Back to Back to Back 1% Gap Ups In SPY!!! Huge Negative Skew In Backtests Over The Next Month

 

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Both yesterday and today were days with back to back 1% gap up openings.

That simple criteria in and of itself has historically led to a mild negative skew to future returns.

However, I have looked at differences on the second day....

• does the gap fill or no?
• is there any substantial sell-off after the open?
• does it close higher than the open?
• does it close near the top of the range?

And in the current market environment the last 2 days both did NOT lose more than 0.5% from the open.

And when adding that one simple criteria, we are left with the table above.  It has a huge negative skew over the coming 2-4 weeks.

It is rare to ever find any combination of factors that produce a negative skew like this.

I posted about a similar set up in late 2018.

So, while today had a monster follow through (in some sectors) to yesterday, I would say the odds strongly favor some significant give back of the recent gains.

Today also had some odd underlying internal data in that LESS than half of the volume on NYSE was in up issues and advancing issues barely outnumbered decliners. 

So maybe today wasn't as massively bullish as it would seem.  The value line geometric index (unweighted average stock price) was actually slightly DOWN today.

There may be a few trading strategies that make sense here, but a bear call credit spread or a bear put debit spread would make sense to me with expirations 2 weeks out from now.

Price Projections on SPY For a Probable Continued Decline 10-1-20

 

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I have produced a projection here with both a projection based upon current short term cycles which are the red lines which project about 6-8% expected declines over the next week from today's highs.

This would be in the higher (more negative) middle of the range of back tested past similar price pattern to our recent few weeks.  

I back tested some failed reversals similar to last week's (which has not failed yet), and saw that similar setups have declined on the order of 10-20% within a week or 2 after a close below the failed reversal.

So that would put us towards the lower portion of the red rectangle on the chart.

That chart shows a price a time window based upon some projections of various portions of the declines that have occurred since the February top.

So if the correction is NOT over yet (which is my bet), then expect a pretty sizeable sell off from here, that could get wild and volatile quickly and be bigger than most people would expect.

From a technical and program trading standpoint, the 200 day moving average is towards the top of that projection range, and that would be the next algorithmic buy point that could see a buying surge if it is touched.

NOW.....IF....prices were to decline to the 200 day average and rebound, a further break to new lows could be a continuation or acceleration of the downtrend point in my opinion.

If have seen many times over the years where prices decline to the commonly watched moving averages and make a short-term rebound after touching them.  I have learned to expect that, and to often recognize the signs that they are just "blips" of automated trading but often don't really reflect a true reversal.

In summary, I believe there is high risk and pretty high odds of some declines from here for days or weeks.  I think it would be wise to NOT be long stocks moving forward until the negative cycle window has passed.

Pete

Get Out of Stocks At This Morning's Open - Oct 1 2020

Currently everything I am looking at, taken together, suggests that after this morning's apparent gap up, the risk is much higher than reward over the coming couple weeks.

I don't have time to put much info or charts here but I will quickly verbally summarize.

• Today there is about a 1% gap up indicated.  There was also a 1% gap up on Monday (which has not been filled).
• Back tests show about a 2:1 or greater risk after the open than reward.
• Back tests show about 66% chance of the close being below the open today.
• Back tests show about 66% chance of prices closing lower than today's close at the 5-6 day forward point (Oct 9th in this case)
• Back tests show about 90% chance of a lower close than today's close within the next 5 days.
• I would estimate the chances of a big decline (like 5%+ in the next 5-6 days at about 33% or higher)
• Short term cycles that I follow are peaking this morning in the context of intermediate term cycles being in a strong downward portion of the cycle.  This info is extracted independently of the other data above, but is clearly giving a confirming downside bias to the historical back tests.

The strongest portion of the coming down cycle appears to be between today and October 13th.

This recent decline has been "weird" in that it never registered any significant fear type readings in the most reliable and consistent measures that I follow (put/call ratios, VIX and VIX/VXV ratio).

The big money is apparently basically unhedged and long both stocks and the stock futures. CoT data shows that the hedgers and small speculator/gamblers were the buyers since March.  Large funds which usually buy rallies, were not buyers since March.

So if prices decline, I don't see any other option than for the big money hedgers to quickly sell out.  It could be a stampede to the downside at some point.  Add to this, the potential for the large hedge funds to begin entering new short positions on a technical break, and the recipe seems strong for a big decline if the September lows are broken.

Lastly from a price pattern standpoint, I had looked at the 9/21/20 decline and attempted reversal day.  It was pretty unique, but in 25 years of data there were 4 previous very similar days.  

• 1 marked a significant bottom
• 3 lead to 10-20% declines over the next 2-4 weeks
• So if there is a close below the 9/21 LOW, I would estimate the odds at 66% or higher of a wipeout type of decline shortly to follow.

Pete

Possible Short-Inverse Set-Up Early This Week

Today stocks are off to a stronger start, but in the context of many things that I am looking at, this could be the last little rally before a strong sell-off resumes.

On a purely objective, back testing basis, a 2% + rally today on lower volume would really fit the bill of a high probability inverse/short set-up.  I have probably posted about these days before, but since most of the market time is not in high volatility down trends, this scenario does not come up often.

Now I won't have all the data until we see what happens today, but if today closes up 2-3% on lower volume, my suggestion is to BE OUT or GET OUT of this market if you are holding positions.

For those of you that are unaware, we currently are in the midst of a never-before-seen level of option speculation on further upside in the market.  In my experience, this speculation will always be unwound or punished.  It is just a matter of when.

Without getting into chart or numbers, I believe that a large amount of the stimulus $ created and distributed this spring and summer has found its way into speculative markets.

• There has been massive call option speculation 

•  This has created a probable "forced" stock buying in mass quantities by market makers who sold the options

•  As the options expire, there will likely be mass quantities of stock to be sold for market makers to get back to neutral positioning

• A huge volume of these options will expire this week, and so it would seem like there will be an underlying down pressure on equities as this week begins to wind down and move to next week. 

 Since this speculative option bubble is greater than anything seen before, the reaction and fallout from it, will likely be larger than what most historical corrections would be.

The call option orgy really got crazy from June through August.  

While it seems crazy, I think that it is very reasonable, and I would actually put greater than 50% odds that the stock indexes in general will fall back below the March lows before the speculative unwinding is complete.

Cycle analysis that I follow shows mid this week as a short and intermediate term cycle high, with a very strong downward phase projecting into mid or late October.

Pete

Oil Stock Prices Look Ready to Rebound to Me 3-30-20

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The chart shows oil prices divided by oil stock prices.

Of note, when there have been major spikes lower in this ratio, oil has consistently rapidly rebounded. 

The other instances showed quick gains of 50%+ in 3-6 months in oil prices.

So volatility is high, but the suggestion here is that short term trading systems can go into buy mode here with stops of course.

The chart shows that of the major lows on this chart, most of them lead to major advances of over a year in time.  The early 2015 was a quick 50% rally in oil followed by lower lows, but still a good short term trade opportunity.

Post "Crash" Rebound Projections for SPY - March 25, 2020

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This chart of SPY shows what are some projections for a continued advance over the coming weeks if the recent lows holds.

This is based on rebounds following some sharp declines into 52 week lows over the last couple decades.

The blue lines represent average MAX gains over 3, 5, 10, and 21 trading days in terms of ATR multiples which bases the projection upon volatility.

That being said, none of the instances in the table below actually gained more than about 23% over the following 1 month.  23% from the recent closing low would put SPY at around $273 which is what the red line represents.

In the comparable past instances a trailing stop of 2 or 3 times the 10 day ATR allowed the gains of the following rally to be captured.  The ATR would be anticipated to shrink as the rally continues and volatility shrinks.  So that is a wide stop now, but could shrink considerably by 2-4 weeks from now.

Click on Table to Enlarge

This table shows the dates of the comparable lows that I am making projections off of.

Click on Chart to Enlarge

The chart here is just for historical context in that the 2 most similar historical precedents to our current environment were 1929 and 1987.

1929 had a more sharply angled and less choppy advance that retraced 50% of the crash losses before rolling over again.

1987 had a quick couple day rebound of 15% followed by a sloppy trading range for a year.


Pete

3-9-20 Stock Market Update and Expectation

The snips here show the results of a scan on past instances in SPY when it was down more than 6% in a day.

SPY only goes back to the mid 1990's, so it is short sighted in terms of history, BUT the data does include a couple of the largest bear markets in history, so it could give us some useful guides.

The implication is that there is about a 2.6:1 greater upside potential over the next 3 days compared to downside.  This is quite strong.  Note that basically all past instances increased 5% or more at some point over the next 3 days.

The lower table shows that all instances made a positive close above the signal day (today) over the next 5 days at some point.  But all of them also showed 2 higher closes over the next 5 days.

And that strategy has given the higher return compared to exiting on the first positive close.

Also note that all prior instances declined at least a little, tiny bit further over the next few days.  In fact looking at the next day's data only (not shown here), all of them made at least a slight loss during the next session.

So the point here is that this is an exceptionally volatile market, but is presenting an exceptionally high reward over the very short term.  If not in the market, a simple strategy would be to enter tomorrow at a limit of today's close.  

Then exit at the first positive close or second positive close OR after 5 days if not profitable.

Average future return peaked at a 5 day hold on this set up.

That also fit with short term cycles which suggest a 3-4 day short term advance is due.  But after than, there may be further downside or retest of the lows.

Continued Extremes Suggest Imminent Sharp (Short Term) Rebound In Stocks - 2/28/20

Some key data points from today are:

• 4 closes in a row below the lower bollinger band on SPY
• 4 closes in a row above the upper bollinger band on VIX
• 2 period cumulative WRSI2 less than 1 

The past history of SPY demonstrates extremely strong (~100%) past history of a high close than the trigger day within the next 5 days.

There was very strong tendency for the next day to close higher.

Also, today was 2 days in a row with gap downs more than 1%.  This also has led to strong rebounds.

• I looked at what happened in past times where the 1st gap down was NOT filled.  And even though prices went dramatically lower the second day, past similar instances suggest around a 50% probability of the 1st gap being filled within the next 5 days.
• That would put price back up at 311 on SPY.

From the most extreme similar instances, the MAX gains over the next 5 days were mostly clustered between 2.25 and 3.5 ATR's (10 period).

• This would suggest that the maximum gain over the next 5 days could be a very sharp rise to between 310-320 on SPY.
• The large gap down from Thursday is currently only 2 ATR's above Friday's closing price, so it seems that that gap fill would be a good target for this rise.
• Assuming we saw a rise and a close above the gap level at ~311, I think that would be an ideal exit time if it occurs.

Pete

Short Term Rebound Is Highly Probable 2-26-20

I have looked at a bunch of different criteria comparing recent action to past history of SPY.

Some key factors that have historically made for short term rebounds include:

• 2 closes in a row below bollinger bands
• Back to back 3% down days
• Gap down of 2% followed by further downside
• several others....

One very simple scan that triggered today is a 2 day cumulative Wilder's RSI2 reading below 2.

• The history of SPY had this set-up 27 times (regardless of bull/bear market), all 27 showed a positive close within the next 5 days.  The average gain was large also, as would be expected given the volatility.

I expect a continued volatile market but with a high probability of a short term rebound over the next couple days.

Currently the short term cycle analysis I follow is suggestive that there will be continued higher volatility with probable lower lows over the coming 1-3 weeks.