Put/Call Ratio Extreme Suggests That Rebound Attempt Is Imminent - 3-28-18

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The above snip is the result of a scan looking at extreme put/call ratios by a few different measures while occurring in the context of a bull market moving average configuration.  Other conditions were that daily and weekly MACD were pointing down and SPY closed down 1% or more on the day.

That paired the list down to a very bullish subset.

SPY only declined about 1% or a little less this morning, but from short term timing cycles and non-confirmation with the QQQ fund, as well as the above noted study, it seems that the downside could be muted for the coming days. 

I exited the rest of QQQ puts I held.

I entered an April 4th SPY 258 strike call with a limit order of 13.50 to exit before expiration if it occurs, but otherwise exit at expiration next week.


Pete

Multiple Comparison Pointing to Thursday as Probable Short Term Bottom

I have scanned past history of SPY in comparison to today's closing action and have further confirmation that on average we may expect a volatile couple days, but probably a rally attempt and short term bottom likely to form within the next week.

The most common thread here seems to be an elevated downside skew for the next couple days before stabilizing.

Based on what I am seeing I would estimate the odds of a further 2% decline or more over the next 3 trading sessions to be greater than 66%, with some possibility of a "wipeout" type move.  I would estimate the odds of a wipeout move to be ~25% or a bit greater over the next 3 days.  That would be something on the order of 5% or more loss at least intraday.

Again price in SPY has come back down close to the 200 day moving average.  And the failure of price to clearly stay above it after yesterday may indicate that yesterday's rally was just a program trading buying surge at the 200 day average but without broad follow through.  So it could be just a "blip" from that average in the midst of an incomplete selling cycle.  It seems very possible that a sharp move down to wipe out stops and trigger sell orders could occur over the next couple days.

That would be the classic market behavior, often accompanied with a break of a prior significant low.  In this case, this significant low is the February low which is about 3% below today's closing price in SPY.

The next significant low below that would be the August 2017 low down around 242 on SPY which is about 7% lower than current closing price.

I would estimate somewhere in that range to be a probable low over the next 2-3 sessions, with some minor possibility of something even greater to the downside occurring.

I currently am holding some put options on QQQ since 3-14 of which I exited half at today's close because of the bullish divergence on the hourly chart.  I plan to exit the other half by the end of this week, but quite a bit of action could occur by then, so I will key in on the 60 minute and 15 minute chart for ques for exit, and run some back tests as I see what gaps and price moves are occuring.


Pete

Short Covering Rally - Short Term Expectations 3-27-18

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Yesterday the stock averages gapped up and gained ground from the open in explosive fashion. 

After a period of decline, the question is what this means going forward.

I scanned the history of SPY and looked at times where the prior day closed below the lower Bollinger Band and was down 1% or more, and the current day gapped up 1% or more and made further open to close gains all without making a lower low compared to the previous session.

The above table is the whittled down history of market days similar to Monday going back to 1995 in SPY.

Of note, within the next 5 trading days, 6 out of 8 experienced losses of 3.7% or more relative to the close of the signal day (Monday in our case).

7 out of 8 experienced losses of 1.9% or more relative to the signal day close.

Those numbers are based on intraday figures, NOT on closing figures.  But we can see a clear skew to the downside right away in the past instances.  And on a closing basis, the first day following the signal days did not make much further gain or loss on average.  But the next 2-3 days following that showed about half the instances made some sharp breaks lower to retest the lows.

In going through the charts of the past instances, they all experienced some temporary support after a retest of the lows.  So we may expect that if prices do come back down to challenge Friday's low, that we could see further rally attempt somewhere between there or the February price lows.

Also, note that all the instances in that table were in the context of incomplete bear markets except the August 2015 instance.  So possibly this is a harbinger of a longer term shift???

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Also an extreme total put/call ratio was registered on Friday at 1.53.  The above table shows readings of 1.5 or greater in the past.

Also note the downside skew over the next few days.  Again, while not shown here, the MAX closing loss point is the 2nd and 3rd day after the signal. 

So both of these studies suggest a possible/probable retest of last week's low by Thursday this week or maybe a bit beyond.

That fits well with what I am seeing in time cycle analysis in the Nasdaq, which currently projects a bottom on March 29th which is Thursday.


I will update as action unfolds over the next couple days.  Personally I would be looking only to play clear short term reactions expected to the upside of say 1-2 weeks, with the idea that the longer term trend may have shifted to down already.


Pete

Chances of a "WipeOut" Move This Week.....

I have scanned current market data from several angles in comparison to the last 22+ years of data in effort to estimate what is likely to occur in the wake of this week's decline and technical set-up.

In short I estimate about 25-50% chance of a wipeout type move occuring by this Wednesday.  By that I am meaning something on the order of 5% loss or more.

Based on the several factors I would estimate that SPY could easily carry down to 247 by April 3-4th. 

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The chart above here shows a typical time and trend channel pattern for a "flat" correction.  This would project a move to the lower trend channel at April 3-4th which would be ~$247 on SPY.
That would be 4-5% below current levels and based on several scans comparing to past similar declines, that would be reasonable in the next 3 days to 2 weeks.

Points of note here are that the hourly chart currently does not have a bullish divergence occurring, so it seems more likely with this intensity of decline, that we will see either a divergence develop or a large capitulation gap down like 2% or more gap down as at least a temporary capitulation/spike low.

Also SPY is perched right at its 200 day moving average as of the close Friday.  As I have noted many times in the past, these key moving average points will typically be met by gap ups with gains after the open shortly after the average is challenged.  We saw a sharp rebound off the average on Feb 9th.  However, the more times price comes down to touch the average, there is implication of weakness and the possibility of a sharp break down in prices.

Part of the idea here is that certain key averages factor into program trading and if the buying thrusts off the average are weak and re-tested, there may be a major break down through the average.  The average and the space below it may be stop loss triggers or even trend following short trigger points and result in a large and sharp price movement.

If we are to see that occur here, the chart concern is that there is not a major chart support region until down at the $240-220 region of SPY which would be a pretty major decline.

From a chart point if prices are to break clearly below the lower channel line of the chart above, it would be indicative of longer term trending action to the downside rather than corrective activity of the bull market.

As a side note but maybe of significance, bond prices have rallied weakly off the recent lows, and as of this coming week, the key time cycles in bonds are peaking and indicate downward pressure into early or mid May.  Given that prices are marginally above MAJOR horizontal support, it seems possible that a major breakdown in prices could occur on a break to new lows for the bear market in bonds.

Bearish Reversal Pattern With Divergences 3-13-18 Stock Market Update

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The chart above is the Nasdaq composite daily.  It has made a new high above the January highs, and today created a wider range bearish engulfing pattern which is a top reversal pattern potentially.

I view this as potentially meaningful for a number of reasons some already discussed in recent posts, but I will create a short list

• Significant non-confirmation of other indexes to make new highs
• VXN touched lower bollinger band yesterday
• Cycle time analysis turning lower for next couple weeks
• Dual time frame MACD divergence in Nasdaq (Daily, Weekly)
• Price touching the top channel line of the high for the bull market 
• Breadth and sentiment major divergences

I view the risk to be a good bit higher than reward potential for the next couple weeks.

I have an eye on inverse positions or put options here currently.

Pete

SPY Update - Expecting Price to Make Another Move Lower Into April of Beyond

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The above chart is a SPY daily chart.  And back on 2-14-18 I had posted regarding past similar instances of selloffs and rebounds following put/call ratio dual time frame imbalances like we were seeing in January of this year. 

At that time I noted that the subsequent rebounds of the 4 previous noted comparable instances had retraced 50-75% of the initial decline.  And I overlaid the actual % and time gains on this chart as indicated by the lines rising up from the 2-9-18 low.  It is notable that tomorrow will equal the time of the longest rebound out of the previous 4, before the decline began its next move down.  So we may be nearing the time point here where prices could be peaking and another round of hard selling comes in.

The blue box on the chart above represents the range of declines over the next 3 months of the 4 comparable instances following the put/call ratio signal.  The indication here is that we may expect another wave of selling to break the February low.

The cycle analysis of current active cycles indicates upward cycle trends into next week and possibly a bit beyond.  But following that, there is downward cycle activity into mid April or beyond.

Basically at this point I am looking for a risk reward set-up or clear technical divergence to develop to initiate a short/inverse position in SPY or related ETFs.

Another concept that I have discussed many times over the years on the blog is "price logic".  This objectively gauges which direction of market price action is stronger/weaker and infers the direction of the next "strong" market move.  On the chart above we can see that the move down from Jan to Feb was very directional and that the ensuing rebound has only partially retraced the decline in more time than the decline took to form.  The idea here is that the current rebound is a counter trend move to a larger downward trend or formation of at least 3 moves....DOWN-UP-DOWN

The other main possibility that I see is that the Jan-Feb decline is the first move down of a triangular pattern or sideways move, meaning that most all price action would occur within the bounds of the Jan highs to Feb lows.  I view this as a less probable scenario but we will see.


Pete

Initial Rebound Probably Near Complete - 2-14-18

I have looked at the market action of the last couple days a few different ways with the idea of what has happened in the past after sizable sell-offs and then the subsequent rebounds.

Today marks 4 days up in a row, and yet price is still below the mid line of the bollinger bands.  So we a have strong rebound after a sharp sell off with wide standard deviation bands.  I have looked at some slight variations of this theme, looking at VIX bollinger bands, and also at multiple up days with the daily MACD still in a down position, and the results are mild to moderately bearish for 1-2 weeks.

One of the scans that was more bearish was 4 days up in a row with today being up 1% or more.  That had a notable bearish skew in forward returns for a couple weeks based on past similar instances.

I also took some time yesterday to compare the most similar past sell offs which then resulted in a failed rally and lower lows for the move.  And the retracement levels were 50-75% of the preceding sell off.  Today hit 50% on the retracement, so we are already in the lower end of the range where past rallies have peaked. 

In follow up to yesterday's post, the VIX/VXV ratio fell back just below 1.0 today.  The past few comparisons of periods of the ratio spiking above 1.0 with a waterfall decline, show that the ratio dropped back to below 1.0 for a few days here and there near the top of short term rallies as prices worked into a retest of the waterfall lows.  So that is still my best idea here, we are near the short term peak of a rebound which is expected to challenge the recent lows.

The VIX also fell 22% today.  I scanned for times when the VIX fell over 20% in a day, and 9 out of 13 had notably greater MAX losses over the next 5 days than MAX gains.  The few instances that did not have greater declines than gains, basically just kept on going up in the context of the recent bull market.  So this suggest we are very near to a point of recognition - either we have had a spike low and price is likely to march higher, or the rally will quickly fail and the next several sessions (1-2 weeks) will have a markedly bearish skew as stocks retest the lows.

As a side note, but somewhat relevant.  I have stated this before on the blog, but price bars with very long tails, like that from last Friday 2-9-18, have a tendency to have retests of the "tail".  I have observed this personally that very wide range bars with long tails are likely to have price come down and tests the lows.

I have heard Steve Nison of candlestick fame, state that on their studies of candlesticks, a successful  "hammer" candlestick bottom reversal has ~60% chance of having price come back to, or below, the mid point of the tail.  So even if a lower low does NOT occur relative to the reversal bar, there may be ~60% chance of price coming back to the mid point of the tail.  That would be ~258 on SPY.

Now the 2-9-18 candlestick is not really a classic hammer candlestick, but in my estimation, a very long tailed reversal with a close towards the upper end of the range, probably has a similar profile.

So my best idea of the odds from this point are for price to come back down to test that 258 region on SPY within the next 2 weeks.  I would not be surprised to see a rally attempt kick in again from those levels.

As another side note, since much of trading is automated computer algos which incorporate key technical indicators and moving averages, I have noticed tendencies for key moving averages like the 200 day moving average to trigger buying programs.  That did occur on 2-9-18.  And if the average is touched again on a retest of the 2-9-18 low, I think it would be reasonable that the buying kicks in again.  BUT, the more times the average is touched without subsequent gap ups and closes above the open, the more that indicates a possible failed rally. 

THEN, if after a couple rally attempts off the average occur, and price is able to break lower and make a lower low, there may be some freefall below where the programs have spent their buying around the 200 day average, and now price rapidly declines to the area of the next significant prior low/high from the uptrend.

In this case, while there are minor lows and highs during the uptrend over the last year+, the last real basing and significant highs/lows were Sept-Nov 2016 in the 208-220 region on SPY.  That seems like a long shot, but if price chops at the 200 day MA and ultimately fails in coming weeks or months, I would not really be surprised to see those 2016 levels be retested on the next move down.

That is looking a long way ahead, but I think it is important to have some view of the risk present at key break points in a market that has been as one sided and speculatively run up as stocks have been in the recent bullish run. 


Pete