SPY Aug 25th 243 call Option Entry

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After the set up of the big rise in the VIX last week, I had laid out a trade plan to buy a near term SPY call.

However, as of last week, despite a sharp drop in SPY, there was not even a 15 minute chart bullish divergence, present, and so I felt that it would be likely for at least a poke lower to create some divergence before a multi day rally occurred.

And that is what happened this morning, with a nice 15 and 30 minute chart bullish divergence after a slightly lower low than Friday's.

I entered a little bit off this morning's low, and bought the Aug 25th 243 strike call.

I went through the stats from last week's post and found some data corruption in my spread sheet which altered the stats somewhat.  The win % on the set up is ~80% rather than 90% and the optimal limit exit is 60% gain rather than 80%.

So I am using actually a 50% limit gain from last Thursday's close which is the trigger day of the study and the comparable price for the backtests.  And since the price of the option was currently lower, I am lowering the limit exit slightly to increase my probability of a profit on a short bounce back up to 244 to 245.

I have a limit order of 2.50 in for the exit, which would probably take a move back up to near 245 by mid week to fulfill the exit limit order.


Pete

Stocks Coming Off Multiple Time Frame Bullish Divergence - Probable Rally Ahead 2-12-16

If you look at the stochastics in weekly, daily, and hourly time frames on SPY, you will see that yesterday marked basically a triple time frame bullish divergence.  This is a powerful bullish set-up.  And today's price action confirms the likely bottom completion.  I would suggest that the near term outlook is bullish from this point.

I personally view the current market point to be somewhat similar to the July 2008 bottom in SPY.  However, the market was more deeply oversold at that point.  In the current environment I feel that a major support line in the market has been established in SPY/SP500 at the level of the August and February lows, as well as lows going back to 2014.

IF these lows are broken after a multi week rally attempt from this point, I think that the market could experience a large sell off.  We have seen such behavior in gold, silver, and oil in the last 1-2 years.  The technical set up was there for a significant bottom (even weekly MACD bullish divergence), but when it was broken, the prices had a lot further to fall.  The market was very weak in order to break a low that "should" hold, or that has all the typical sign that it could be a bottom.

The 195-204 level on SPY would be the target range for the top of a "failed" rally which would lead to another break to lower lows, and indicate in all probability a bear market is indeed in place.

Pete

Waiting For Some Divergence To Anticipate a Rebound In Stocks

Currently as I review the MACD charts on SPY time frames from 15, 30, 60 minutes, there is no classic bullish divergence on any of those time frames.  So that leads me to suspect that the short term down trend may not be complete.

Today stocks are set to gap up, but I would not be surprised to see price fails to rally in a significant fashion before another push to lower levels is made.  That being said, IF price does push to a slightly lower low with some bullish divergence and price then reverses higher, I would anticipate a brief rally attempt which may meet resistance in the 195-196 region, which would be a pretty sharp move likely.

If SPY gets hammered down today with another major sell off after then open, then it would seem more likely to me that the August lows could be tested this week.  So in short, I would not go long the equity side here yet, until at least a bullish divergence is present and price confirms a little upside with a bullish cross (moving average, MACD, etc) on one of those lower time frames.


Pete

QQQ Hourly MACD Bullish Divergence - Early Week Rally Probable Next Week

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This is an hourly chart of QQQ.  Evident on the MACD below the chart is a pronounced bullish divergence between the MACD and price.  Price made a lower low, and the MACD made a higher low and reversed modestly higher today.  This is not enough to trigger a buy signal in my trading algorithm.  But it won't necessarily catch every turn, especially on a short term time frame.

Its seem likely that price could form a short term rebound of at least part of a day, and maybe about 2 days.  Now there is certainly potential even for new highs, but the weekly chart appears solidly bearish at this point, so I don't necessarily count on new high to create the classic multiple time frame bearish divergence which I mentioned in my stock market top video last week.

At this point, my expectation is for a brief rebound from these levels, followed by a move to yet lower lows for this decline.  I won't offer any more expectation than that currently for the short term trading time frame.

On an investment point for stocks, it seems like the only reason stocks have held up is "free money" that has continually been shunted into stocks and stock futures in the last couple years of quantitative easing.  So if long stocks, the February low would be my suggested stop loss point to exit investments.  On could certainly rationalize just remaining long stocks with a stop at that support level or with some % based trailing stop.  That would allow continued appreciation.

Pete

DDD Technical Analysis and Short Interest Analysis

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This chart is a daily chart of DDD.  I bought a May 29 strike call on it yesterday.

The technical position of the stock is compelling for a rally here in my opinion.  Price has under cut a low from March 2013 (not visible on this chart) and reversed higher here.  Stochastics is showing a weekly and daily bullish divergence on the low Tuesday in conjunction with a very high volume gap down and under cut of the January lows only to reverse and close in the upper end of the range and above the January lows.  This has the appearance of a failed break of support which often provides a high quality long entry.

There is money flow index bullish divergence on the recent leg down, indicating that the downtrend is running out of steam.

The stock is heavily shorted with 33% of the float short as of 1/15/15.  The short interest ratio is 12.5 which is rather high and indicates plenty of short covering potential on a rally.  While I don't have detailed data on the underlying short squeeze trigger price, I am estimating that a rise to the $35-38 level will likely cause some short covering based on the short interest increase from October to December.

Another factor here is that earnings comes out 2/26/15 before the market opens.  Given the oversold technical position of the stock with bullish divergence, I would give better than even odds to a bullish response during this earnings period.

Pete

Why I Expect Oil to Rally When Everyone is Bearish

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This is a chart of crude oil with Commitment of Traders positions below the price chart.  I wanted to give a little more detail on my perspective on the energy complex.

Of note on the large speculators positions, they have gotten progressively more short until early December which is their normal pattern.  They are the money that drives speculative trends.  Interestingly however, as price began to accelerate down ever faster at the beginning of December, the large specs have not increased the short position.  At this point there is a bullish divergence in the positions.  So crude oil has fallen 33% without the large specs increasing their short position.  This type of divergence is pretty classic as a trend ending pattern in underlying positions.

For basic understanding, first realize that the money that drives trends comes from somewhere.  And when the biggest money that there is, which drives the price trends, no longer follows the trend, the implication is that they do not have any more fund capacity collectively to participate in or push that trend.

So we have certainly ample evidence of that with a multi week massive decline but no further shorting by the large specs.  Additionally, there is now in the last few weeks at least a modest return to the normal commercial/smart money pattern of buying as prices decline.  So that indicates to me that the very directional commercial capitulation stage of this decline is likely waning.

Additionally, the daily MACD is demonstrating bullish divergence, and the money flow index is demonstrating pretty classic reversal divergence.  The money flow index basically looks at price and volume and typically demonstrates a substantial lead time with prices.

Taken together, it appears to me that energy prices (including natural gas, heating oil, gasoline) are likely to stage a rally very soon.  Whether or not it will be a bear market rally I don't know.  I would lean towards believing that because of no weekly time frame MACD divergence currently at these lows.  I think it will more likely turn into a volatile basing period or a rally followed by a failed breakdown to new lows before prices may bottom longer term.  But that is looking out kind of far for my purposes.  Really I am just interested in catching the next swing up, which I expect to be quite swift given the major oversold condition of this market.

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For those more interested in equities, this is XLE which is a major ETF covering oil and energy related stocks.  Notice how it has not maintained the aggressive decline that oil has.  And it also is displaying a drawn out bullish divergence on the MACD with a more classic chart pattern bottom with a failed breakout below the December 16th low, followed by an immediate reversal higher.  This indicates a stop running move in the market and that the buying interest was picking up right at that low as other (dumb money) was selling out or shorting in the break.  This makes the dumb money about as wrong as possible and the smart money about as right as possible.

For trading purposes the XLE etf may be a better purchase or near term speculation than crude oil itself.  That remains to be seen, but just understand there are several ways to participate in this probable reversal.

Time to Buy Oil or Speculate on Call Options

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The chart above is USO which is an ETF that tracks crude oil prices.  Obviously anybody at this point is aware that oil has fallen substantially.  That fact in and of itself is reason to consider buying oil or putting it on a speculative watchlist.

And when I say that "anybody" is aware of crude's decline at this point, I can say from experience in recent years of market cycles, that there are certain social "tells" that are pretty raw psychological indication that a trend is near its end.  Dependent upon your social circles, and how much you much interact with "the public" etc, you may be able to get significant information from just making note of ANY comment on a particular market by "the public".  Recently, within the last 3 weeks, I have heard people comment how low gas prices are - people that I have never heard mention prices of anything in any other conversation.  Market prices are not even on their radar. 

So if you think about the herd psychology and obviousness of the trend which must be occurring for their brain to now verbally note this in a group of others, where the potential for criticism or confrontation of significance exists, it seems to me that this is a very REAL and astute indication of the end of a trend, when the "dumb money" is compelled to note it.

So this is the current backdrop in which we find oil/energy prices.

Now we currently have other technical indications that the trend is ending. 

There is triple time frame stochastics bullish divergence (weekly, daily, hourly) at the current low.

There is daily time frame MACD divergence at the current low.

The recent consolidation on the last couple weeks formed a triangle, which typically is a pentultimate price pattern, meaning it occurs just prior to the last move of a trend.

There is now substantial Money Flow Index bullish divergence (which takes volume into consideration) and the trend in money flow appears to be turning up.

So moving to the chart above, there has been a moving average crossover of the money flow index after an extreme oversold reading with bullish divergence.

AT A BARE MINIMUM if you are short oil or energy at this point, I suggest you cover the position.

If you are an options speculator, I would suggest $19 or $20 strike calls with a few months until expiration.  A very simple, and in my estimation a well in excess of 50% probability of winning trade, would be to buy an April 20 strike call on USO and to put in a limit order to sell it at 100% gain.  Let it expire worthless if the order is not filled, or exit at expiration with the value in the option if the 100% gain is not hit in the meantime.

Another similar play would be to buy the October 20 strike call and to hold for a 100% gain with the same exit contingencies just noted in the previous idea.

If you make a trade on this and want follow up analysis or help with fine tuning the exit, then comment here or email reply to me and I will follow up on this with you.

Pete

SPY Oversold Going into FOMC Announcement 12-17-14

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As of yesterday's price action, SPY was oversold and showing bullish divergence on the hourly price chart.  Today is the FOMC announcement and so there is the possibility of a news-driven sharp move here.  Given the technical set-up, it seems likely for a rebound attempt.  A major downer would be unexpected here, but could be of longer term significance.

There has not been a bottom reversal signal in my SPY trading system currently, and there has been no bullish divergence to develop in the underlying real money sentiment analysis.  So in the past that has typically meant that we see at least a slightly lower low before a reversal occurs.  If that occurs followed by a reversal bar, we likely will see a signal occur and it so, I will note it with some detail on the significance and how to trade it, if at all.

Additionally, the VIX/VXV ratio has closed above 1.00 for 2 out of the last 3 days before today, and as I have noted repeatedly on this blog in the past, that often occurs just before an important low occurs.  So really, it means that you take any objective long trading signals generated here.  The signals dependent upon your plan and trading method.

Further understand that we are entering into a positive seasonality in the end of year time frame, which would just again be another confirmation that long signals should be acted on.  And a stop is always used in case of a major surprise or trend shift.

Pete

DBA Call Option and Technical Analysis

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This is an hourly chart of DBA, which is the PowerShares Agriculture fund.  I purchased some call options near the close of today's session.  I bought the Sept 26 calls for 0.50 a contract.  The spread was about 0.05 which is 10%, but given the possibility of a 100% + move in the options over the near term I settled for it.

The chart above shows a beautiful bullish divergence on the momentum as it hit today's lows.  But I would suggest looking at the multiple time frame set-up as well.  The daily MACD and momentum are showing classic bullish divergence as well between the two major lows visible on the chart above.  Additionally, the weekly stochastics is over sold and with some mild bullish divergence.  So it appear that today could be the trough of a potential multi time frame turn higher.

Looking at the last portion down of the chart above I have labeled a nice looking Elliott wave style 5 wave impulse.  So at this point given the obvious loss of momentum and the possible failed break below the July 11th low, it appears likely that we see at least a partial retracement of the last move down over the last couple weeks.  From looking at the daily chart, it seems that a move back up to the 27.00 level could be quite likely.

If prices do indeed rally here, and completely retrace the last two weeks downward move in LESS time than the decline took to form, I believe the logic would be that a new upward pattern was at play, and that we could probably expect prices to rally well above 27.00 in coming weeks.  The pink vertical lines show the current forward time projection as August 29th the date prices would need to move above 27.00 by in order to confirm this.

So given that possibility I just bought the Sept expiration calls anticipating a quick rally to 27.00, with possibly a move well above that.

My current exit plan is to simply maintain the option with no stop loss and am willing to hold until expiration even if it results in 100% loss.  That is factored into the amount risked/put into the trade.  I currently plan to exit half the contracts at 100% gain if prices rally modestly from here.  HOWEVER, if prices rally very swiftly (3-4 days) back above 27.00, then I will opt for holding all the contracts and use the daily chart as a possible exit indicator prior to expiration if a divergence develops.

So part of the logic is that a rapid retracement of this last decline would suggest a likely new pattern occurring, and with the 26 strike option, it would seems likely that the option would expire in the money and that the 26 level would be a significant support level.  And so I would like the opportunity to make a larger gain on the whole position if everything develops in ideal fashion.

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This chart is a daily chart with two projections up from this low that simply project the 2 prior significant rallies visible the chart up from today's low.  In both instances we see it would be likely that the option could expire in the money and probably make 100% gain along the way.  But if we see a significant rally even close to the green projection line, then a 400-500% gain on the option would be possible.  So while I don't EXPECT that, I want to plan for the scenario that makes the big money and maximize it by holding the whole position if price explode up from current levels indicating a possible intermediate low is in place.

Pete

Mixed Currents In Stocks 9-4-13

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This chart shows a striking bullish divergence on the MACD in SPY.  So from this time frame it would be sensible to go long here with a stop below the 8/28/13 low and a target of the August high.

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The 15 min time frame is not showing any bearish divergence yet which suggests that price will move at least slightly higher before possibly continuing a larger time frame down trend.

The CBOE total put/call ratio today came in at 0.77 which is rather low.  The ISE call/put ratio came in very high, and the equity put/call came in at 0.54 2 days in a row which is on the low side.  All these reading could be interpreted as persistent complacency in the options market despite just a 2 day rally in stocks.  Also volume came in lower today compared to yesterday which means that the add on to yesterday's strength was on waning activity.  All these could be signs of a probable corrective rally which could be a shorting opportunity.  But price action holds the final answer.

In a case like these if looking to short then I would look for a bearish divergence pattern to develop on the 15 min technicals at a bear minimum before taking any sell signals to short.  Given the indicator set-up I think a 30 min chart may even need to develop some divergence before this attempt stalls out.

Situations like this can be tricky because there is no clear market trend and different time frames are mixed on the signals and set-ups they are giving us.  So there is no necessity to trade if it is not obvious what to do given one's method.