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

Change of Character in Trend - Lower Bollinger Band Probable Target - SPY 11-10-17

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The chart here is SPY on a daily time frame.  It shows several months of the recent uptrend and nicely illustrates simple concept in technical analysis pertaining to Bollinger Bands.

Once the center line is crossed on a closing basis, the idea is that the nearest band becomes a price target.  So in an uptrend, when prices close below the 20 day average center line in this case, the lower band becomes a price target.

In this case we can see the action in June where prices closed below the band in the second half of June, and then tagged the lower band after about 5 days.  In August, there was a wide range break below the mid point that tagged the lower band the same day.

Now notice the current trend up since August.  I have marked with green arrows the 4 days at which price came down to touch the center line.  Each day price reversed to close off its low and above the mid point.

Now when I see something like this, it indicates to me that program trading may be coming in using the center point as a buying trigger.  But here is a more subtle point I have picked up on over the years and have written about here before.

If you look at the last 3 times the mid point was touched (before yesterday), you can see that the next day gapped up.  In fact the next 2 days gapped up in all 3 instances.  Similar comments apply to the March 9 and 14 center line reversals as well as the June 16 center line reversal.  Gaps ups following the center line test, generally indicate "successful" short to intermediate term tests of the center point.
So the norm for a continued trend is the programs kick in to buy at the mid line and then continue the buying into the next session and create the gap ups.

So when the character changes and price does not gap up, PAY ATTENTION.  To me it indicates that the normal trend continuation program buying pattern is not in place. 

In fact a decent size gap down the following day, indicates a failed test of the average and a probable quick test of the lower band.

This morning prices are set to gap down moderately.  Coupled with the clear bearish divergence at the recent highs and the weak/negative breadth as evidenced by the McClellan oscillator being negative for a couple weeks as price rose, I would suggest that this current gap down will likely lead to a quick move to the lower bollinger band.

Currently the near term support on a move down is 254.00.  But I think prices clearly have more risk than this to the downside in the coming couple weeks.

The last time I remember such and extended period of negative McClellan oscillator readings as prices were making higher highs was Sept 2014 before the vertical decline into mid Oct. 2014.


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

SPY Bounce at 200 Day Moving Average - Probably Temporary

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Last week the SPY etf rebounded off the 200 day simple MA.  Now today it came back down and touched again.  And buying came in after the open to hold the close above the average.  Also note that the long term bull market trendline (in red) is right in the same area as the 200 day MA.

It has been a while since I discussed this phenomenon extensively so I will link to a post I made in 2011 which showed a very similar chart set-up.  You can go back through your charts and see the resultant action.

Basically what happens at key moving averages in stocks or indexes - I believe - is that there are many trading algorithms that use those averages as data points for initiating trades.  And so in this case you have price moving down, and it touches the average.  But every time it touches, the program trading kicks in and starts to initiate buying.  This is because the market is in an uptrend, and the weight of the automated trading is on the buy side.

And sometimes that buying is very strong and prices bottom right at the average.  But other times, there is no real interest.  It just chops around until the automated trading is spent, then the trend continues ( in this case down).

So one of the keys I have found is to look at the action after the moving average is touched.  If you go back to Feb 1st 2015, you will see the type of action that unfolds with strong buying followed by a gap up, and a formation of a lasting low.  So for a bullish reversal to hold, you will often see a close high in the range, followed by a gap up and a close above the open after the gap up.  Volume often will rise on these days as well.

Contrast this with the moving average tests where the reversals off the averages are weak, and the result is often several touches of the average.  This is what we are seeing here so far.  The gap ups last week were on weak volume, and each day price closed below the open.  Now we have a gap down (indicating still selling interest) and another test.  For a successful test from here, we would see a gap up tomorrow and a close above the open, and higher volume.

Even if price makes a modest rally for a few days, a deep retracement back to the average would seem to me to be a sure sign of a failed rebound attempt off this average.  The result would be a swift break below the 200 day MA.  It may lead to a big sell off in this case.

The yearly low is not too far below price on the SP500.  And given the we are past mid way in the year, a break of the yearly low, could trigger further selling in stocks.

My suggestion here is to short this market on a break of today's low with a stop above the rebound high from last week.  If price make a weak rally back towards last week's gap down, I would suggest a short there.

Now if we see a gap up and close above the open tomorrow with dominant buying interest (increased volume, close in upper portion of range) I will certainly respect the rally attempt until last week's low is broken.

Pete