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