New SPY/UPRO Trade

Based on the flip flop reversal pattern which occurred in SPY over the last couple days, there is a bullish trade opportunity based on the past similar occurrences.

I scanned SPY for

• yesterday down more than 2%
• today gapped down
• today closed up more than 1%

18 occurrences came up, and the average close 7 days later was about 2.5% higher in SPY.  Now these stats are relative to Monday's close.  But early tuesday is down, and so the reward to risk may be even a bit higher which is good.

Now in this instance, I also see a qualitative pattern suggesting to me that SPY may make another move to new highs in the coming few weeks.  It would not surprise me if that ended the bull market though.

In this case I would suggest using a 5.5% limit sell order after entry on SPY, and a 5.5% stop loss order.  This can be entered as an OCO order if you can.  Exit the trade at the close of 9/21 if the limits are not hit. 

Most of the past instances occurred in bear markets where volatility was higher.  But the few that occurred in bull markets still showed a nice positive expectation.

Pete

SPY Option Trade Exited for 50% Gain

If entered using a limit order of 1.74 for the 213 SPY call option expiring this week, and using the 50% limit exit order which stats showed has had ~90% win rate on past similar tests, the trade is already exited in today's session for another nice play.

I took a partial position on that order this morning when my limit order of 1.20 did not fill shortly after the open.  SPY would have had to trade about 50 cents lower this morning for it to fill.

This shows what can be a pitfall of trying to get too perfect on certain trades.  The simplest play in this case would have been to buy right at the open as the gap down was indicated.  And the stats were so outstanding that there was not great reason not to.

In any case, for now if you have not entered (and exited) the trade ideas I posted, I suggest standing aside and let things further unfold.

Pete

Implications are Strong For a Gap Fill This Morning If Price Gaps Down

Futures in the SP500 have been lower since last night, and so I ran some back tests this morning looking at times when a 2% down day was followed by a gap down.

I looked at it with different filtering, but the results were consistent.  One of the ways I looked at it is to test and see if price gapped down less than 1%, would the gap be likely to fill?  Looking back at the history of the SPY etf there were 58 instances where the 2% down day was followed by a gap down in the range of 1% or less.  Out of those there were only 5 which did not completely fill the gap and trade back above the previous day's close.

When I filtered the results to look only at instances with a rising yearly average, the results showed 21 instances, all of which completely filled the gap down.  Also in these instances, the average close 5 days ahead (this Friday in this case) was 1.24% higher from the open (of today/ day 1).

Given the studies I looked at yesterday being so consistent, and a fair possibility (~50%) of a MAX intraday gain of 1% or more from today's open, I am going to purchase the SPY 213 call option expiring this Friday, with a limit order of 1.20.  It would take a move down to roughly the 212 level on SPY to fill the order.  Then I will set a limit order of 100% gain for exit of the trade.

Pete

SPY is Likely to Fall a Bit More Then Rebound Sharply for 1-2 Weeks - New Option Trade

The previous recommended SPY put option trade was exited on Friday for 100% gain which was the suggested limit order for the trade based on the backtests.

Friday was a notable day with a very strong sell off and close low in the range and huge volume increase.  The VIX swelled over 30%.  The total put/call ratio increased more than 20%.

The increases in the VIX and total put/call ratio themselves are not particularly bullish.  From the tests I ran, it seems to be neutral for the near term, but the risk for oversized sell offs is increased for the intermediate term looking out a couple months or more.

However, the price and volume pattern itself, is showing notable bullish skews over the next week.

A scan I ran had the following criteria:

• SPY down 2% or more
• SPY gaps down
• SPY closes in the bottom 10% of the day's range

Going back o Sept 1995, there were 112 instances, which is a nice sample size.  And over the following week, 91% of those instances, showed gains in ATM call options of 50% or more.

This is a very high win rate...outstanding consistency.

So the play here would be to purchase a SPY 213 call option which expires this coming Friday, Sept. 16th.  Then set a limit order of 50% for exit.  I would use a limit of Friday's closing value in the option for entry.  The closing value was ~1.74.

Another strategy would be to set a limit order to buy the same option at 1.30, and then set a 100% limit order to exit the trade.  This is based on the fact that there is a greater than 60% chance that tomorrow will have a lower low at least 0.5% below Friday's close.

When filtering for bull or bear markets or MACD configuration, the results were not significantly different.  

If tomorrow SPY gaps up, then based on the past similar occurrences, 2/3 of the time, price will decline back to the level of the previous day's close or lower - filling the gap.  I say this in case tomorrow gaps up, it would then be sensible to place the limit order at 1.74, and use the 50% limit exit order.

I may update on the set up again in the morning as I see the futures position and probable gap direction and size.

Pete

SPY Trade Update

Regarding the recent SPY trade I outlined, when I provided the information I stated that exiting after 7 days was the highest expected value on the backtest.  I did not take into account Labor Day market closure when suggesting exiting at the close today/Friday.  So the 7th day would actually be this coming Monday's close.

Currently, the decline appears to have quite a bit of downside strength and has not yet had bullish divergences on any time frame 15 minutes or above.  So it seems most likely to me that there will be lower lows to come below this morning's lows.  I don't have an opinion on whether Monday will be an up or down session.  For those that are moderately skilled in technical analysis and are able to monitor the markets a bit, it seems sensible to use a SPY 15 minute chart with MACD and exit if/when there is a 15 minute bar that closes at a new low for the decline, but the MACD lines are not at a new low.

But for the simple/safe method, the past stats indicate an exit at tomorrow's close for the equity side of the trade.

For the SPY put option recommended, it would likely take another 3 points down in SPY before hitting the 100% profit target from my entry, though my entry was not outstanding, and the last several days had much better entry prices with gains already reaching or nearing 100%.

I am still maintaining my 100% profit limit order for possible exit of the trade.


Pete

Probable Pullback in Stocks Over the Next 2 Weeks - Put Option Trade 9-1-16

I ran a simple scan this morning based on recent market action.

• 5 day moving average of total put/call ratio was above its 1 standard deviation bollinger band
• VIX high was less than 15

Typically I view the top condition as a bullish set-up, meaning when the put/call ratio elevates to an extreme, stocks are about to rebound.  However, the second condition shows a market which has been very low in volatility and is not "oversold" or exhibiting much fear as evidenced by option premiums.

So what we have is potentially the early signs of the low complacency starting to break.  So I tested to see what happened after past similar instances.

Over the next 2 weeks the MAX loss was about 3 times the max gain in SPY.  So there is a significant bearish skew.  Some of these signals come in clusters, so I only looked at results relative to the first day of a cluster and removed the rest.  There were 9 unique instances left going back to Sept 1995.

Setting a 4% limit gain order on SPY and a 4% stop loss order (both relative to Wednesday's close) and shorting SPY has been a profitable play in the past.  If the limit orders are not hit within 7 days, then exit the trade.  So exit at next Friday's close if the limit/stop is not hit.

For options, 7 out of the 9 past instances showed an increase of 100% or more when buying an ATM put option with 2 weeks until expiration.  So in this case a 217 SPY put expiring either next Friday or the following Friday would both be OK here.

I personally have an order to buy a Sept 16th standard expiration SPY 217 put for 2.35.  It would take some rebound from this mornings lows to fill the order.  SPY would have to rise to 217 to 217.35ish to fill the order probably.

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