Stocks Are Set Up for a Sharp Short Term Rebound 9-27-22

 

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This table shows the history of SPY when the previous day RSI2 was less than 2 and today makes a 52 week low.  So basically price was already oversold to an extreme level, and then makes a 52 week low the next day.  The implication is high probability (90%+) of a high close within the next 5 days.

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This is an hourly chart of SPY showing a stark bullish divergence on the MACD at today's lows.  While I don't have a way to back test the significance of this, but in conjunction with the daily time frame price action, this shows a set-up where a 15-60 min chart could be "stalked" for a technical entry signal, with  a stop below the low.  

I any case it shows that momentum may be slowing, which is typical before a rebound.

Just a longer term note.......there is extreme fear and correlated selling in markets right now by many measures.  I have seen many indications that buying and holding for a year from the current levels would have a high probability of success based upon historical precedents.

Price pattern in stocks suggests continued sell off probable today - then sharp rebound 5-12-22

 This is a quick update to say that after looking at past price patterns in the context of markets making 52 week lows,  that with today's gap down I would estimate a higher chance of a continued sell off into the close.

But buying at the close today has a very profitable (volatile) short term set-up for a price rebound in stocks.

The idea would be to buy at today close and then sell at the first profitable close (or the following open).

Probable Continued Sell Off in Stocks 5-5-22

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It is very rare to have any combination of underlying price factors which produce an extreme negative skew in forward returns in my experience.

But based upon today's market action I looked .....

Criteria:

• Yesterday SPY was up >2.5%
• Today is down more than 3%
• Price is below 200 day moving average

This basically shows a big flip flop in price in the context of a down trend.  

There are not many instances, but the past instances show a high probability of a continued decline with a 4:1 maximum loss compared to gain over the next 5 days.

There was also a high probability of 2 or more closes down in a row over the next 5 days.

9 out of the 11 instances showed maximum losses of over 4.9% or greater over the next 5 days.  

This scan was not adjusted for volatility.  So understand that there could a large increase in volatility over the next few days.

 

Panic Selling In SPY Suggests A Bullish Short Term Trade Opportunity 2-24-22

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The current sell off in SPY has reached a panic level that puts it in an elite class of sell-offs.

While fear is very high like it is now, it often FEELS very risky to buy stocks.

And certainly prices could go lower.

HOWEVER, the points of very high fear are often the greatest points of short term opportunity to go against the crowd.

The above table shows evidence of this.  That shows past instances in SPY when:

• Gap down is more than 2%
• The last 3 days were down previous to the gap down

Note the huge return from columns AK and AL,

This strategy would be buying at the open today and then selling at the close tomorrow or the following day.

In addition, in these past instances there was 100% chance of a higher close within the next 5 trading days relative to the close TODAY.

Now since volatility is very high, and there are no guarantees, the question here is not so much whether the odds favor a short term buy.  They clearly do.

The question is risk management and How Much? to buy.

If not using stops, then bullish option spreads or a naked call option could be used.

If going long the equity, then I like to use the leveraged ETF like SPXL but only use a portion of the account.  This should really be part of a defined plan.  

For fun here......if you are reading this, do you think prices will rebound and make a higher close within the next 5 days?

Or do you think this time is different?

Comment either way if you have an opinion!

Pete

Back to Back to Back 1% Gap Ups In SPY!!! Huge Negative Skew In Backtests Over The Next Month

 

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Both yesterday and today were days with back to back 1% gap up openings.

That simple criteria in and of itself has historically led to a mild negative skew to future returns.

However, I have looked at differences on the second day....

• does the gap fill or no?
• is there any substantial sell-off after the open?
• does it close higher than the open?
• does it close near the top of the range?

And in the current market environment the last 2 days both did NOT lose more than 0.5% from the open.

And when adding that one simple criteria, we are left with the table above.  It has a huge negative skew over the coming 2-4 weeks.

It is rare to ever find any combination of factors that produce a negative skew like this.

I posted about a similar set up in late 2018.

So, while today had a monster follow through (in some sectors) to yesterday, I would say the odds strongly favor some significant give back of the recent gains.

Today also had some odd underlying internal data in that LESS than half of the volume on NYSE was in up issues and advancing issues barely outnumbered decliners. 

So maybe today wasn't as massively bullish as it would seem.  The value line geometric index (unweighted average stock price) was actually slightly DOWN today.

There may be a few trading strategies that make sense here, but a bear call credit spread or a bear put debit spread would make sense to me with expirations 2 weeks out from now.

Price Projections on SPY For a Probable Continued Decline 10-1-20

 

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I have produced a projection here with both a projection based upon current short term cycles which are the red lines which project about 6-8% expected declines over the next week from today's highs.

This would be in the higher (more negative) middle of the range of back tested past similar price pattern to our recent few weeks.  

I back tested some failed reversals similar to last week's (which has not failed yet), and saw that similar setups have declined on the order of 10-20% within a week or 2 after a close below the failed reversal.

So that would put us towards the lower portion of the red rectangle on the chart.

That chart shows a price a time window based upon some projections of various portions of the declines that have occurred since the February top.

So if the correction is NOT over yet (which is my bet), then expect a pretty sizeable sell off from here, that could get wild and volatile quickly and be bigger than most people would expect.

From a technical and program trading standpoint, the 200 day moving average is towards the top of that projection range, and that would be the next algorithmic buy point that could see a buying surge if it is touched.

NOW.....IF....prices were to decline to the 200 day average and rebound, a further break to new lows could be a continuation or acceleration of the downtrend point in my opinion.

If have seen many times over the years where prices decline to the commonly watched moving averages and make a short-term rebound after touching them.  I have learned to expect that, and to often recognize the signs that they are just "blips" of automated trading but often don't really reflect a true reversal.

In summary, I believe there is high risk and pretty high odds of some declines from here for days or weeks.  I think it would be wise to NOT be long stocks moving forward until the negative cycle window has passed.

Pete

Get Out of Stocks At This Morning's Open - Oct 1 2020

Currently everything I am looking at, taken together, suggests that after this morning's apparent gap up, the risk is much higher than reward over the coming couple weeks.

I don't have time to put much info or charts here but I will quickly verbally summarize.

• Today there is about a 1% gap up indicated.  There was also a 1% gap up on Monday (which has not been filled).
• Back tests show about a 2:1 or greater risk after the open than reward.
• Back tests show about 66% chance of the close being below the open today.
• Back tests show about 66% chance of prices closing lower than today's close at the 5-6 day forward point (Oct 9th in this case)
• Back tests show about 90% chance of a lower close than today's close within the next 5 days.
• I would estimate the chances of a big decline (like 5%+ in the next 5-6 days at about 33% or higher)
• Short term cycles that I follow are peaking this morning in the context of intermediate term cycles being in a strong downward portion of the cycle.  This info is extracted independently of the other data above, but is clearly giving a confirming downside bias to the historical back tests.

The strongest portion of the coming down cycle appears to be between today and October 13th.

This recent decline has been "weird" in that it never registered any significant fear type readings in the most reliable and consistent measures that I follow (put/call ratios, VIX and VIX/VXV ratio).

The big money is apparently basically unhedged and long both stocks and the stock futures. CoT data shows that the hedgers and small speculator/gamblers were the buyers since March.  Large funds which usually buy rallies, were not buyers since March.

So if prices decline, I don't see any other option than for the big money hedgers to quickly sell out.  It could be a stampede to the downside at some point.  Add to this, the potential for the large hedge funds to begin entering new short positions on a technical break, and the recipe seems strong for a big decline if the September lows are broken.

Lastly from a price pattern standpoint, I had looked at the 9/21/20 decline and attempted reversal day.  It was pretty unique, but in 25 years of data there were 4 previous very similar days.  

• 1 marked a significant bottom
• 3 lead to 10-20% declines over the next 2-4 weeks
• So if there is a close below the 9/21 LOW, I would estimate the odds at 66% or higher of a wipeout type of decline shortly to follow.

Pete