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