skew is negative, and still relatively strong at 2 months.

Another notable part of the info in the table, is the very large skew in the MAX gain/loss of the VIX.  There just has not been much history of the VIX staying at 10 or 11.  So if you trade volatility, there may be an indication for action here.

In fact the expected swell in the VIX may be the most significant aspect of this set up.  There is a profitable option play on my model based on this scan.  Buying an ATM put with 2 months until expiration and using a 50% limit order gain after entry worked well on average.  But there are only a couple similar instances.  The point is more that, even a moderate 1-2% decline, in combination with a possible larger % increase in the VIX at the same time, could give the put options a boost to those levels of paper profit.

Part of the question is then WHEN a decline would be anticipated since these lazy markets can go for weeks without much downside.  I am not an independent expert on cycles, but some of the information which I have followed for long enough to feel there is some pragmatic use in, suggests that the upward current could crest somewhere around next week.  Then there may be more downward current (or at least less upward current) into early March.

So my general take here is that there will not likely be much further % gain in SPY over the next couple weeks, and then there may be a sharp but brief sell off in the Feb-March time frame.  Given the low volatility and the couple past comparable time periods, if a decline occurs, it may be expected to be mild, like 2-5%.

I am choosing to make an option play here, but certainly a paired limit/stop order on a SPY leveraged ETF, or even on a VIX tracking ETF could be very sensible given the skews in the data over the next couple months.  

If there are further specifics on trade orders for the ETFs, comment or reply, and I could get something up here.


Monday, January 9, 2017

Bearish Trade Stats From Recent Set Up

Click to Enlarge Stats

On December 9th and December 13th a trade set up triggered which has had a consistent and marked bearish skew looking ahead a couple months or more.  I did not remark on it at the time because the technical analysis was pretty clear to me that any immediate pullback was likely to be modest and that further bearish divergence would likely develop.

However, I will now make not that this set up is active and still in a range where it could be acted on,

The scan is as follows:
  • daily MACD position is UP
  • daily MACD lines are both above 0
  • SPY closes up for the day
  • there is a total put/call "sell" signal (5 day average is below 1 st dev bollinger band)
I removed subsequent readings from clusters with multiple signals after the first in a 2 week period.

The stats above are for an ATM put option with 2 months until expiration if purchased at the signal, in this case on Dec 9th.  Past instances show peak expected value at 120% gain on the option, but the 90% gain mark puts the win rate at 67% with only a slightly lower expected value.  So that is the stat shown here.  The stats are nice here, and would suggest that a 226 to 228 strike SPY put could be purchased with a standard february expiration, and then set a limit order of 90% gain to exit.  There would be about 2/3 chance of winning based on the stats, and the expected value is around 26%.

Click to Enlarge Stats

In this case, the equity stats have a strong skew and a nice trade set up as well.  Using the simple methodology I have designed for trading these situations, you enter inverse on the set-up and then set and equal percent stop loss and limit gain order.  If neither are hit (which is MOST common) you exit the trade a predetermined time.  In this case it is a 2 month time exit from the initial entry, which would be Feb 9th.  

The stats shown above would be for a short of SPY and then use a 6.25% limit gain and stop loss or exit Feb 9th.  Basis the SPY etf the expected value would be about 2.25%.  But the stats justify 3x leverage.  And so the theoretical stats there would be about 6.75% expected value.  That is pretty nice for an "equity" play when the market is anticipated to fall.

In this case in you buy a 3x inverse etf like SPXU then the stop would have to be 18.75% away from the entry and the limit order the same.

So these stats are certainly actionable by my criteria for trading.  And I also looked at times when there was a put/call "sell" signal at a new 52 week high, which also was the case in December.  And there was a bearish skew looking out 2 months, which also showed profitable stats using a limit order of 140% gain on the ATM put option.  I simply note this to say that even though stocks are at all time highs, the signal here still seems to be legit.  

And now that some time has burned away and some divergence has developed in the technical analysis, I think there is higher chance of stocks moving down with minimal time decay on the options.  In fact the option price is lower now than at that point, and so the value may be better.

That being said, I think it is likely that SPY could move higher for a couple more days to create an hourly time frame bearish divergence.  If so, that could be a fine tuned entry point.  I have a limit order to enter a position based on a move up to the 228 region in SPY.


Multiple Time Frame MACD Divergence In SP500 - Correction Or Bull Market Top Ahead?

Click on Charts to Enlarge

The charts here are the SP500 cash for the top three (monthly, weekly, daily) and SPY for the bottom chart, which is 60min candlesticks.

The monthly, weekly, and daily time frames are all currently displaying bearish divergence at the recent high on Friday.  Given the confluence and time scale of these divergences, I believe that price may be near a crest.  While tops can be sloppy and drawn out, we have already been seeing that for about 2 years.  

Rather than prognosticate on causes and projections and patterns, what we objectively are seeing is a divergence which truly indicates a "slowing" of the trend.  And the divergences so often occur preceding major changes in direction.  So I imagine that like a ball thrown up into the air will gradually slow before it reaches its peak and then begins to travel back down, the rising market will experience progressive slowing down, until it reaches a peak and turns down.  The smaller time frame divergences, I imagine to help identify the finer timing or reaching of the zenith in price.

So much for theories.  But what has happened in the past under some similar circumstances?

I ran a scan on SPY going back to late 1995 where there was a weekly, and daily time frame MACD bearish divergence concurrent with, or within a month after a put/call ratio sell signal like happened a couple weeks ago in the current market.  I also went through and excludes most days after the first signal day if there were a cluster within a 2 week period.

There result is that there was a negative skew in forward return looking out for a couple months.  It was not real lopsided, but in anycase it does support the idea that stocks may be near a relative top.  From a probabilistic standpoint is the only way we can meaningfully approach it for trading.

The skew is not real strong but is most prominent looking ahead about 3 days and at 1 month.  At 1 month after the past signals, the average closing return has been a mild negative at -0.25%.  And the MAX loss has been about 1.3 times the size of the MAX gain.  The numbers here are not strong enough for me to suggest an inverse trade based on those stats alone.  

So there is not a lot actionable here from the trading front.  But for those who want a larger market context for incorporation into trade selection, hopefully this helps.