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