Massive Sell Off Suggests Short to Intermediate Term Rebound in SPY

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The snip above show a study of SPY performance after 3 closes down in a row and the most recent close down being more than 2% as we saw on Friday.  The filter also includes the weekly MACD in the down position.

The stats look at the performance of buying an ATM call option with 1 week until expiration and setting a limit order of a 50% gain after entry.  Any loss assumes 100% loss on the position.

There have been 77 trades going back to 1995.

83% of the trades would have ended up reaching the 50% limit gain before expiration making a hugely profitable trade.  The expected value is over 24% per trade.

Additionally while not shown here, only 4 out of the 77 trades did not show a lower low in the next 5 days.  So it seems likely that next week will have a slightly lower low (at least slightly) followed by a sharp rally.  This makes it sensible to place a limit order to buy the option at or below this Friday's closing price to help solidify the reward to risk picture.

The stats are even stronger for 4 days down in a row which also occurred into Friday's close.  And the stats are even stronger for the 4th day being down greater than 3% which also occurred on Friday.  However the instances are more sparse.  But the optimal play there would be to place a limit order of 100% for the 1 week at the money option.

Out of the 77 instances, 44 gapped up the next trading day.  So more often than not the market gapped higher.  But we also see that almost 95% of the instances a lower low was made in the next week.  So if Monday opens with a gap up, the suggestion would be to wait for price to come down to buy the option.  In other words, if there were a clear indication that Monday was more likely to gap DOWN, then the suggestion would be to buy the option at the open Monday.  But since that has not been the case, simply waiting for a lower low to be made (below Friday's CLOSE, not low) seems to be the best strategy.

Of note also for past stats.....if the next day gapped up 1% or more, and then price fell below the previous day's close within the next 3 days, then 7 out of 9 instances showed 100% or greater gains, which is even stronger than the other stats.  So that suggests that if Monday gaps up, and then price moves below Friday's close, we still want to enter the trade, but switch the limit gain order to 100% for maximum expected value.


So the play here is to buy the Aug 28th expiration SPY 198 call for a limit of 3.50 either Monday or Tuesday.  If filled, then set a limit order to sell the option for 5.25 after entry.

If the order is not filled by Tuesday, I would suggest switching to the next week expiration for trades and re-assessing the action.

From the trade stats of the closest fit scenarios, it seems that SPY is likely to rebound to fill the 8-21-15 gap down (or at least very close) at some point next week.

Stats are available for playing the equity side of this as well.  If you need those, please comment what your question is and I will try to assist.


Pete

Another Rebound Likely In Store Over the Next 1-2 Weeks In Stocks

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This table shows statistics of 2 trade set-ups that are in play as of this past Friday's closing action in stocks.

The left hand column shows trade stats over the next 5 days after 6 consecutive closes below the open in SPY.  The expected value of all trades is 1.24% gain closing the trade 5 days after the trade triggers (Friday's close).

The right hand column shows times in the current and in the prior bull market when a "3 month low" buy signal was triggered in my bottom spotting algorithm.  Now currently the SPY is not triggering the signal, but the DIA (Dow 30 ETF) is triggering it.  So I am suggesting here that using the stats from the SPY trading history will be appropriate for estimating the forward returns.

The expected value of all trades is 2.21% when closing the trade out 10 days after it triggers.  Actually 9 days appears to have an even higher expected value.  So if entering, the trade is planned to close on Aug 20 or 21st.  Also note that the win rate is in excess of 75%.  The average winning trade is 3.4%.  If that average were to occur here, it would put the SPY up to about 215.00 in the coming 2 weeks.


ITM options could be used for some leverage here.  I would suggest SPY strikes 204 or lower and still exit at the same time frame.  If a rally does unfold, a few simple indicators could be used as contingent exits.  I will discuss this as the trade unfolds.

I personally am going with a SPY Aug 28 expiration 204 call on this trade.


Pete

Close out SPY trade by the end of the day today

As suggested in the last post, stocks have rebounded from the multiday sell off last week.

Last night I looked at times when stocks closed down 5 days in a row in a bull market which occurred into Monday's close.  There was nothing really different compared to the 4 closes down post I made a couple days ago.  The best short term trade after 5 days down was to close the trade out after 2 days, which would be today again.

So I suggest closing out the current trade by the end of the day today  Long term stats suggest likely further gains, but for the record here, the suggestion was for a short term play on this.


Pete

3 Day Rally Probable Beginning Early This Week

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This past week showed 4 closes down in a row from Tuesday through Friday in the SPY etf.  I sorted data going back to 1995 with 4 closes down in a row and added a couple filters to see what we may expect here.

Additional filters were:

• that the quarterly moving average was above the yearly, indicating an established bull market
• The 4th close down was greater than 1% (which occurred Friday also)

The average close 3 days later was up 1.26%.  The stats above show the trade expectancy stats of all the 37 instances.  The win rate was about 75%.

So for an equity trader here, there is a clear bias to the upside through Wednesday's close.  I would suggest that a limit order of 207.48 (equivalent to the large gap fill from 7/13/15) could be used as an entry order, with the trade closed out at Wednesday's close.

The average max gain to max loss shows a bullish skew in all time frames out to 6 months.

 Click to View Enlarged Stats

The table here does not capture quite all 37 instances but does show the averages max gains and loss across the time frames.  This data would fit with the idea that the current market action is a major consolidation in a bull market with the next dominant move to the upside.


From my perspective I believe another move to new highs would be ideal before a new possible bull market top could form.


Pete

Exit Short Term SPY Puts/Hedge From Last Week

Last week I made a post suggesting that there was a negative skew to forward price action based upon my analysis of options data and my real money sentiment/trading algorithm.  The suggestion was that a 50% limit order gain be used on an ATM Sept expiry option.

From Monday's close when that post was written, the suggested option (Sept 212 put) is up about exactly 50% and SPY is now at potential support of a large gap up from a couple weeks ago.

So, it seems wise to exit that put option for the time being.

I looked at some comparisons based on last week's sell of, and the data suggests a short term rebound over the next few days.  Beyond that I don't have much to offer other than what I've already posted over the last few weeks.


Pete

Time to Cover All Gold Shorts - Massive Rally Likely to Occur Based on Extreme Smart Money Position

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There are multiple factors currently suggesting that anybody short in gold get out as fast as you can.  The move down is almost certainly done or very very nearly done.  How big the rally will be, we shall see, but it could easily be 10-20% in the next 1-2 months.

The chart above shows the extreme oversold MFI14 indicator below prices of GLD.  And note the wide range bullish engulfing pattern on Friday as well.  That is a bottom reversal pattern.  It occurred on heavy volume and an obviously extreme move in price over the last few weeks.  Without knowing anything else about a market, understanding the implications of this candlestick should be cause to exit any short position.

Furthermore, there has been a huge increase in the commercial/producers/smart money positions on the long side of gold.  There was an extreme accumulation of new longs by commercials last week, and going back to 2006 (which is where my data currently ends) the commercial net long position is the highest it has ever been.  On a relative basis it corresponds with the peak net longs which have occurred right at the bottom of other declining phases of this bear market in gold. 

On the flip side the large speculators are the most net short going back the same amount of time.  The total speculative long position of small and large combined is also at the lowest point going back over the stated time frame.  The last time their longs approached the current levels was at the beginning of July 2013 right as a leg down was ending and a pretty swift and large bear market rally occurred.

Lastly, June and July is the seasonally most common time for a bottom to occur in precious metals.  So given the extreme sentiment, technical analysis and historical extreme move into gold by the smart money, this appears to be an exit point for gold shorts without question.

There are various long strategies that could be used here to capitalize on the anticipated rally.  One would be to buy the gold miners ETF on Monday with a stop below Friday's low.  Bullish option spreads or other directional option strategies may be appropriate as well.

Low Panic Levels Suggest Negative Skew Over Next 2 Months

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As of today's close, my complacency indicator shows a reading below 7.0.  The images above show all times in this bull market with readings below 7.0.  Of note is a consistent greater max loss than max gain on all time frames out to 5 months.  The greatest skew to the downside is at 2 months where it is about 1.6:1 in favor of downside.

Looking at the options gains for calls and puts for ATM options with 2 months until expiration, there are about 55 days which meet the criteria and the average max put option gain is about 150%. 

About 8 out of 10 of the instances showed max put gains of greater than 50%.

About 6 out of 10 of the instances showed max put gains greater than 100%.

So those stats suggest a couple obvious trading or hedging strategies by simply buying the put now, and setting the limit exit order.  Of course fine tuning could be attempted as action unfolds.

Now the 14 period Money Flow Index is also currently greater than 70.  When adding that criteria to the filtering process the 2 month max loss and gain show greater than 2.0:1 skew in favor of max loss.  And half the instances showed put gains of greater than 150%.

So I think an ideal situation here would be for some further upside leading to a divergence in the MFI and then to speculate on the puts. 

But for now, a 2 month hedge with ATM puts and a 50% limit order to exit the position seem like a solid odds play to protect for some potential downside into September.


Let me know if there are further details desired in regards to this data.


Pete