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

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

Several Conditions Suggesting A Probable Rebound Coming In Stocks Over 1-2 Weeks or More

I spent considerable time testing current market conditions against past data, and while it does not appear to be a screaming bottom, there are several factors which I rate to be significant that produce some very strong short skew results to the upside.

Some of the condition combinations below produced significant upside skews over the coming 1-2 weeks.

VIX up 20%+
Equity P/C ratio 21/84 avg. >= 1.05

VIX up 20%+
VIX/VXV >= 0.95
VIX/VXV 10 avg. >0.95

Total P/C 5avg. < -1 st. dev
SPY down >= -1%

Based on the large increase in the VIX yesterday as well as an extended period of VIX/VXV elevation one of the more highly probable plays here would be writing an OTM bull put credit spread with 1 to 2 weeks until expiration.

I am looking at spreads that are ATM or about 1% OTM.

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

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

VIX and SPY Bollinger Bands Suggest at Least a Minor Pullback is Right Ahead

The VIX has closed 2 days in a row below its lower bollinger band, which is not a common occurrence.

I have looked at this data and combined it as a filter in a few different ways with other data.  The message is consistently that in the past after similar occurrences there has been a relatively strong skew to the negative in the short term.

Over the next couple weeks the MAX loss has been greater than 2 times the MAX gain on average. 

However, in this LOW VOLATILITY environment, a strong skew does not really mean big price action.  So over the next couple weeks, the average decline to be expected from past data may be ~1.5%.

The cycle analysis timing that I use, also suggests that there may be 1-2 weeks of downward pressure still in stocks.  So these perspectives are consistent and would suggest weakness (or at least NOT strength) through roughly August options expiration.

There are enough divergences showing up here that I feel a high confidence that in the short to intermediate term the market may cool off and not make much more net gains for a few weeks.


I don't have much of a longer term perspective to offer from the data.  I would suggest that in the quest for investment yield, the odds seems to be tipping in favor of money flowing to bonds and away from stocks.

Bonds and notes have major short interest accumulated, and the SP500 dividend yield has fallen below very short term yields on Treasuries.  The suggestion here is that there may be money ready to flow back into bonds rather than piling into stocks on a breakout to new highs in the SP500.

For those who may have interest in commodities and currencies, there is much evidence in the underlying positions that we are quick approaching a commodity rally and probable decline in the US Dollar index.

Some notable markets with extreme short interest and probable sharp rallies to come are gold, silver, coffee, sugar, among others.

Oil actually is more the opposite.  It has come off of record long positions and extreme bullish sentiment, and so from a pairs trade perspective, a long gold/short oil trade may make sense.


Pete

Initial Rebound Probably Near Complete - 2-14-18

I have looked at the market action of the last couple days a few different ways with the idea of what has happened in the past after sizable sell-offs and then the subsequent rebounds.

Today marks 4 days up in a row, and yet price is still below the mid line of the bollinger bands.  So we a have strong rebound after a sharp sell off with wide standard deviation bands.  I have looked at some slight variations of this theme, looking at VIX bollinger bands, and also at multiple up days with the daily MACD still in a down position, and the results are mild to moderately bearish for 1-2 weeks.

One of the scans that was more bearish was 4 days up in a row with today being up 1% or more.  That had a notable bearish skew in forward returns for a couple weeks based on past similar instances.

I also took some time yesterday to compare the most similar past sell offs which then resulted in a failed rally and lower lows for the move.  And the retracement levels were 50-75% of the preceding sell off.  Today hit 50% on the retracement, so we are already in the lower end of the range where past rallies have peaked. 

In follow up to yesterday's post, the VIX/VXV ratio fell back just below 1.0 today.  The past few comparisons of periods of the ratio spiking above 1.0 with a waterfall decline, show that the ratio dropped back to below 1.0 for a few days here and there near the top of short term rallies as prices worked into a retest of the waterfall lows.  So that is still my best idea here, we are near the short term peak of a rebound which is expected to challenge the recent lows.

The VIX also fell 22% today.  I scanned for times when the VIX fell over 20% in a day, and 9 out of 13 had notably greater MAX losses over the next 5 days than MAX gains.  The few instances that did not have greater declines than gains, basically just kept on going up in the context of the recent bull market.  So this suggest we are very near to a point of recognition - either we have had a spike low and price is likely to march higher, or the rally will quickly fail and the next several sessions (1-2 weeks) will have a markedly bearish skew as stocks retest the lows.

As a side note, but somewhat relevant.  I have stated this before on the blog, but price bars with very long tails, like that from last Friday 2-9-18, have a tendency to have retests of the "tail".  I have observed this personally that very wide range bars with long tails are likely to have price come down and tests the lows.

I have heard Steve Nison of candlestick fame, state that on their studies of candlesticks, a successful  "hammer" candlestick bottom reversal has ~60% chance of having price come back to, or below, the mid point of the tail.  So even if a lower low does NOT occur relative to the reversal bar, there may be ~60% chance of price coming back to the mid point of the tail.  That would be ~258 on SPY.

Now the 2-9-18 candlestick is not really a classic hammer candlestick, but in my estimation, a very long tailed reversal with a close towards the upper end of the range, probably has a similar profile.

So my best idea of the odds from this point are for price to come back down to test that 258 region on SPY within the next 2 weeks.  I would not be surprised to see a rally attempt kick in again from those levels.

As another side note, since much of trading is automated computer algos which incorporate key technical indicators and moving averages, I have noticed tendencies for key moving averages like the 200 day moving average to trigger buying programs.  That did occur on 2-9-18.  And if the average is touched again on a retest of the 2-9-18 low, I think it would be reasonable that the buying kicks in again.  BUT, the more times the average is touched without subsequent gap ups and closes above the open, the more that indicates a possible failed rally. 

THEN, if after a couple rally attempts off the average occur, and price is able to break lower and make a lower low, there may be some freefall below where the programs have spent their buying around the 200 day average, and now price rapidly declines to the area of the next significant prior low/high from the uptrend.

In this case, while there are minor lows and highs during the uptrend over the last year+, the last real basing and significant highs/lows were Sept-Nov 2016 in the 208-220 region on SPY.  That seems like a long shot, but if price chops at the 200 day MA and ultimately fails in coming weeks or months, I would not really be surprised to see those 2016 levels be retested on the next move down.

That is looking a long way ahead, but I think it is important to have some view of the risk present at key break points in a market that has been as one sided and speculatively run up as stocks have been in the recent bullish run. 


Pete

Dual Time Frame Price Channel Throw Over in SPY - Topping Probably 1-18-18

Click on Chart to Enlarge

The top chart here shows SPY on a 60 min log chart going back to August 2017.  I have connected a couple key highs in the run up since then, and currently price is hanging out above the upper boundary of the channel on this time frame.  The next chart will show this with a higher time frame also.

Click on Chart to Enlarge

This chart is a daily log scale chart on SPY going back to the 2016 low in January after the 2015-2016 correction.  I have drawn some channel lines on this time frame we can see that SPY is also hanging out above the upper boundary line of the channel for the last week or so.

So we have a dual time frame move up above the upper channel line coupled with extremely one sided bullish sentiment on the market.  I have showed some similar events in past markets, and in my estimation this is significant and could be a point where prices peak and begin a multi month consolidation.

Currently the market is showing some unique signals in real money sentiment.  

For instance, today was the 3rd close in a row above the upper daily bollinger band on the VIX which typically would show a cluster like that at the bottom of a correction, or early in the phase of a sell off.  But yesterday prices on SPY closed above the upper bollinger bands and at a 52 week high.

I can't find any instances of a similar occurrence in the past 23 years.

Also when the VIX is stretched to the upside, usually the put/call ratio is rising also, both of which indicate rising fear or pessimism.  But currently, the put/call ratios have been at extreme opposite conditions both short term and on a multi year basis.  So the pairing of relatively elevated VIX and relatively extreme low put/call ratios is at a discrepancy I also can't find a comparable scenario to for the last 23 years by a few different measures.

Price is the final result of all other market info, and so the multi time frame extreme throw over of the upper price channel of the rise for the last 2 years seems to me to be the final say of significance.

Markets can run up or down for extended periods, and so when staying with the trend this is where a methodical trailing stop adjustment scheme is so key to stay with the trend.

Further Signs of Excessive Complacency From Put/Call Ratios 1-15-17

As of Friday's close,there are further signs of a stretched or imbalanced condition in the put/call ratios which suggest that stocks may be within days of an intermediate high.  The table below shows when there is a "sell" signal from the total put/call ratio while the equity put/call ratio is at a longer term complacency imbalance.  I have removed clusters and we are left with some notable tops in recent years.

Click on Stats to Enlarge

I have looked at the data from a few angles including:

• total put/call "sell" while SPY closes above bollinger bands = BEARISH
• total put/call "sell" while equity put/call ratio is imbalanced = BEARISH
• total put/call "sell" while MACD daily and weekly are UP and SPY closes UP = BEARISH
• total put/call "sell" at a 52 week high = BEARISH

The total put/call "sell" is a 5 day average that is more than 1 standard dev. below the 20 day average.

Also recently there has been a cluster of days where the VIX rises while SPY also rises.  I have looked at the in conjunction with a relatively low VIX/VXV ratio and it is mildly bearish over the next few weeks on average.

Also, I have a "gap indicator" which factors into account cumulative gap direction and relative size and over the last week it reached to an extreme level indicating possible "exhaustion".  I filtered that condition with times when price closed above the bollinger band, and the result is also moderately bearish looking out to about 1 month and then results are typical after that.

Also I looked an example of extreme price momentum in SPY, where the daily and weekly MACD are both positive and in an UP position with no bearish divergence and price has closed above the upper bollinger band on SPY for 2 consecutive days.  Removing the 2018 instances from the last couple weeks, there were not many instances but 3 out of 5 showed sizeable pullbacks of greater than 2.5% over the next 2 weeks.  The negative skew didn't last longer than a couple weeks, but possibly this extreme momentum puts stocks at a spot of probable near term "profit-taking".

So in summary, on a long term basis stocks have historic levels of complacency and indication that the investment crowd is very "one-sided" in the bullish camp, creating a condition of long term risk for stock prices.

On an intermediate term basis, I put the most weight on the put/call ratio studies mentioned above based on personal experience.  And currently, this real money gauge is suggesting a negative skew to forward market prices for several weeks or months.

And in conjunction we have some signs from VIX, gaps, and price momentum, that stocks could be near to a shorter intermediate term correction when comparing to past similar data.

Looking at price cycles currently active in the market, SPY is currently near a peak of the upward portion and from my most recent analysis, the currently active cycles will be creating a downward pressure for several weeks. 

Pete

Low VIX Readings - Probable Short Term Weakness

I ran a simple scan over the weekend looking at time when price on SPY made a new 52 week high, and also the VIX closed at or below -1.9 standard deviations from its 20 day average.

That was the simple set-up which occurred Friday.

The stats show about 2. to 1 greater MAX loss than MAX gain over the next 3 and 5 days.  The skew is still notably negative at 1.75:1 at the 1 month mark forward from the signal.

Also I looked at some option today, and noted that the 259 strike put on SPY which expires this Wednesday Nov 8, was trading at a level that only required a 0.39% decline, by close on Wednesday to take the option to a 100% or greater gain.

So I looked at the 27 instances that I filtered from the above scan, and found that 22 out of 27 instances declined at least 0.39% within the next 3 days.  So there is about an 81% chance of a double or more in the option value by this measure, and seems to be a reasonable speculative play.

SPY Bounce Possibly Near an End - Projections for Further Decline - 8-25-17

Click on Chart to Enlarge

Currently the strongest portion of the expected rebound based upon recent studies is completing.  The recent volatility spike showed the strongest closing returns at 5 days after the signal.  The time has passed now over the last session or two.

So it is possible that price continues to advance, but the recent 5 day rebound has been relatively weak.  From both price and breadth measures, my take is that the recent rebound is still a counter trend move that is likely to fail and lead to new lows.

Based upon the price action coming down off the highs in SPY, where the "C" move was larger than the "A" move, it is quite possible that the next move down will be larger again than "C".  That would be an expanding pattern.

I have often found the speed line of the A-C points to be a useful approximation of where the next direction move down will find support.  So in this case if price breaks to new lows, I will keep that in mind if we see volatile action or a sizable gap down in the region of the speed line.

I have a green horizontal support/resistance line on the chart as well which has 3 past touch points on the chart, and so it would again be a target on a decline from current levels.  So basically a decline to 240-241 on SPY would be a very reasonable suggestion for a near term move.

That target would also also fit with the past study on put/call sell signals in July/Aug which showed 8 out of 9 had declines of 3% or more in the next 4 months.  SPY has yet to decline 3% from that signal origination in late July.

Lastly here, the VIX historically has an approximate 19-20 day cycle.  And based upon that it appears that the next VIX high could be roughly expected toward mid September or a little earlier.


Pete

SPY Call Option Exit 8-22-17

Click on Chart to Enlarge

The limit exit of 2.50 for the SPY Aug 25th 243 call option was achieved today.

The purchase was yesterday morning at a price of 1.10 for ~125% gain on the option.

And the option price on the trigger day of the VIX up >30% study 1.70, and so the 50% gain from that trigger level was also achieved based on the trade plan I detailed in the post.

The key take home here is that the biggest factor involved in the option price is the underlying stock price.  And when set-ups occur with consistent skews in forward price moves, indicating a strong tendency for price to move sharply/significantly in the time frame of the option, the options can provide a profitable speculative vehicle for the trade.

Also another finer point is that the VIX up > 30% criteria was significant in its own right, but when combined with a close look at the short term technical analysis, showing that there was still some probable downside after the trigger, it enable a better entry price - in this case the improvement was an entry at 1.10 rather than 1.70 or close to it.  The result was that on this trade I was able to get a return of 125% rather than 60%, while still keeping to the parameters and backtest on the trigger study.


Pete

Another Short Term Bullish Set-Up - Great Call Option Opportunity on Backtest 8-17-17

Today SPY sold off hard similar to what occurred last Thursday.  The VIX rose 32% on the day, similar to the huge rise last Thursday.

Based on the back tests I've run, this is not really bullish over the intermediate term.  The closing returns on SPY at 1 month after the signal has been barely positive, which is worse than normal.

But over the short term, particularly for about 1 week, the back tests are positive, with average positive closing returns on SPY being more than +1% at the 4 and 5 day marks after the signal.  Then the gains start to fade to near 0 at 1 month after the signal.

However, the SKEW to MAX gains versus MAX losses over the next 5 days is a paltry 1.09, meaning that the average maximum gains are barely bigger than maximum losses over the next week. Basically what this means is that there were some big downers in the group, rather than a consistent tendency to trade in the positive without much downside.  That small skew and real possibility of some big downside is not what I want to see for taking an equity trade.  So I would avoid a simplistic long trade here on the equity ETFs.

That being said the tendency to rebound to some degree is so consistent, that the options have provided an outstanding profile for profit over the week following these signals.  Every instance flagged in the backtest of about 22 instances has shown MAX gains of 0.96% or more in SPY over the next 5 trading days.  And that has translated to some consistent gains in the weekly expiration call options.

The following table shows stats based upon my model for the forward change in the option price for an at the money call option with 5 days until expiration.  And the results here are ~90% of the past instances made MAX gains of 80% or more on the call option during the next 5 trading days.  The way I construct the model is actually conservative (it is not based on actual contract data), and so in reality the results are probably even mildly better than this.

So the strategy here would be to purchase an at the money SPY call option with an August 25th expiration and then set a limit order to exit at 80% gain in price.

Now digging deeper into the past instances near term behavior, about 3/4 of the past instances showed at least some intra day loss on the day following the signal, and the average intraday drawdown was pretty high at ~1.5%.  So this would argue that the odds favor setting a limit order to enter the trade that is equal to today's closing price for the option or lower.  For those with skill in short term analysis and ability to watch the markets, could watch a short term intraday chart tomorrow to see if short term bullish divergence develops on the technical analysis, at which point an entry could be made at the market.

The following table shows some of the MAX gains in the call options and some of the dates for you to reference the charts.  There are previous instances that dont fit on this screenshot.

The past instances show that if the day following the signal gaps DOWN, then there is a strong tendency for a short rebound to follow and for the day to close higher than the open by a wide margin.

Also if the next day gapped UP, then the future returns in the ETF itself are more negative.

So to translate this into an action plan, if SPY gaps up tomorrow, I WON'T buy the option at the open.  But if it then trades lower during the day and creates some short term bullish divergence, then I will buy and set the limit gain order for 80%.

If SPY gaps down, I will buy the Aug 25th expiration at the money SPY call option at the open and set a 100% limit gain to exit.

No Clear, Consistent Forward Bias Is Evident Currently In My Backtests - SPY 6-29-17

For the last couple weeks stocks have traded sideways which the scans I ran at the time had suggested there would be limited upside.  Then this week a little selling has returned in choppy fashion.

I ran some various scans today looking at current price movements, indicator formations, and real money sentiment.  Most of what I looked at showed forward returns that were somewhat neutral, certainly not tradable from the criteria I like to see.

So currently I am deferring to the last significant studies I noted which were late May and again around the June 9th high in SPY which both suggested a notable bearish skew for 1-2 months.

Despite today's selling the NYSE TRIN indicator dropped substantially which is not a typical pattern of rising on a sell off.  The Nasdaq TRIN is showing a more typical rise the last few days.  I don't know if this oddball reading on the NYSE TRIN adds weight to the idea that a low is not yet at hand.

The VIX chart shown here is showing a pretty typical configuration for a long in an uptrend.  We see a spike of the VIX above the longer term bollinger band while the shorter term bollinger band has risen above the longer term band.  I have shown this indicator overlay many times in recent years, and if you want more info on it you should be able to find related posts using the search bar for the blog.  Search VIX and Bollinger Bands.

Now the VIX has been at an historical extreme low, and so that has figured in to the recent scans indicating a bearish skew for SPY.  So there is some conflict here, but be aware that the short term set up is looking like a buy.

More Signs That a Sell Off Is Looming in SPY - 1-26-17 Stock Market Update

With the break to new highs in SPY, there are now some intermediate term bearish divergences which are prominent.  My perspective here is that stocks have more downside risk over the next couple months in comparison to upside potential.  With that said, the most comparable environments that are showing up in my scans are environments where stocks may spend more TIME in a general uptrend, but there may be a rapid sell off which more than wipes out the lazy gains which occurred preceding it.

Click on Table to Enlarge

The table here shows the results of a scan with the following filters:

• New 52 week high
• Close > upper bollinger band
• VIX high is < 12
• VIX close is < 11

Then subsequent readings (3 of them) which occurred in clusters after the first reading were removed.  This left us with basically 2 past market periods.  

1. Very late 2006 into early 2007 - which resulted in the very sharp sell off right at the end of February and into mid March.
2. Mid 2014 from late June to July - which was followed by a somewhat similar brief, but sharp drop into August 2014.

Looking at the table shows a strong downside skew over the near term, however, with volatility being so low, that does not really portend a big move.  Even looking out to 2-3 months the skew is negative, and still relatively strong at 2 months.

Another notable part of the info in the table, is the very large skew in the MAX gain/loss of the VIX.  There just has not been much history of the VIX staying at 10 or 11.  So if you trade volatility, there may be an indication for action here.

In fact the expected swell in the VIX may be the most significant aspect of this set up.  There is a profitable option play on my model based on this scan.  Buying an ATM put with 2 months until expiration and using a 50% limit order gain after entry worked well on average.  But there are only a couple similar instances.  The point is more that, even a moderate 1-2% decline, in combination with a possible larger % increase in the VIX at the same time, could give the put options a boost to those levels of paper profit.

Part of the question is then WHEN a decline would be anticipated since these lazy markets can go for weeks without much downside.  I am not an independent expert on cycles, but some of the information which I have followed for long enough to feel there is some pragmatic use in, suggests that the upward current could crest somewhere around next week.  Then there may be more downward current (or at least less upward current) into early March.

So my general take here is that there will not likely be much further % gain in SPY over the next couple weeks, and then there may be a sharp but brief sell off in the Feb-March time frame.  Given the low volatility and the couple past comparable time periods, if a decline occurs, it may be expected to be mild, like 2-5%.

I am choosing to make an option play here, but certainly a paired limit/stop order on a SPY leveraged ETF, or even on a VIX tracking ETF could be very sensible given the skews in the data over the next couple months.  

If there are further specifics on trade orders for the ETFs, comment or reply, and I could get something up here.

Pete

VIX and McClellan Oscillators Give Further Warning That Stocks Will Pullback Soon

Click on Chart to Enlarge

Short term, the hourly chart of the VIX is in the formation of a sell warning which I have highlighted many times on the blog.  VIX is below the longer term bollinger band (and the standard bollinger band) and the shorter term bollinger band is below the longer term band.  So this is a dual time frame type of signal that there is a statistical extreme or imbalance in the short term trend relative to the longer trend.

Additionally, as of current intraday values, the daily VIX value is below its lower bollinger band.  I have backtested that simple condition going back 20+ years, and there is a short term negative skew in forward SPY returns for a week or so after the signal.  Longer term, looking forward several months that signal itself is not really bearish, but the forward returns are a little muted.

Click on Chart to Enlarge

This chart is of the McClellan Oscillator which is a measure of advancing and declining issues trend.  It basically works like other oscillators in that trends will tend to turn NOT when breadth is at a peak or trough, but after an extreme followed by a divergence in the oscillator relative to the price action.  In our current environment, there are bearish divergences in the oscillator indicating that the new price highs are occurring with fewer stocks advancing than at previous highs.

Now the really significant thing I see (but without any backtested data), is that the value of the oscillator is still below zero despite the new highs in prices.  This occurred earlier this week as well.  Now, again without backtesting, I can only speak to memory of observed cases like this, but notably the Sept 2014 price high, occurred with consistent McClellan oscillator readings below 0.

So from my perspective the current environment of stalling after a breakout to new all time highs, short term divergences and waning breadth, and major "smart money" selling into the breakout, is a caution and potential for a failed breakout which could lead to a significant correction.

My suggestion is certainly don't buy here.  For short term speculation, I don't have any real strong bearish study to alert to, but from the factors I have looked at here relative to VIX and bearish divergences, it seems there is at least a mild negative skew for upcoming weeks.

Pete

Put Option Trade on SPY 6-8-16

Today was a potentially important day in stocks given the backtests which I ran today after the close of the market.
Here is a relatively simple scan:

• VIX/VXV less than 0.86
• VIX up more than 2%
• SPY up more than 0.1%

Now the VXV has a limited history going back about 8 years.  So we only have instances from the current bull market to judge.  However, I ran the same basic idea and removed the VIX/VXV filter and instead ran added a filter of the 5/63 day total put/call ratio being less than 0.92.  And the same approximate results occurred even with different days showing up.

Click on the Chart to Enlarge

This chart shows the summary of future returns for the next 6 months.  We can see there are not many instances, but basically stocks had run out of steam and were set for a significant pull back over the coming weeks, beginning soon.  The skew is very negative over the coming couple months.

As for the options there are profitable plays in several different strikes and time frames I am sure.

But I think the most sensible is the following purchase of an option.

Click on Chart to Enlarge

This chart summarizes the past results of buying an at the money put option with 2 weeks until expiration and setting a limit order to exit at a gain of 40% or letting the option expire worthless.

7 out of the past 8 instances hit the limit order making for a very nice opportunity.

In the current circumstance the closing value of SPY was more negative at 8 days forward compared to 10 days forward, so it indicates that the maximum gain was likely to occur within 8 days from entry of the option.  So the option to purchase would be the standard June 17th expiration option.  In this case I would go with the 212 strike put on SPY.

The key to long term success once a profitable method is obtained is to have as close to optimal money management as possible and to always stay "in the game".  So my point here is that the above profile suggests an aggressive position is very justifiable.  But if you use a simple % of account allocation on all trades, then there are many profitable orders.  Buying 2 months until expiration and setting a 70% or 130% limit gain and letting losers expire worthless will also both provide profitable plays based on past stats, and allow for this month's expiration to pass if there is anything holding the market up through expiration.  

So it may make sense to take the full position and split it into 2 parts, with half in the 2 week until expiration and half with a 2 month expiration 212 SPY put.  

On the equity side, entering short SPY here and then setting a paired limit order and stop loss order of 6.75% or exiting after 2 months was a simple a nicely profitable trade.  The expected value on SPY was about 3.5%.  Stats allowed leverage of 3x on the whole account if using a triple leveraged bear ETF.  So the return expected on the account would be about 10% expected over the next 2 months by using the 3x inverse ETF.  This would be a more conservative play, but one that could be used in all types of accounts and provide a standout return during an expected downtime in the markets.

I know this post has a lot to sort through, so comment or reply if you have questions regarding the info or your situation.

Pete

Intermediate Term High Likely Completing In SPY 4-19-16

I ran a pretty simple scan today on the history of SPY (going back to fall 1995).  The criteria were as follows:

• VIX high is less than 15
• 5/63 day total put/call ratio less than 0.85
• Daily MACD is in bearish divergence position

The forward returns showed a nearly 2.4 times greater MAX loss versus MAX gain over the coming month.  And buying a 1 month until expiration at the money put option on SPY had a 2 out of 3 chance of at least doubling in price prior to expiration.  So that is a very profitable speculative opportunity to buy the put here and simply set a limit order to exit at 100%.  Let it expire worthless if it loses.  There is no stop.

Also there is a dual time frame (hourly and daily) MACD divergence on today's highs in SPY.  These types of set-ups have been highlighted many times on this blog and often nearly pinpoint a significant turning point for multiday or multi week changes of direction.

So the point here is that SPY is at a lower high than the last intermediate term high in November, and SPY is displaying the type of set up which indicates a completed rally.  So the easy money has been made.  The expected returns for the next several weeks are likely to be flat or negative based on what I have looked at.  

Let me know if there are any questions or specific scenarios you want further info on here.

Pete

VIX Bollinger Band Sell Signal on Stocks at SPY Gap Fill

VIX Hourly Chart with Bollinger Bands Giving Sell Warning for Stocks

Today the rise in stocks coincided with a dual time frame VIX sell signal which I have highlighted many times here on the blog, with basically all being timely early warnings that a rally in stocks is ending.  The easy money is made, and the downside risk outweighs the upside potential in the near term.

As noted above the hourly VIX closed below its lower bollinger bands on 20,2 and 126, 2 settings and the 20, 2 lower band was below the 126,2 lower band.  What this means in short, is that the VIX is at an extreme low level relative to the longer term trend.  This typically lead to some mean reversion or some type of smart money activity understanding the imbalance, and price halts its directional move.

SPY gap down at 204 is now filled with extreme short term complacency in the options market

Today's action in SPY filled the open gap down at 204 on SPY.  This is the open gap down level which I had discussed a few times as the obvious target for the rally.  Now as a side note, after observing action of individual stocks at support and resistance levels around large gaps, I have observed that a common mode of price action is for the gap to be completely filled prior to the final counter trend price move high or low being in place.  So what often happens, is after the gap is filled, price reacts briefly (in this case it would likely lead to a brief sell off in stocks) and then price moves to a new extreme for the counter trend move which creates a more classic divergence pattern in the technical analysis and a more likely final high or low.

So in our case, this would suggest that SPY may briefly sell off here, and then rally up to new high for the move which would likely be in conjunction with stark daily time frame divergences in the MACD and other indicators.  This would also, likely allow time for the weekly stochastics to cycle up to an overbought reading and create a dual time frame signal with weekly overbought, and daily overbought with bearish divergence which is a great sell set up in technical analysis.

I don't have a real strong opinion here as to whether the bull market is over or not, but there are multiple signs that the current trending move to the upside is about to stop and lead to some choppier action if not an outright downside reversal.

I will update with stats in the near future.

Pete

McClellan Oscillator, NYSE TICK, and VIX All Showing Bearish Divergence With SPY

On today's rally in SPY up to touch and close above the 200 day moving average, there are multiple short term divergences occurring.  This indicates that stocks could pull back from this level immediately.  However, in a previous post I had highlighted unfilled gap downs on SPY, with the 204 level being a likely target for this rally, even if the market were to roll over into a bear market.

So currently, that gap is still unfilled and only about 1% above current levels.

McClellan Oscillator Overbought with Bearish Divergence

 McClellan Oscillator is now showing a sharp bearish divergence today after a recent overbought reading.  If stocks are in a counter trend rally to a long term down trend, I would expect the top to occur very quickly.  Counter trend moves tend to create a spiky short divergence pattern in the McClellan Oscillator.  If stocks are going to move to new bull market highs or have a sustained rally, a more sloppy drawn out divergence pattern is likely to emerge.

NYSE Tick Showing Bearish Divergence on Hourly Time Frame

 This is an hourly chart of the NYSE TICK index which is a short term measure of breadth.  We currently see a sharp bearish divergence relative to new price highs in SPY today for the rally up from February lows.  This again implies that the trends ability to sustain is in question.  What is occurring is that fewer stocks are moving higher than were earlier in the move.  That is classic action as a move tops.

VIX Showing Non-Confirmation Relative to SPY

Since the VIX is correlated inversely with stocks, we would expect the VIX to make a lower low when stocks make a higher high.  In this case, the VIX did not quite make a lower low.  The hourly VIX chart shown here shows that the VIX is hovering above the longer tern bollinger band on this time frame.  If the VIX pokes down to this level, that would be further sign of a statistical extreme and probable mean reversion ahead.  So let's keep an eye on this.  But even as it stands, this is a bearish type of signal.

Certainly as price has moved up to the 200 day moving average and daily stochastics shows a bearish divergence, money flow index is overbought, and the short term measures here are displaying bearish divergence, I think that for trading purposes, anyone who is long would be wise to exit.  That way you are out of the market and ready for the next move.  Expect that it will be a few days or more before stocks make a possible top.

Keep in mind the stats I recently showed regarding a SPY inverse etf trade, or a SPY put option trade.   Those looked at price movements likely over the next 1 month.  That study is still young, and implies that with the pop higher today, the reward to risk profile may be even better.


Pete