Exit SPY and MU Call Options

If you took any of the trades suggested in the comments earlier this week, the SPY trades should be up in excess of 100% currently and I would recommend exiting today rather than wait for tomorrow.

The MU calls are also in a modest profit of around 50% and I would suggest exiting them with a market order currently.

My feeling is that we will see another pullback and retest of this week's bottom relatively soon, but I don't have the definite stats to suggest any trade here currently.


Pete

6 Days Down In a Row in SPY - What Next?

Looking back at past instances of 6 days down in a row in SPY, there have been a few nice bottoms which have been caught within the next trading day or so, but overall the downside momentum was very strong and the rallies to follow were often brief and not as consistent as would be nice to take any type of trade.

We are in such rare territory here, that there are not enough instances to get a strong data set from.

At this point I would think that the October low in SPY has to be a target before a more lasting multi day rebound occurs.  Most of the prior instances of the washouts we looked at filled the big gap down within 1-2 days.  SPY didn't manage to do that here suggesting at least short term weakness I think.

It seems best to just hold tight here, another more obvious trade opportunity will likely arise int he coming few days to couple weeks I think.


Pete

Implications of Gap Up After 52 Week Volume High

I ran a scan today looking at times going back to 1995 when a 52 week high in volume was followed by a gap up of greater than 1%.

The peak positive return were 2 days and 6 days after the signal day, which in the current case was yesterday.

This is in line with previous stats showing that the max return tended to occur within about a week following the signal day of the big selloff type of day.

When I ran the scan for a 2% or greater gap up, there were 3 instances instead of 8.  The peak gains were also at days 2 and 6.

There were positive average returns from the close of the signal day for up to about 7 days.  After that they began to tip into negative average closing returns.


I also looked at time when the sum of the last 5 days gaps was more negative than -5%.
Similar comments apply with peak positive closing return at days 2 and 5 on average after the signal day.

So to sum up the expectation here, we may see/expect price to push up to fill the gap down at 198 on SPY within the next trading week (5-6 days).  At that point the scales would likely tip in favor of negative future returns and a probable retest of yesterday's low.

If/when we fill the gap, I will give further insight into how to speculate on the probable downside to come.

As of the time of this typing, it seems the easy money was made between yesterday's open and today's gap up open.

Without seeing further upside from here I personally am not ready to speculate on the downside.  I don't know if this bounce will be able to muster the strength to get back up to the 198 level, but that is what the best comparisons suggest has consistently happened over the week following the washout like happened yesterday.


Pete

What Are The Implications of This Continued Massive Sell Off?

Click on Stats to Enlarge

Today I ran a scan that looked at time since 1995 in SPY when price closed down 5 days in a row and the 5th day had a gap down greater than 2%.

There were only 4 instances all shown in the table above.  The next day showed an average gap up of 2%.  The Jan 2008 instance showed a large gap down the following day, but that was a great short term buy.

Note that from the close of the signal day (today), the average 1 week maximum gain on an ATM call option was nearly 300%.  All 4 instances showed 160% or great gains. 

The maximum gains over the next 5 trading days all were greater than 4.6% with the lowest amount being the Jan 2008 instance.  In my opinion, that is probably the closest fit to our early stage bear market/volatility environment.

Looking at the average closing return following those instances, we see that at 4 days, and 8 days, all 4 instances showed positive closes relative to the signal day.  This would suggest that our market currently could have an upward current into Friday.

So we are truly in a rare environment here, but as is the case, the more extreme conditions get, the more sharp and impending the rebound.

Futures are up as I type this evening. 

From past instances it seems likely that the market will make a run back for the 198 level on SPY this week to fill today/Monday's big gap down.  The stats are certainly supportive of that idea given the few instances that are comparable.


Pete

MU Call Option

I purchased a Aug 28 expiration 15 strike call on MU for 0.58 per contract this afternoon.

Click on Charts to Enlarge

The daily charts show a pronounced bullish divergence  in the MACD indicator.  And while the session has not closed yet, so far the probability looks quite high that MU will form a bullish engulfing pattern on the day.

Given the trade stats shown over the weekend on SPY, it seem likely that stocks will continue to attempt a rebound for another couple days at least.  A fill of the last couple unfilled gaps on MU over the next couple days would push the trade to 100% or more profit. 

I am setting a limit sell order @ 1.80 to close the trade on a potential move higher from here.

SPY Option Trade 8-24-15

I bought a SPY Aug 28 expiration 197 strike call at the open with a limit order of 0.70.

Then I exited the trade with a limit order of 2.25 after about 15 min of trade.

I am now setting a limit order of 3.75 to buy a Aug 28 expiration 189 strike call.  This would require a little pull back from the morning thrust and probably a tightening of the spreads.

I would then suggest a 50% limit gain order GTC after that for simplicity unless you have some time during market hours to track a short term indicator to try to time the exit if/when the market rallies.


Pete

A Large Gap Down Monday Morning Could Offer A Nice Short Term Bullish Play

Click on Stats to Enlarge

Tonight I ran some stats as a follow up to the previous post, this time looking at similar set-ups to this past Friday's when the following trading day gap (in this case Monday) gapped down.

The stats are solidly positive again with 80% or more of instances showing gains greater than 50% on the ATM option from the signal day's close.  But the option gain stats above are all relative to the signal day's close.  So if you actually wait and buy on the following day's gap down, then the gains become even bigger.  There were some monster trader wins in this list.

The historical evidence still solidly points to buying a call option with a week until expiration tomorrow morning with the strike price somewhere in the region of Friday's close or Monday's open.

If you go back through the charts and look at the instances when the following day gapped down and then price closed above the open (and the higher the better), it made sense to hold that option for the next 5 days rather than sell right at the 50% gain.  But for simplicity, I would add to the last post that buying a SPY Aug 28 expiration call option tomorrow morning at a strike around Monday's opening price, and setting a limit gain of 50% for the exit, should be a solidly positive expectation trade.

Looking at the following day gap down of more than 2%, every trade out of 7 instances showed a return of 50% or greater gain on the ATM option bought at Friday's close.  And the average close on SPY 5 days later was +4.96%.  Buying at the open of the gap down the following day would have shown an even larger gain obviously.

So the indications here are clear that this gap down into Morning is likely to be an exhaustion of the move.  Something new can always happen, but with a correctly or comfortably sized position, with defined risk such as a call option, I feel that I HAVE to take this trade regardless of how wrong it feels because the market is free falling down.

I will assess this in the morning but likely buy an ATM option with an expiration this coming Friday, August 28th.  Assuming the trade unfolds in a massively positive direction, I would suggest using a 5 minute or 15 minute MACD chart to look for a bearish divergence to exit the trade prior to expiration.