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

 Click on Table to Enlarge

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

0.5% Gap Downs 3 Days In a Row

There have been 3 days in a row of 0.5% or greater gap downs in SPY as of today.  Action after the open has been relatively tame with no big down days.

Without factoring in any other data, just looking at the 3 gap downs in a row, there were 26 instances in the history of SPY (back to late 1995).

19 closed above the open on the day, with an expected value (including losses) of a little over 1%.

Also, 20 out of the 26 filled the gap down of the most recent day (today in this case) within the next 2 trading sessions (by Wednesday in this case).


The flip side of this is that, there are some signs that suggest a pullback is probable.  So I am looking to make an inverse trade on the index ETFs.  But the data above suggest we may anticipate a fill of today's gap before considering an inverse position.

I am monitoring the 30 min and 60 min SPY charts with a 3.0 volatility stop as an entry signal for a short/inverse trade.

The above data also basically fit with what I am seeing from time cycle analysis.  Short term the cycles are up until Tuesday/Wednesday, than are turning lower into next week.


Pete

Current Action in Market Compares to January 2008

The last 2 trading sessions in SPY were kind of unique in that both saw sizable gap downs of greater than 1% and both rallied to close above the open and above the mid range for the session.  And Wednesday made a 3 month price low.

The only other instance of this I can find going back 10 years is the Jan 22 and Jan 23 of 2008 instance.  That decline really was the kick off of the bear market and made a larger and faster type of decline and undercut existing support from the bull market.  Our market is similar in that regard right now as well.

So based upon that precedent, my last post still is my best projection here.  The specifics of the price action following the Jan 2008 waterfall decline were an initial 7 day rally (after the two gap and reverse days) followed by a month and a half to retest the Jan 22 low.  Then a 2 month rally occurred and gave a great shorting opportunity.

Given our market today has experienced less time since the high and the pattern structure seems different, I think that we are less likely to see a drawn out consolidation at this level and more likely to see a 1-3 week rally followed by substantially lower lows.

I will update as appropriate when action unfolds, but for now it looks like we should be ready to short the market next week for an expected retest of this week's low.

Click on Chart to Enlarge

Here is the chart of the 2007 bull market top and the decline into Jan 2008 and the following retest and rally.