Probably Just a Short Covering Rally Here Before a Break To New Lows

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It seems most likely to me that SPY is still forming an upwards correction off the August 24th low.  I had recently mentioned that a rally was expected after the break of the lows of the 1st week of September.  We did end up seeing a brief 1 day rally initially, but I don't think that was THE rally which would correspond with the past post crash markets.

The current rally has more of the robust feel and look (seems like a legit reversal), which often preceded the break to new lows below the crash low.

Until This week's low is broken to the downside, I think there are other interpretations, but if the timing of the pattern unfolds as I expect it would for the completion of a contracting pattern (E smaller than C, and C smaller than A), then some time between today and Tuesday would likely mark the end of this rally attempt, and we would see a very sharp break down to lower lows.

So as a simple trading strategy here, we could enter short the market on a break of this week's low with a stop above the intervening high.  Then a partial profit exit could be made and stop adjustment made in order to decrease risk and still allow the possibility for a substantial profit on the short.

Another possibility for trade strategy based off the assumption of the above mentioned contracting pattern, would be to enter short early next week with a stop a little above 198.  If price moves above 198ish, then this rally would not longer be smaller than the C wave noted above in the chart.  Then a partial exit could be taken at a 0.5:1 reward to risk level, and then move the stop down to half the original amount at that time as well to create a "no risk" trade.

I don't have any clear cut stats to offer on the option side here, but I will run some scans over the weekend to see if any profitable edge seems apparent.  Also keep in mind that the scan from 9-15-15 is still in effect with the hold time of 2 months (so basically until November expiration).  That scan would argue the legitimacy of re-entering (or continuing to hold) the Nov SPY 198ish puts with the possibility of a break down and a more obvious exit after a break of the August low.


Pete

SPY Time Pattern Analysis and Logic

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The review of SPY tonight will rehash a little of what I have pointed out in recent posts, and also add a pattern concept.

First off, as suggested in the last post, the short-term price logic continues to confirm a bullish trend.  The up moves are directional, large and fast.  The intervening downward move was small and "slow".  And again with today's move higher, the intervening downward move was completely erased in less time than it took to develop from high to low.

So the next thing to look for here in terms of when the trend is potentially ending is to look for a divergence pattern to develop.  So in the chart above I show a momentum indicator.  If price makes a higher high, but the momentum fails to make higher highs, that would indicate a slowing down of the market, which is the typical pattern that precedes a reversal.

There is an unfilled gap down above prices, and it is highlighted on the chart.  Sizable gaps have a strong tendency to fill within a couple week time frame.  And so as we see prices rallying here, that gap is an obvious target of potential attraction for prices, and may also offer a potential point of chart resistance.

The pattern concept I want to point out here is that when two successive moves in a pattern are similar in time, the next move is typically longer.  As an ideal ratio the next move may take about the same time as the total time of the prior 2 moves together.  That is what the vertical lines are showing as a time projection on the chart above.  That would suggest we may see price move generally high until Friday.  From my pattern based research, a typical ABC pattern has a median C leg that takes a little less than the total time of A+B.  However the AVERAGE C leg, takes about 1.17 times the time of A+B.  In any case, I am simply offering the suggestion here, that even if this move up here is counter trend in a correction, we may still have a couple days up in the current portion of the move.

Pete