SPY Bounce Possibly Near an End - Projections for Further Decline - 8-25-17

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Currently the strongest portion of the expected rebound based upon recent studies is completing.  The recent volatility spike showed the strongest closing returns at 5 days after the signal.  The time has passed now over the last session or two.

So it is possible that price continues to advance, but the recent 5 day rebound has been relatively weak.  From both price and breadth measures, my take is that the recent rebound is still a counter trend move that is likely to fail and lead to new lows.

Based upon the price action coming down off the highs in SPY, where the "C" move was larger than the "A" move, it is quite possible that the next move down will be larger again than "C".  That would be an expanding pattern.

I have often found the speed line of the A-C points to be a useful approximation of where the next direction move down will find support.  So in this case if price breaks to new lows, I will keep that in mind if we see volatile action or a sizable gap down in the region of the speed line.

I have a green horizontal support/resistance line on the chart as well which has 3 past touch points on the chart, and so it would again be a target on a decline from current levels.  So basically a decline to 240-241 on SPY would be a very reasonable suggestion for a near term move.

That target would also also fit with the past study on put/call sell signals in July/Aug which showed 8 out of 9 had declines of 3% or more in the next 4 months.  SPY has yet to decline 3% from that signal origination in late July.

Lastly here, the VIX historically has an approximate 19-20 day cycle.  And based upon that it appears that the next VIX high could be roughly expected toward mid September or a little earlier.


Pete

SPY Call Option Exit 8-22-17

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The limit exit of 2.50 for the SPY Aug 25th 243 call option was achieved today.

The purchase was yesterday morning at a price of 1.10 for ~125% gain on the option.

And the option price on the trigger day of the VIX up >30% study 1.70, and so the 50% gain from that trigger level was also achieved based on the trade plan I detailed in the post.

The key take home here is that the biggest factor involved in the option price is the underlying stock price.  And when set-ups occur with consistent skews in forward price moves, indicating a strong tendency for price to move sharply/significantly in the time frame of the option, the options can provide a profitable speculative vehicle for the trade.

Also another finer point is that the VIX up > 30% criteria was significant in its own right, but when combined with a close look at the short term technical analysis, showing that there was still some probable downside after the trigger, it enable a better entry price - in this case the improvement was an entry at 1.10 rather than 1.70 or close to it.  The result was that on this trade I was able to get a return of 125% rather than 60%, while still keeping to the parameters and backtest on the trigger study.


Pete

SPY Aug 25th 243 call Option Entry

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After the set up of the big rise in the VIX last week, I had laid out a trade plan to buy a near term SPY call.

However, as of last week, despite a sharp drop in SPY, there was not even a 15 minute chart bullish divergence, present, and so I felt that it would be likely for at least a poke lower to create some divergence before a multi day rally occurred.

And that is what happened this morning, with a nice 15 and 30 minute chart bullish divergence after a slightly lower low than Friday's.

I entered a little bit off this morning's low, and bought the Aug 25th 243 strike call.

I went through the stats from last week's post and found some data corruption in my spread sheet which altered the stats somewhat.  The win % on the set up is ~80% rather than 90% and the optimal limit exit is 60% gain rather than 80%.

So I am using actually a 50% limit gain from last Thursday's close which is the trigger day of the study and the comparable price for the backtests.  And since the price of the option was currently lower, I am lowering the limit exit slightly to increase my probability of a profit on a short bounce back up to 244 to 245.

I have a limit order of 2.50 in for the exit, which would probably take a move back up to near 245 by mid week to fulfill the exit limit order.


Pete

Another Short Term Bullish Set-Up - Great Call Option Opportunity on Backtest 8-17-17

Today SPY sold off hard similar to what occurred last Thursday.  The VIX rose 32% on the day, similar to the huge rise last Thursday.

Based on the back tests I've run, this is not really bullish over the intermediate term.  The closing returns on SPY at 1 month after the signal has been barely positive, which is worse than normal.

But over the short term, particularly for about 1 week, the back tests are positive, with average positive closing returns on SPY being more than +1% at the 4 and 5 day marks after the signal.  Then the gains start to fade to near 0 at 1 month after the signal.

However, the SKEW to MAX gains versus MAX losses over the next 5 days is a paltry 1.09, meaning that the average maximum gains are barely bigger than maximum losses over the next week. Basically what this means is that there were some big downers in the group, rather than a consistent tendency to trade in the positive without much downside.  That small skew and real possibility of some big downside is not what I want to see for taking an equity trade.  So I would avoid a simplistic long trade here on the equity ETFs.

That being said the tendency to rebound to some degree is so consistent, that the options have provided an outstanding profile for profit over the week following these signals.  Every instance flagged in the backtest of about 22 instances has shown MAX gains of 0.96% or more in SPY over the next 5 trading days.  And that has translated to some consistent gains in the weekly expiration call options.

The following table shows stats based upon my model for the forward change in the option price for an at the money call option with 5 days until expiration.  And the results here are ~90% of the past instances made MAX gains of 80% or more on the call option during the next 5 trading days.  The way I construct the model is actually conservative (it is not based on actual contract data), and so in reality the results are probably even mildly better than this.

So the strategy here would be to purchase an at the money SPY call option with an August 25th expiration and then set a limit order to exit at 80% gain in price.

Now digging deeper into the past instances near term behavior, about 3/4 of the past instances showed at least some intra day loss on the day following the signal, and the average intraday drawdown was pretty high at ~1.5%.  So this would argue that the odds favor setting a limit order to enter the trade that is equal to today's closing price for the option or lower.  For those with skill in short term analysis and ability to watch the markets, could watch a short term intraday chart tomorrow to see if short term bullish divergence develops on the technical analysis, at which point an entry could be made at the market.

The following table shows some of the MAX gains in the call options and some of the dates for you to reference the charts.  There are previous instances that dont fit on this screenshot.

The past instances show that if the day following the signal gaps DOWN, then there is a strong tendency for a short rebound to follow and for the day to close higher than the open by a wide margin.

Also if the next day gapped UP, then the future returns in the ETF itself are more negative.

So to translate this into an action plan, if SPY gaps up tomorrow, I WON'T buy the option at the open.  But if it then trades lower during the day and creates some short term bullish divergence, then I will buy and set the limit gain order for 80%.

If SPY gaps down, I will buy the Aug 25th expiration at the money SPY call option at the open and set a 100% limit gain to exit.

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.