High Probability Set Up In Stocks - Short Term Rebound Expected 10/3/19

SPY has closed below its lower bollinger band for 3 days straight.  That itself produces a robust signal with high probability of short term skew to the upside in stocks in coming days.

Factoring an uptrending market into it improves the signal.

Also as of today we are seeing some extreme readings in the put call ratios.  I have looked at these readings coupled with a variety of other combinations of data from today's session, and there consistently is a high probability of a higher close in coming days.

There is approximately 90% probability of a high close than today's close within the next 5 days.  Including any losers, the average trade return is quite good - depending on the scan combination, around 1% expected value or higher.

Most of the scan combinations I looked at had higher expected values by holding for either 2 consecutive higher closes OR two higher closes within the next 5 days.  This strategy dropped the win percentage down to the 80%+ range but produced a higher expected value on most criteria combinations.

In summary, I expected some chop and volatility into next week, possibly with lower closes yet to come, but the odds appear to be high for a higher close above Thursday's close within the next week.

Short Term Rebound is Highly Probable over Next 3-5 Days in SPY ; Longer Term, BEWARE 8-5-19

Click on Chart to Enlarge

There are multiple short term extremes showing up right now indicating high probability of a short-term rebound in stocks.

Based on multiple back-tests of different data sets (price, volatility, put/call ratios), I would estimate the probability of a close above today's close within the next 5 trading days to be about 90%.

The chart above shows the average price action over the next 3 days in terms of 10 day ATR. 
These projections are based upon the price set-up of 3 consecutive closes below the lower bollinger band on SPY.

• The average close 3 days ahead has been about +0.9 ATR.
• The average maximum gain over the next 3 days has been about +1.85 ATR which would put price up around yesterday's low.
• The average maximum loss over the next 3 days has been about -1.0 ATR which is about 4.00 on SPY currently.
• Also of note, for the same set-up, 50% of past instances filled the gap open down within the next 3 days.  So about 1/2 the time we could expect SPY to trade back up to 292.62 or higher within the next 3 days.

Now, on a longer term basis this looks very much like a bull trap topping process, and there are multiple long term price and sentiment divergences to suggest that a bull market high could be in on this recent failed breakout to new highs.

My personal stance is to continue to trade with a bearish perspective as long as new shorter term technical sell signals occur below the recent highs.


Pete

Even More Bullish Call Option Set Up - 3 Consecutive Closes Below Lower Bollinger Band

Click on Stats to Enlarge

Going Back a little over 20 years in SPY, there have been 47 previous instances before today, of 3 consecutive closes below the lower daily bollinger band.  The statistics above show the option trade stats for buying an ATM call option with 1 week until expiration and setting a limit order to exit at 130% gain or exiting at expiration.  This limit order provided the optimal expected value.

This is a very simple scan but is a very powerful set up historically.  Over the next 5 trading days, the MAX gain has been twice as big as the MAX loss in SPY.  This skew provides a profitable equity play here as well on the long side.  Setting a loss limit of 12.5% and a profit limit order of 12.5% has led to an average gain of 2.34% in the past history if exiting at the close 5 days later if the limit orders were not hit.

Pete