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