SPY Closes Below Bollinger Band 4 Days In a Row - Implication is STRONG For a Rebound In the Next 3-5 Days

Click on Tables to Enlarge

As of Monday, SPY had closed below the lower Bollinger Band for 4 days in a row.  This is a rare occurrence.  And it has closed below the lower band for 5 out of the last 6 days.

This set up is one of the strongest I have ever filtered for in terms of short term skew towards the upside.  The stats above show about a 4:1 greater MAX gain to MAX loss over the next 3 days.

That being said, as today is indicating a gap up, some of that potential gain is gone if buying at the open.  However, gap ups after these signals, on average, lead to further gains from the open.

So while we have had some other signals in the past week which have often led to short term rebounds, and this time the sell off continued, the indication here is that some reversion to the mean is likely to occur in terms of trading systems.

Click on Table to Enlarge

This little table shows dates on an amalgamation of filtered signals that I have noted to have positive short term skews in the past.  There will be a number of duplicates that are not removed in this sample, but the indication is clear.

There is over a 90% probability of a higher close than the signal day within the next 5 days.  And nearly a 2% expected value if buying at the close of the signal day, and exiting at the first profitable close in the next 5 days, or just exiting at the close 5 days later if not.

I like this type of strategy for directional option trading.  There is high probability of success, the expiration date is clear, and no stop needs to be used (depending on how deep ITM the option is and your risk strategy).

Because volatility is high and much of the option value can be sucked out if trading close to the money, some ideas are to trade deep ITM (like >0.90 delta), or to buy an option with 2 weeks until expiration, but keep the same exit strategy within 5 days.  That way, not all the time value will get sucked out even if the exit doesn't come for 5 days.

Back to Back Closes Below Bollinger Band - Both Down 1% or More

First my post from yesterday contained what appears to be an error in that End of Day data showed the VIX unchanged and I had stated it was down 2%.  My hourly chart data showed the close down 2%, but the daily chart data showed it unchanged. 

That being said the market continues to appear to be very near a short term capitulation and brief rebound.

I ran a filtering of the last 23+ years of SPY data and looked at:

• 2 closes in a row under the lower bollinger band
• Both days were down more than 1%

The results were 35 instances.  33 of them had a higher close within the next 5 days.  

If entering at the close of the signal day (today) and exiting at the close of the first higher close within the next 5 days, or exiting at the close of the 5th day if there were no higher closes, then the EV was 2.37% gain.

So the odds appear to favor an rebound rally in short order.  I would caution, that this does not mean the decline is over.  And a sharp rally for a couple days could be a lower time frame short set-up for another move lower.

Looks to Be At Short-Term Capitulation in Stocks - 12-18-18

Without having much time to post here, today is showing a somewhat unique set of criteria that while infrequent, has on average shown a pretty big short term skew to the upside.

Interestingly the VIX was down about 2% today, while SPY was down 1.5% and closed below the bollinger band and near a 52 week low.

From what I am looking at, it appears more probable for stocks to gap UP tomorrow, and possibly run up from there, BUT if a gap down does occur, the past comparable instances show about a 2/3 chance of closing above the open and with a strong expected value and about 2:1 MAX gain to MAX loss after the open.

Looking at the intra-trade volatility, it appears that using a 3.75% stop loss could be used as a protective measure for a major wipeout move like January or October 2008.

I think there is some risk of that occurring immediately, but I think the odds are a good bit higher for some rebound for 1-2 weeks.

The February low was broken in SPY, DIA, IWM, NYSE but not in the QQQ.

These breaks of lows can be times of capitulation, and so it fits from a charting standpoint that a rebound could occur. 

Back to Back 1% Gap Ups In SPY

Currently the market is in an interesting and somewhat unique position as it has gapped up 1% or more 2 days in a row.

My studies of gaps have shown back to back gap DOWNS to be a bullish short term indicator.  So I wondered whether back to back gap ups was a bearish indicator.

On average after the close of the second day, returns were mildly negative over the coming 1-2 weeks.  So the summary would suggest that we may not expect much more upside reward than downside risk after today, when considering the next 2 weeks of action.

Now, I went a bit further with this scan, and out of a total of 20 back to back 1% gap ups since Sept 1995, I used the trade so far today to look at the future returns of the instances were today was strong after the open.

So I filtered out only the instances where SPY did not trade down more than 1% from the opening priced during the day.  The results left 9 instances which are reflected in the table below.

Click on Table to Enlarge

So these are all unique instances and shows a strong negative skew to forward returns for the next 2-4 weeks. 

I would suggest this implies that our correction is probably not "over" yet, or at least we could experience another retest of the recent lows before a possible uptrend.

The instance in 1999 was occurring at a 52 week high which is not our scenario.  The other instances are more similar to our market, with the year 2000 December instance being the most similar to ours.

I would say this study suggests that we expect/plan for lower lows to come into late January or sooner.

Elevated VIX/VXV Ratio "Retest" 12-7-18 -- Another Test Suggesting Short to Intermediate Term Rebound of 1 Week or More

I create a condition scan today looking at times of persistent elevated VIX/VXV ratios, followed by a "retest" of the ratio to a lower high.

Scan Criteria
10 day avg.VIX:VXV ratio peaked at >1.0 over the last 2 months
Today VIX:VXV single day ratio is >1.0
Today the 10 day avg. ratio is LESS THAN 1.0

The VXV only goes back 11 years, but includes almost all of the last bear market and several major corrections since then.

There was a notable forward positive skew especially at 4-5 days ahead.

Adding the condition of a large down day in SPY or a large 3 day maximum decline, made the skew stronger.  Those conditions fit our current environment.

This scan condition has been excellent as an opportunity to sell puts/premium or write an
ATM or OTM bull put credit spread with 1 week until expiration.

Some Stats For Current Market Action

This morning I looked at several combinations of factors in the current market compared to past market data.  I will provide a few close estimates here and give an idea for a profitable course of action.

There is about 40% chance of today's gap down filling today
There is about 60% chance of today closing above the open

Given today's gap down in SPY of about 1.6% I look at what happened if SPY closes down more than 1%

Scan Criteria
Yesterday closed down 2% or more
Today gapped down 1% or more
Today closed down 1% or more

When I ran this scan, I got 19 instances back in the past 23 years.  All of them showed basically 100% loss of premium if selling an ATM put at the close with 5 days until expiration. 

So the market on average rallied significantly, and with elevated volatility it was a good time to sell options versus buying options.

Trade Idea
If today closes down (especially if 1% or more), a bull put credit spread with ATM strikes could be written with an expiration of next Friday.

Also, cycles I use are suggesting upside into mid December or longer.  And in the above scan, there was a very strong expected value by holding for 8-10 days from the close of the signal day

So a Dec 24th SPY expiration could be used as well for an ATM bull put credit spread

Several Conditions Suggesting A Probable Rebound Coming In Stocks Over 1-2 Weeks or More

I spent considerable time testing current market conditions against past data, and while it does not appear to be a screaming bottom, there are several factors which I rate to be significant that produce some very strong short skew results to the upside.

Some of the condition combinations below produced significant upside skews over the coming 1-2 weeks.

VIX up 20%+
Equity P/C ratio 21/84 avg. >= 1.05

VIX up 20%+
VIX/VXV >= 0.95
VIX/VXV 10 avg. >0.95

Total P/C 5avg. < -1 st. dev
SPY down >= -1%

Based on the large increase in the VIX yesterday as well as an extended period of VIX/VXV elevation one of the more highly probable plays here would be writing an OTM bull put credit spread with 1 to 2 weeks until expiration.

I am looking at spreads that are ATM or about 1% OTM.

Yesterday's Action in Stocks Suggests Gains are Ahead 10-24-18

Click on Stats to Enlarge

The above scan looks at times in my data where the VIX/VXV ratio was above 1.0 and there was a bullish divergence on my "panic indicator" which combines data from put/call ratios, volume, volatility.

The VXV data only goes back to December 2007.  So it misses the very early part of the 2007-2009 bear market, which may be analagous to our market.  In order to attempt to remedy that, I looked at the year 2007 and filtered for the panic indicator bullish divergence, along with a VIX increase of 5% or more to just gauge some probable similar circumstances. 

The results of the 2007 sample were similar to what we are seeing in the data where we do have the VXV which is posted above.

There was a very strong positive skew looking forward on all time frames noted.  The 1 month time frame was very strong in the skew and the closing returns.

So while we could just see a short term rebound, or no rebound at all, it appears that yesterday's action could be a short or intermediate term bottom with a week or more ahead of gains.

As is the case in volatile environments, if the decline is not over, it could increase in intensity on further breaks to lower lows.  So stop losses are recommended!

VIX/VXV Ratio Study Suggesting a Rebound Into Next Week 10-18-18

The VXV (3 month volatility index) does not have a real long history, but has data going back about 8 years or so.

Today the VIX/VXV ratio closed a bit above 1.0 which is a theoretical imbalance in the ratio as the VIX is shorter duration and typically has lower volatility.

I ran a scan to look at the following:

• VIX/VXV > 1.0
• SPY closes down 1% or more
• Price is NOT at a 10 day low

So the idea here is that the volatility remains elevated with a sizable sell off, but price is NOT breaking to lower lows.  I wondered whether price being above recent lows had any difference in the past compared to price falling to new lows.

The data suggests a significant positive skew in the next week price action for the scan noted above.  

Compared to price making a new 10 day low on the day, our current conditions had both higher closing price action moving forward as well as a larger positive skew in MAX GAIN to MAX LOSS over coming days.

There was no positive skew in MAX GAIN to MAX LOSS over the next week when price was declining to a 10 day low with the other conditions listed above.

So in the scan above, 23 instances were returned, and in 20 of them, my option price model shows that the ATM put lost over 90% of its value by expiration 5 days forward.

This data suggests that currently there is an opportunity to sell premium or write a bull put spread with expiries either next Wednesday or next Friday as the data on both would be about the same.

I did write a credit spread near the close today with expiry of next Friday.

Pete

Market Pop and VIX Drop Suggests At Least Some Continued Bullish Trade - 10-17-18

I ran a few scans today on SPY past history looking at similar market conditions to the current one:

One simple scan is:

• VIX declines 15% or more
• VIX closes below 20
• SPY gains more than 1%

Going back to 1995 that left 24 instances which matched Tuesday's action in that fashion.

Out of those 24 instances only 6 had a MAX loss of 1% or more in the next 3 days.

The average closing price gain a week later was 0.71% with over 2/3 of instances being positive.

Only 3 out of the 24 shows closing losses of 1% or more 1 week later.

But 10 instances out of 24 showed closing gains of 1% or more 1 week later.


It wasn't an incredible put selling opportunity, but about 75% of the past instances showed 70% or greater loss in the ATM put at expiration 1 week later.

The average VIX close 1 week later was down about 5%

From looking at past instances of big VIX spikes (like +33% or more), once it was done there were significant rallies in almost all case.

I would expect SPY to close between 275 and 285 next Wednesday (2 weeks out from the VIX spike) based upon past similar instances.


So the outlook here is for some continue short-covering to be probable for a week or so.

Currently active time cycles on SPY suggest that there is upwards bias on the cycle until the middle of next week, which is why I am focusing on the 1 week time frame here.

After that, time cycles turn down until about November 5th-6th.


So my plan here is to continue to hold some option credit spreads that I recently sold with reasonable of collecting full value of the credit next week.

Then it would be a time to consider purchasing a Nov 7th put or sell a bear call credit spread if prices do rise into next week.


Pete

Stock Market Volatility - Big Pop or Big Drop Ahead? 10-11-18

I have spent considerable time today comparing current market conditions with past data in order to guide expectation and strategies for trading.

MOST of the extremes in VIX, put/call ratios, multiple gaps downs and back to back down days or down streaks have in the past led to strong short term rebounds with peak gains coming at 4-8 days later.  So I think it is possible and reasonably probable that stocks rally 2-6% over the next couple weeks on a closing basis from today's low.

However, and few of the conditions I looked at which indicate very extreme readings, like 3+ standard deviation from the norm, suggest there is also a real possibility of a short term "wipeout" move which will occur before any rally attempt materializes.

Currently, I would estimate the probability of a 5% or greater decline, over the next 3 days or less, to be around 40%.

There is currently no bullish divergence on the hourly MACD chart of SPY, and given the strength of the decline, I would expect for that to develop before the low is in. 

If there is a gap down tomorrow, then from past similar instances I would estimate that from tomorrow's open there is a 2:1 or greater MAX gain versus MAX loss after the open, with a high probability of a close above the open. 

This data is useful in particular for a Friday where if tomorrow gaps down, we could write an option credit spread ATM or slightly OTM with the expiration at tomorrow's weekly option.

Since volatility is very high, and the odds of a close above the open are well above 50% from past stats (more like 75% from what I am looking at), then this could be a nice time to SELL premium with the limited risk of a bull put credit spread.

I may update tomorrow.


Pete

Gold Short Covering Rally Looks to Me Like It Will Continue

Click on Chart to Enlarge

The chart here is of GLD etf and shows projections of a continued advance up from the recent lows.

Since the lows over the last week or so, the rally in gold has been notably larger than any counter trend advance going back to the April highs.  So by this measure, the rally has overbalanced previous moves in the leg down, and indicates by objective measures that a larger phase of upward market movement may occur.

I have drawn lines on 3 of the major short covering moves off of lows over the last 2 years, and then projected them up from this August's low.  And we see what looks like an 10%+ move as realistic coming off of the current low if it holds.

The sentiment at this year's lows was at a historically extreme level and would argue for the possibility of a major low occurring here.

The Commitment of Traders data showed that large speculators went net short at the recent bottom, which is very rare in gold historically.  It does not mean that the low is in, but would indicate the possibility of a historically large amount of speculative short interest to unwind which could fuel major legs up in months to come.

Other precious metals look to me to be in similar set-up, and so this complex I view as having explosive potential.  Just based on the moves over the last couple years, there may still be 3:1 reward to risk using a stop below this month's low, if the rally were to continue and reach gains similar to the amounts of previous rallies in recent years.


Pete

VIX and SPY Bollinger Bands Suggest at Least a Minor Pullback is Right Ahead

The VIX has closed 2 days in a row below its lower bollinger band, which is not a common occurrence.

I have looked at this data and combined it as a filter in a few different ways with other data.  The message is consistently that in the past after similar occurrences there has been a relatively strong skew to the negative in the short term.

Over the next couple weeks the MAX loss has been greater than 2 times the MAX gain on average. 

However, in this LOW VOLATILITY environment, a strong skew does not really mean big price action.  So over the next couple weeks, the average decline to be expected from past data may be ~1.5%.

The cycle analysis timing that I use, also suggests that there may be 1-2 weeks of downward pressure still in stocks.  So these perspectives are consistent and would suggest weakness (or at least NOT strength) through roughly August options expiration.

There are enough divergences showing up here that I feel a high confidence that in the short to intermediate term the market may cool off and not make much more net gains for a few weeks.


I don't have much of a longer term perspective to offer from the data.  I would suggest that in the quest for investment yield, the odds seems to be tipping in favor of money flowing to bonds and away from stocks.

Bonds and notes have major short interest accumulated, and the SP500 dividend yield has fallen below very short term yields on Treasuries.  The suggestion here is that there may be money ready to flow back into bonds rather than piling into stocks on a breakout to new highs in the SP500.

For those who may have interest in commodities and currencies, there is much evidence in the underlying positions that we are quick approaching a commodity rally and probable decline in the US Dollar index.

Some notable markets with extreme short interest and probable sharp rallies to come are gold, silver, coffee, sugar, among others.

Oil actually is more the opposite.  It has come off of record long positions and extreme bullish sentiment, and so from a pairs trade perspective, a long gold/short oil trade may make sense.


Pete

Another Test of 200 Day Moving Average in SPY - 5-3-18

I have discussed the tendency of markets to rebound from key moving averages in the past, and also given perspective on some subtleties which follow.

First, from my perspective an average like the 200 day moving average in SPY leads to rebounds when touched simply because of groupthink which is programmed into the market.  So computerized/automated trading programs may involve buy/sell action or contingencies at these commonly followed averages.

So there is nothing magic about it.

What I have seen in the past is that strong and lasting rebounds from key averages often are initiated by gap ups and closes above the open following the decline to the moving average.

When we see weak (no gap up, and or no follow through after the gap up) price action following the touch of the average, that may be an indication that the market will not continue its rally attempt.

TAKE NOTE of multiple weak follow through attempts followed by even slight breaks to lower lows.  What can be happening there is that selling is coming in following every automated buying blip, and THEN when the buying triggers are exhausted, the bottom falls out underneath so to speak.  So there can be a rapid downward movement in prices.

Given that since February, each successive touch of the 200 day moving average has held, BUT BEEN SMALLER in the attempted rally, we find ourselves at a point of convergence that is about to break.

I would argue that it would be correct to short sell on a stop order as it breaks to new lows following today's rebound attempt.

Active cycle analysis suggests to me that any rebound from here may be short lived.

I don't know how strong a move down will occur on a price break, but I have seen this type of exhaustion in enough markets enough times to recognize the risk of a big move down as well as the opportunity for rapid price moves and volatility expansion which can work in one's favor if positioning for a breakout.

Since a contracting triangle appears to be forming, I am alert to the possibility of an upside breakout and continuation of the bull market.  But it appears to be unlikely to me that it will occur at least for a few weeks.


Pete

Put/Call Ratio Extreme Suggests That Rebound Attempt Is Imminent - 3-28-18

Click on Stats to Enlarge

The above snip is the result of a scan looking at extreme put/call ratios by a few different measures while occurring in the context of a bull market moving average configuration.  Other conditions were that daily and weekly MACD were pointing down and SPY closed down 1% or more on the day.

That paired the list down to a very bullish subset.

SPY only declined about 1% or a little less this morning, but from short term timing cycles and non-confirmation with the QQQ fund, as well as the above noted study, it seems that the downside could be muted for the coming days. 

I exited the rest of QQQ puts I held.

I entered an April 4th SPY 258 strike call with a limit order of 13.50 to exit before expiration if it occurs, but otherwise exit at expiration next week.


Pete

Multiple Comparison Pointing to Thursday as Probable Short Term Bottom

I have scanned past history of SPY in comparison to today's closing action and have further confirmation that on average we may expect a volatile couple days, but probably a rally attempt and short term bottom likely to form within the next week.

The most common thread here seems to be an elevated downside skew for the next couple days before stabilizing.

Based on what I am seeing I would estimate the odds of a further 2% decline or more over the next 3 trading sessions to be greater than 66%, with some possibility of a "wipeout" type move.  I would estimate the odds of a wipeout move to be ~25% or a bit greater over the next 3 days.  That would be something on the order of 5% or more loss at least intraday.

Again price in SPY has come back down close to the 200 day moving average.  And the failure of price to clearly stay above it after yesterday may indicate that yesterday's rally was just a program trading buying surge at the 200 day average but without broad follow through.  So it could be just a "blip" from that average in the midst of an incomplete selling cycle.  It seems very possible that a sharp move down to wipe out stops and trigger sell orders could occur over the next couple days.

That would be the classic market behavior, often accompanied with a break of a prior significant low.  In this case, this significant low is the February low which is about 3% below today's closing price in SPY.

The next significant low below that would be the August 2017 low down around 242 on SPY which is about 7% lower than current closing price.

I would estimate somewhere in that range to be a probable low over the next 2-3 sessions, with some minor possibility of something even greater to the downside occurring.

I currently am holding some put options on QQQ since 3-14 of which I exited half at today's close because of the bullish divergence on the hourly chart.  I plan to exit the other half by the end of this week, but quite a bit of action could occur by then, so I will key in on the 60 minute and 15 minute chart for ques for exit, and run some back tests as I see what gaps and price moves are occuring.


Pete

Short Covering Rally - Short Term Expectations 3-27-18

Click on Stats to Enlarge

Yesterday the stock averages gapped up and gained ground from the open in explosive fashion. 

After a period of decline, the question is what this means going forward.

I scanned the history of SPY and looked at times where the prior day closed below the lower Bollinger Band and was down 1% or more, and the current day gapped up 1% or more and made further open to close gains all without making a lower low compared to the previous session.

The above table is the whittled down history of market days similar to Monday going back to 1995 in SPY.

Of note, within the next 5 trading days, 6 out of 8 experienced losses of 3.7% or more relative to the close of the signal day (Monday in our case).

7 out of 8 experienced losses of 1.9% or more relative to the signal day close.

Those numbers are based on intraday figures, NOT on closing figures.  But we can see a clear skew to the downside right away in the past instances.  And on a closing basis, the first day following the signal days did not make much further gain or loss on average.  But the next 2-3 days following that showed about half the instances made some sharp breaks lower to retest the lows.

In going through the charts of the past instances, they all experienced some temporary support after a retest of the lows.  So we may expect that if prices do come back down to challenge Friday's low, that we could see further rally attempt somewhere between there or the February price lows.

Also, note that all the instances in that table were in the context of incomplete bear markets except the August 2015 instance.  So possibly this is a harbinger of a longer term shift???

Click on Stats to Enlarge

Also an extreme total put/call ratio was registered on Friday at 1.53.  The above table shows readings of 1.5 or greater in the past.

Also note the downside skew over the next few days.  Again, while not shown here, the MAX closing loss point is the 2nd and 3rd day after the signal. 

So both of these studies suggest a possible/probable retest of last week's low by Thursday this week or maybe a bit beyond.

That fits well with what I am seeing in time cycle analysis in the Nasdaq, which currently projects a bottom on March 29th which is Thursday.


I will update as action unfolds over the next couple days.  Personally I would be looking only to play clear short term reactions expected to the upside of say 1-2 weeks, with the idea that the longer term trend may have shifted to down already.


Pete

Chances of a "WipeOut" Move This Week.....

I have scanned current market data from several angles in comparison to the last 22+ years of data in effort to estimate what is likely to occur in the wake of this week's decline and technical set-up.

In short I estimate about 25-50% chance of a wipeout type move occuring by this Wednesday.  By that I am meaning something on the order of 5% loss or more.

Based on the several factors I would estimate that SPY could easily carry down to 247 by April 3-4th. 

Click on Chart to Enlarge

The chart above here shows a typical time and trend channel pattern for a "flat" correction.  This would project a move to the lower trend channel at April 3-4th which would be ~$247 on SPY.
That would be 4-5% below current levels and based on several scans comparing to past similar declines, that would be reasonable in the next 3 days to 2 weeks.

Points of note here are that the hourly chart currently does not have a bullish divergence occurring, so it seems more likely with this intensity of decline, that we will see either a divergence develop or a large capitulation gap down like 2% or more gap down as at least a temporary capitulation/spike low.

Also SPY is perched right at its 200 day moving average as of the close Friday.  As I have noted many times in the past, these key moving average points will typically be met by gap ups with gains after the open shortly after the average is challenged.  We saw a sharp rebound off the average on Feb 9th.  However, the more times price comes down to touch the average, there is implication of weakness and the possibility of a sharp break down in prices.

Part of the idea here is that certain key averages factor into program trading and if the buying thrusts off the average are weak and re-tested, there may be a major break down through the average.  The average and the space below it may be stop loss triggers or even trend following short trigger points and result in a large and sharp price movement.

If we are to see that occur here, the chart concern is that there is not a major chart support region until down at the $240-220 region of SPY which would be a pretty major decline.

From a chart point if prices are to break clearly below the lower channel line of the chart above, it would be indicative of longer term trending action to the downside rather than corrective activity of the bull market.

As a side note but maybe of significance, bond prices have rallied weakly off the recent lows, and as of this coming week, the key time cycles in bonds are peaking and indicate downward pressure into early or mid May.  Given that prices are marginally above MAJOR horizontal support, it seems possible that a major breakdown in prices could occur on a break to new lows for the bear market in bonds.

Bearish Reversal Pattern With Divergences 3-13-18 Stock Market Update

Click on Chart to Enlarge

The chart above is the Nasdaq composite daily.  It has made a new high above the January highs, and today created a wider range bearish engulfing pattern which is a top reversal pattern potentially.

I view this as potentially meaningful for a number of reasons some already discussed in recent posts, but I will create a short list

• Significant non-confirmation of other indexes to make new highs
• VXN touched lower bollinger band yesterday
• Cycle time analysis turning lower for next couple weeks
• Dual time frame MACD divergence in Nasdaq (Daily, Weekly)
• Price touching the top channel line of the high for the bull market 
• Breadth and sentiment major divergences

I view the risk to be a good bit higher than reward potential for the next couple weeks.

I have an eye on inverse positions or put options here currently.

Pete

SPY Update - Expecting Price to Make Another Move Lower Into April of Beyond

Click on Chart to Enlarge

The above chart is a SPY daily chart.  And back on 2-14-18 I had posted regarding past similar instances of selloffs and rebounds following put/call ratio dual time frame imbalances like we were seeing in January of this year. 

At that time I noted that the subsequent rebounds of the 4 previous noted comparable instances had retraced 50-75% of the initial decline.  And I overlaid the actual % and time gains on this chart as indicated by the lines rising up from the 2-9-18 low.  It is notable that tomorrow will equal the time of the longest rebound out of the previous 4, before the decline began its next move down.  So we may be nearing the time point here where prices could be peaking and another round of hard selling comes in.

The blue box on the chart above represents the range of declines over the next 3 months of the 4 comparable instances following the put/call ratio signal.  The indication here is that we may expect another wave of selling to break the February low.

The cycle analysis of current active cycles indicates upward cycle trends into next week and possibly a bit beyond.  But following that, there is downward cycle activity into mid April or beyond.

Basically at this point I am looking for a risk reward set-up or clear technical divergence to develop to initiate a short/inverse position in SPY or related ETFs.

Another concept that I have discussed many times over the years on the blog is "price logic".  This objectively gauges which direction of market price action is stronger/weaker and infers the direction of the next "strong" market move.  On the chart above we can see that the move down from Jan to Feb was very directional and that the ensuing rebound has only partially retraced the decline in more time than the decline took to form.  The idea here is that the current rebound is a counter trend move to a larger downward trend or formation of at least 3 moves....DOWN-UP-DOWN

The other main possibility that I see is that the Jan-Feb decline is the first move down of a triangular pattern or sideways move, meaning that most all price action would occur within the bounds of the Jan highs to Feb lows.  I view this as a less probable scenario but we will see.


Pete

Initial Rebound Probably Near Complete - 2-14-18

I have looked at the market action of the last couple days a few different ways with the idea of what has happened in the past after sizable sell-offs and then the subsequent rebounds.

Today marks 4 days up in a row, and yet price is still below the mid line of the bollinger bands.  So we a have strong rebound after a sharp sell off with wide standard deviation bands.  I have looked at some slight variations of this theme, looking at VIX bollinger bands, and also at multiple up days with the daily MACD still in a down position, and the results are mild to moderately bearish for 1-2 weeks.

One of the scans that was more bearish was 4 days up in a row with today being up 1% or more.  That had a notable bearish skew in forward returns for a couple weeks based on past similar instances.

I also took some time yesterday to compare the most similar past sell offs which then resulted in a failed rally and lower lows for the move.  And the retracement levels were 50-75% of the preceding sell off.  Today hit 50% on the retracement, so we are already in the lower end of the range where past rallies have peaked. 

In follow up to yesterday's post, the VIX/VXV ratio fell back just below 1.0 today.  The past few comparisons of periods of the ratio spiking above 1.0 with a waterfall decline, show that the ratio dropped back to below 1.0 for a few days here and there near the top of short term rallies as prices worked into a retest of the waterfall lows.  So that is still my best idea here, we are near the short term peak of a rebound which is expected to challenge the recent lows.

The VIX also fell 22% today.  I scanned for times when the VIX fell over 20% in a day, and 9 out of 13 had notably greater MAX losses over the next 5 days than MAX gains.  The few instances that did not have greater declines than gains, basically just kept on going up in the context of the recent bull market.  So this suggest we are very near to a point of recognition - either we have had a spike low and price is likely to march higher, or the rally will quickly fail and the next several sessions (1-2 weeks) will have a markedly bearish skew as stocks retest the lows.

As a side note, but somewhat relevant.  I have stated this before on the blog, but price bars with very long tails, like that from last Friday 2-9-18, have a tendency to have retests of the "tail".  I have observed this personally that very wide range bars with long tails are likely to have price come down and tests the lows.

I have heard Steve Nison of candlestick fame, state that on their studies of candlesticks, a successful  "hammer" candlestick bottom reversal has ~60% chance of having price come back to, or below, the mid point of the tail.  So even if a lower low does NOT occur relative to the reversal bar, there may be ~60% chance of price coming back to the mid point of the tail.  That would be ~258 on SPY.

Now the 2-9-18 candlestick is not really a classic hammer candlestick, but in my estimation, a very long tailed reversal with a close towards the upper end of the range, probably has a similar profile.

So my best idea of the odds from this point are for price to come back down to test that 258 region on SPY within the next 2 weeks.  I would not be surprised to see a rally attempt kick in again from those levels.

As another side note, since much of trading is automated computer algos which incorporate key technical indicators and moving averages, I have noticed tendencies for key moving averages like the 200 day moving average to trigger buying programs.  That did occur on 2-9-18.  And if the average is touched again on a retest of the 2-9-18 low, I think it would be reasonable that the buying kicks in again.  BUT, the more times the average is touched without subsequent gap ups and closes above the open, the more that indicates a possible failed rally. 

THEN, if after a couple rally attempts off the average occur, and price is able to break lower and make a lower low, there may be some freefall below where the programs have spent their buying around the 200 day average, and now price rapidly declines to the area of the next significant prior low/high from the uptrend.

In this case, while there are minor lows and highs during the uptrend over the last year+, the last real basing and significant highs/lows were Sept-Nov 2016 in the 208-220 region on SPY.  That seems like a long shot, but if price chops at the 200 day MA and ultimately fails in coming weeks or months, I would not really be surprised to see those 2016 levels be retested on the next move down.

That is looking a long way ahead, but I think it is important to have some view of the risk present at key break points in a market that has been as one sided and speculatively run up as stocks have been in the recent bullish run. 


Pete

VIX/VXV Ratio Still Elevated - This Rebound Will Likely Lead to A Sharp Sell Off and Retest of the Lows Over the Next 1-2 Weeks

Click on Chart to Enlarge

The snip above are the past instances when SPY closed up 3 days in a row and the VIX/VXV ratio was greater than 1.0.

The VXV has a limited data history, so this only picks up on a couple unique market environments in 2011 and 2015.

But I still view this as extremely relevant even without a larger data set.  The implied volatility structure still is imbalanced, and "fear" is present in the market.  As such, we may not be out of the high volatility daily swings of recent days, and the probability of a retest of recent lows may be higher.

This view would be consistent with the price cycle analysis tools i use which suggest upward price cycles will peak this week in the short term, before another 1-2 weeks of downward cycle pressure. 

None of the past instances led to a lower low below the waterfall decline low (last Friday's low in our case).  So they occurred in the context of the rebounds and restests of the lows following those vertical sell offs.

That is the probable position I see us in currently.

Since the VXV has limited history I scanned some conditions indicating big recent moves in the VIX and in SPY by using a high width of the bollinger bands as the backdrops for those scenarios of rebounds following a volatile price decline and VIX rise.

The take home was similar by adding in some more unique instances from the mid to late 1990s and a few in the 2000s era.

So from the past stats it appears probable that SPY could witness a sell off over the next 3-5 days of 3% or more from today's close at 266.  The closing low in SPY on the recent sell off was near 258.  And a 3% decline from 266 would put SPY at about 258.  So it seem like price could retest that closing low, possibly without a lower intraday low over the next week or so.

I plan to speculate with a SPY put option expiring next week.


Pete

Expect Another Round of Selling After A Possible 1-2 Week Rally from the Recent Lows - 2-12-18

In follow up to a post from last month on put/call ratios which was timely and gave forewarning of the potential for a sizeable sell off to come over the next few months, I want to reflect on the development of those comparable instances to gauge how the decline may unfold and see what type of readings (in the indicators which flagged the decline) showed up at the end of the correction/leg down.

I had looked for times when:

• 21 day avg. of EQUITY put/call was less than or equal to 0.92 of the 84 day average
• 5 day avg. of TOTAL put/call ratio was less than or equal to -0.95 standard deviations below to the 20 day average

As the ensuing sell offs developed, there was tendency for a 1-2 week rebound rally to occur when the 5 day avg. total put/call ratio rose above 1 st. dev above the 20 day average.  At the first occurence of this, the above mentioned equity p/c ratio had moved back up about ~1.0.

However, that rally offered a secondary selling opportunity.

When the corrections had bottomed in the other instances, the 21/84 equity p/c ratio had flip flopped to a reading of 1.08 or more, indicating a comparable imbalance in the opposite direction.  When those levels had been reached in the longer term eq. p/c ratio, then a total p/c reading indicating extreme pessimism was a great indication of a more lasting rebound attempt.

So our current market seems to be following this template so far.  The initial plunge over the last 2 weeks, has led to a short term spike in p/c ratios.  But the 21/84 equity p/c ratio has only just reached back to 1.0.  

The current small rally may be expected to continue for several days.  But the past instances would suggest the probability that another move down will occur with a higher 21/84 ratio.  And that could very well make a significantly lower low.  A shorter term pessimistic extreme in the ratios which occurs in that context would fit the template for a larger rally attempt.

Pete

Gap Up Today Could Still Lead to a Morning Sell-Off Followed by a Rebound

I have scanned current market conditions with past similar scenarios, and in this case am looking at time where a really strong sell off like yesterday was followed by a gap UP.

From the ways I have looked at it, the past similar instances suggest a greater than 50% chance that even with this morning's gap up, prices could come down and make a lower low today. 

However, that would be a time to anticipate a possible rebound.

One of the scan's I looked at was:

• Yesterday SPY was down more than 3%
• Yesterday SPY closed below the lower Bollinger Band
• Today gapped up more than 1%

This was a pretty elite class of past market sell offs, and most of them demonstrated lower lows over coming weeks, though on average there was a slightly greater 3-5 day MAX gain versus MAX loss.

From all the tools I have available and the current market perspective, what I see fits the template that a rebound into next week is probable, but if it occurs, we would likely see a "re-test" of this week's lows, and possibly lower lows of significance.

Pete

Gap Down Tomorrow Could Lead to Another Big 1 Day+ Rally 2-8-18

Today saw SPY get hammered in another big selloff to a lower low for the move.

Currently to me the decline looks to be near complete with some hourly bullish divergence showing up.

I have scanned current conditions against past market action and it seems like 80+% chance that tomorrow has a lower low than today - meaning probably not just a gap up and go without a brief poke to new lows.

In my mind, during the selloff earlier in the week, the was a lack of capitulative type readings and sentiment present, which I felt was "off" for that low to hold.  In particular, despite multiple days down in a row and back to back 2%+ down days, the total put/call ration didn't really spike at all.  It never even got above 1.8 deviations from the 20 day average.

But today, the put/call ratio did spike outside the bollinger bands, and now there is a more pronounced 60 min chart bullish divergence present that suggests to me that there is short term capitulation that could lead to a multi day rally.

Based on several scans of market action comparable to the recent period, tomorrow's session would on average show a gap DOWN, though a gap down is not much more likely than a gap up.  HOWEVER, if tomorrow does gap down, then the best comparisons that I can find, suggest a huge skew towards the market rallying after the open.  The MAX gain to MAX loss ratios after the open in the past comparisons are 4-7:1.  And the average open to close change on gap down days is OVER 3%. 

So if SPY gaps down tomorrow, the stats would suggest to buy at the open with an appropriate strategy to capture a snap back rally.  For me, I plan to purchase an ATM option which expires tomorrow to try to capture a large gain on the option contract based on an anticipate big open to close gain after a gap down.

So what I am talking about here is the scenario of a gap down.

But if tomorrow gaps UP, then the stats are not really bullish in the short term.  There is still on average a closing gain by holding for 1-2 weeks, but nothing near the scenario of a gap down.

I may post before the opening tomorrow, but the idea here is that while fear is high we want to be clear of the historical patterns and force ourselves to think contrary to the crowd at extreme inflection points.  It could happen that a massive selloff continues straight down from these levels, but it certainly seems more probable from past scenarios, that this extreme will be temporarily reversed.

Pete

Big Flip Flop In SPY - Could Be More Bearish Than Bullish In the Short Term 2-6-18

The recent weeks in stocks have been interesting, unique, and historically exceptional by many measures.  The last 3 days have been no different.

I ran a scan going back to 1995 looking for a similar sell off and rebound type pattern to what occurred over the last 3 sessions.  Here were the criteria:

• 3 days of successively increasing volume
• Today SPY closed up more than 1%
• Yesterday SPY closed down more than 1%
• 2 days ago SPY closed down more than 1%

Only 3 dates came up in the past 22 years.  And I have made notes of the outcomes.

10/23/2008 - Sharp sell off, closing low 2 days later, intraday low 2 days later

11/13/2008 - Sharp sell off, closing low 5 days later, intraday low 6 days later

12/4/2015 - Sharp sell off, closing low 5 days later, intraday low 6 days later

After the above sell offs and low, there were rebounds that were relatively sharp.  And yet none of them marked lasting lows over the coming months.

It may be hard to judge from just 3 instances, but the pattern was pretty consistent and may be one of the best comparisons to the recent sell off and rebound today.

I also looked at past instances of the following criteria which match the current market; this takes volume out of the equation but requires today be a lower low:

• Today made a lower low than yesterday
• Today SPY closed up more than 1%
• Yesterday SPY closed down more than 1%
• 2 days ago SPY closed down more than 1%

There were 17 instances, and over the next 3 days there was greater average MAX decline than MAX gain.  And notably 13 out of 17 instances closed lower the next day, with an average of 1.1% loss.

But at 10 days after the signal, 12 out of 17 closed higher, with an average gain of 2.7%

So now with the current data here a new pattern emerges when looking at the instances above....

There is more downside risk than upside potential over the next few days, and a probable brief retest of today's low, followed by a rebound for 1-2 weeks.

Interestingly, based on the past 17 instances in the second scan mentioned, the 4 instances that closed positive the next day, continued to maintain in positive territory for at least a week, and 3 out of the 4 never really looked back - they were spike low type situations.

So a positive close tomorrow would be suggestive of a rally that could continue to new highs in coming weeks, rather than the hard sell off to retest the lows that the top scan profiles.

Pete

4-8 Rally Expected In SPY Starting This Week

I have scanned current market conditions and possible outcomes for today's close in context of the recent price action, and on average there is a clear short term pattern indicating a rebound rally would be consistent with past similar scenarios.

The closing price gain peaks are 4, 5, and 8 days forward from the low of the sell off, when it ends.

So we could expect the current sell off to begin to rebound from a short term bottom during this week, even if today's low does not hold.

The back tested stats indicate then a probable rebound into next week, probable mid to late next week.

The short term SPY price cycles are confirming that outlook.

From my perspective, it seems likely that a lower low will still occur before a multi day rebound.  The 15 minute chart has yet to form a bullish divergence, but that is the time frame to watch to focus in on the short term bottom if playing the very short term moves here.

Today's price action appears to form a contracting triangle, with the implication that there will be a downward thrust out of it that would then quickly lead to a short term bottom and a rebound would ensue.


Pete

Gap Down Indicated This Morning - Probably Short Term Exhaustion

Currently there is a gap down indicated of over 1% in SPY though future have moved pretty wildly and that could change in the next 30 minutes until open.

Based on scans of past similar violent sell offs, which where followed by a large gap down opening, the gap down has strongly tended to have heavy buying interest come in after the open.

On average it has been a big win to purchase at the open and hold until the close in these situations in the past.

There is strong peak in future closing returns at 4-5 days out from the gap down open in similar situations.

I have orders to exit SPXU I am holding at the open.

I have orders to buy some call options expiring tomorrow, and next Wednesday play on the consistent rebound pattern that has occurred after past big sell offs and gap downs to capitulate.


Pete

Cascading Sell Offs Imply A Rebound - But Likely Lower Lows Will Occur Before The Rebound

A have scanned for past times where SPY closed down 3-6 sessions in a row and today the loss was more than 3%.

Out of 24 instances that came up, 21 of them showed at least some intraday loss the following day (meaning price dipped below today's closing price).

17 of 24 made lower lows the next day.

So even though a gap up would be common tomorrow in this situation, the probability is that the gap would be filled and probably a lower low would occur.  But that would be a high alert situation for a rebound rally to begin.

But following today's close, the past instances reflected on average a notable rebound with the peak short term closing gains at 5 days forward.  About 2/3 of instances closed positive at the 5 day forward mark with the average being about 2.3%


So the template here is to expect a lower low tomorrow or beyond, and for that to be quickly followed by a sharp rebound.

From some other scans and comparisons it seems likely to me that after the expected rebound there would likely be lower lows for the move.  My assessment is that it is unlikely that it will go from extremes panic levels of this magnitude and just turn on a dime without a retest and more classic completion of the typical bottoming formation.


Pete

Elevated VIX/VXV Ratio - Capitulation Dead Ahead?

As of the time of this writing, the VIX/VXV ratio stands at greater than 1.1.  Anything higher than 1.0 is a notable imbalance in the volatility in the options.

The VXV only has a history going back 8.5 years to 2009.  So it does not include the 2007-2009 bear market environment.  But during this bull market, the periods of extreme elevation of the ratio above 1.1 have been near to bottoming points and sharp rebound rallies.

Late July 2011, early Feb 2014, Oct 13th 2014, and August 21 2015 were the dates that came up where the ratio FIRST closed above the 1.1 level.  It was a couple days or so until the low was in. 

Other than the Feb 2014 instance, the others ended with very large gap downs into the low.

So what we may anticipate here is a couple further volatile days with lower lows than today, and possibly a "wipeout" type gap down this week which will have potential for a sharp short to intermediate term rebound for prices to follow.

Given past similar scenarios, a call option purchase of 3-5 days duration from the time of an oversized gap down opening could be a nice speculative play. 

If I see an upcoming high probability play and big gap down opening, I will post here with ideas.


Pete

Stock Likely Bearish Into April 2018???

I have evaluated currently active price cycle in SPY and currently, the dominate cycles indicate downward pressure until late February at which point the next bounce into March is currently indicated.

If the market is to remain in a uptrend, this period could simply be a flattening or chop.  But if a legit correction is to take place, then some notable downside could occur. 

Again, if long in a market, keeping part of a position with a trailing type stop is a way to stay with the trend instead of getting caught in the all-in or all-out trap.

It is apparent that "suckers" have recently bought into the market and the sentiment on many measures is at an historic lopsided bullish skew.  This has the potential for the recent "easy money" period of the last 2 months to be wiped out and punish/bankrupt the suckers in the way that the market collectively always seems to do.

Based on currently active market price cycles, the next very strong downward phase of cycles, currently projects from mid March into mid April.  So it seem possible that SPY has either already topped and is in process of the first real correction since the Nov 16 low, or SPY may manage a higher high in March at which point a more glaring bearish divergence would be set and could be another potential rally high.

I will re-link a recent post I made about 3 weeks ago which showed the put/call ratio "imbalance" present at the time and which produced large period of decline/correction over the ensuing months.  The previous instances would fit well with the idea of a larger ongoing correction or sell off into April or beyond.

Also make note that the move down off the recent high is the largest and fastest decline which has occurred since Nov 2016.  The move up since Nov 2016 is in an elite class of lengthy legs up without notable correction.  So it is "due" at any time for a correction.

After a period of trending advance, a larger and faster or larger and more time consuming correction is a Gann concept indicating an "over balancing" or change in character which is the objective price indication of a trend change or correction.  It is confirming evidence which would guide the analyst to look how past similar market periods progressed. 

In this case, assuming that coming weeks demonstrate some further decline, one of the key points will be to determine whether the character (%, rate, time, etc) of the decline fits better as a correction in a bullish trend, or does it better match the historical initial sell offs in a bear market.



Pete

Dual Time Frame Price Channel Throw Over in SPY - Topping Probably 1-18-18

Click on Chart to Enlarge

The top chart here shows SPY on a 60 min log chart going back to August 2017.  I have connected a couple key highs in the run up since then, and currently price is hanging out above the upper boundary of the channel on this time frame.  The next chart will show this with a higher time frame also.

Click on Chart to Enlarge

This chart is a daily log scale chart on SPY going back to the 2016 low in January after the 2015-2016 correction.  I have drawn some channel lines on this time frame we can see that SPY is also hanging out above the upper boundary line of the channel for the last week or so.

So we have a dual time frame move up above the upper channel line coupled with extremely one sided bullish sentiment on the market.  I have showed some similar events in past markets, and in my estimation this is significant and could be a point where prices peak and begin a multi month consolidation.

Currently the market is showing some unique signals in real money sentiment.  

For instance, today was the 3rd close in a row above the upper daily bollinger band on the VIX which typically would show a cluster like that at the bottom of a correction, or early in the phase of a sell off.  But yesterday prices on SPY closed above the upper bollinger bands and at a 52 week high.

I can't find any instances of a similar occurrence in the past 23 years.

Also when the VIX is stretched to the upside, usually the put/call ratio is rising also, both of which indicate rising fear or pessimism.  But currently, the put/call ratios have been at extreme opposite conditions both short term and on a multi year basis.  So the pairing of relatively elevated VIX and relatively extreme low put/call ratios is at a discrepancy I also can't find a comparable scenario to for the last 23 years by a few different measures.

Price is the final result of all other market info, and so the multi time frame extreme throw over of the upper price channel of the rise for the last 2 years seems to me to be the final say of significance.

Markets can run up or down for extended periods, and so when staying with the trend this is where a methodical trailing stop adjustment scheme is so key to stay with the trend.

Further Signs of Excessive Complacency From Put/Call Ratios 1-15-17

As of Friday's close,there are further signs of a stretched or imbalanced condition in the put/call ratios which suggest that stocks may be within days of an intermediate high.  The table below shows when there is a "sell" signal from the total put/call ratio while the equity put/call ratio is at a longer term complacency imbalance.  I have removed clusters and we are left with some notable tops in recent years.

Click on Stats to Enlarge

I have looked at the data from a few angles including:

• total put/call "sell" while SPY closes above bollinger bands = BEARISH
• total put/call "sell" while equity put/call ratio is imbalanced = BEARISH
• total put/call "sell" while MACD daily and weekly are UP and SPY closes UP = BEARISH
• total put/call "sell" at a 52 week high = BEARISH

The total put/call "sell" is a 5 day average that is more than 1 standard dev. below the 20 day average.

Also recently there has been a cluster of days where the VIX rises while SPY also rises.  I have looked at the in conjunction with a relatively low VIX/VXV ratio and it is mildly bearish over the next few weeks on average.

Also, I have a "gap indicator" which factors into account cumulative gap direction and relative size and over the last week it reached to an extreme level indicating possible "exhaustion".  I filtered that condition with times when price closed above the bollinger band, and the result is also moderately bearish looking out to about 1 month and then results are typical after that.

Also I looked an example of extreme price momentum in SPY, where the daily and weekly MACD are both positive and in an UP position with no bearish divergence and price has closed above the upper bollinger band on SPY for 2 consecutive days.  Removing the 2018 instances from the last couple weeks, there were not many instances but 3 out of 5 showed sizeable pullbacks of greater than 2.5% over the next 2 weeks.  The negative skew didn't last longer than a couple weeks, but possibly this extreme momentum puts stocks at a spot of probable near term "profit-taking".

So in summary, on a long term basis stocks have historic levels of complacency and indication that the investment crowd is very "one-sided" in the bullish camp, creating a condition of long term risk for stock prices.

On an intermediate term basis, I put the most weight on the put/call ratio studies mentioned above based on personal experience.  And currently, this real money gauge is suggesting a negative skew to forward market prices for several weeks or months.

And in conjunction we have some signs from VIX, gaps, and price momentum, that stocks could be near to a shorter intermediate term correction when comparing to past similar data.

Looking at price cycles currently active in the market, SPY is currently near a peak of the upward portion and from my most recent analysis, the currently active cycles will be creating a downward pressure for several weeks. 

Pete

Put/Call Ratios Suggest Correction Ahead for Stocks 1-9-18

Currently many measures of market sentiment are in excessive optimism territory. 

One of the data sets I follow closely and which is a real money measure of sentiment is the equity put/call ratio from CBOE.

Currently there is a relatively low reading on the 21 day average, the lowest going back to mid 2014.
However I looked at this from a larger scale relative basis and what I did was to take the 21 day average a divide it by the 84 day average.  So we are taking the last 1 month readings relative to the last 4 months total.

Currently the ratio stands at 0.92 which is a relatively low reading for the data set.

I then searched for past times when these low readings occurred at a 52 week high and with a close of SPY above its upper bollinger band.

I removed clustering of a few readings where a few days occurred in a short period (like is occurring now).

And the results were a notable bearish skew to forward returns for the next couple months, but being most notable at 1 week to 1 month ahead.

This was pretty consistent as well in that 9 out of 10 instances had equal or greater MAX losses over the next week relative to gains and the MAX losses on average were over 3.5 greater than the MAX gains.

In 7 out of 10 instances there was a 1 week forward looking MAX loss greater than 1%.

Looking out 1 month, when removing clustering and leaving only the very first reading of a cluster, there was ~2.5 greater MAX loss than MAX gain over the coming month.  6 out of 9 instances had MAX losses of 2% or more in the next month.  6 out of 9 instances also closed negative at the 1 month forward mark.


Given my overall assessment of the market here, I would estimate that the above numbers give a fair risk assessment for the upcoming weeks.  I would not be surprised to see a 3% or more decline over the next 3-4 weeks, from this week's opening values.


Pete