Short Term Rebound is Highly Probable over Next 3-5 Days in SPY ; Longer Term, BEWARE 8-5-19

Click on Chart to Enlarge

There are multiple short term extremes showing up right now indicating high probability of a short-term rebound in stocks.

Based on multiple back-tests of different data sets (price, volatility, put/call ratios), I would estimate the probability of a close above today's close within the next 5 trading days to be about 90%.

The chart above shows the average price action over the next 3 days in terms of 10 day ATR. 
These projections are based upon the price set-up of 3 consecutive closes below the lower bollinger band on SPY.

• The average close 3 days ahead has been about +0.9 ATR.
• The average maximum gain over the next 3 days has been about +1.85 ATR which would put price up around yesterday's low.
• The average maximum loss over the next 3 days has been about -1.0 ATR which is about 4.00 on SPY currently.
• Also of note, for the same set-up, 50% of past instances filled the gap open down within the next 3 days.  So about 1/2 the time we could expect SPY to trade back up to 292.62 or higher within the next 3 days.

Now, on a longer term basis this looks very much like a bull trap topping process, and there are multiple long term price and sentiment divergences to suggest that a bull market high could be in on this recent failed breakout to new highs.

My personal stance is to continue to trade with a bearish perspective as long as new shorter term technical sell signals occur below the recent highs.


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

SPY Closes Below Bollinger Band 4 Days In a Row - Implication is STRONG For a Rebound In the Next 3-5 Days

Click on Tables to Enlarge

As of Monday, SPY had closed below the lower Bollinger Band for 4 days in a row.  This is a rare occurrence.  And it has closed below the lower band for 5 out of the last 6 days.

This set up is one of the strongest I have ever filtered for in terms of short term skew towards the upside.  The stats above show about a 4:1 greater MAX gain to MAX loss over the next 3 days.

That being said, as today is indicating a gap up, some of that potential gain is gone if buying at the open.  However, gap ups after these signals, on average, lead to further gains from the open.

So while we have had some other signals in the past week which have often led to short term rebounds, and this time the sell off continued, the indication here is that some reversion to the mean is likely to occur in terms of trading systems.

Click on Table to Enlarge

This little table shows dates on an amalgamation of filtered signals that I have noted to have positive short term skews in the past.  There will be a number of duplicates that are not removed in this sample, but the indication is clear.

There is over a 90% probability of a higher close than the signal day within the next 5 days.  And nearly a 2% expected value if buying at the close of the signal day, and exiting at the first profitable close in the next 5 days, or just exiting at the close 5 days later if not.

I like this type of strategy for directional option trading.  There is high probability of success, the expiration date is clear, and no stop needs to be used (depending on how deep ITM the option is and your risk strategy).

Because volatility is high and much of the option value can be sucked out if trading close to the money, some ideas are to trade deep ITM (like >0.90 delta), or to buy an option with 2 weeks until expiration, but keep the same exit strategy within 5 days.  That way, not all the time value will get sucked out even if the exit doesn't come for 5 days.

Back to Back Closes Below Bollinger Band - Both Down 1% or More

First my post from yesterday contained what appears to be an error in that End of Day data showed the VIX unchanged and I had stated it was down 2%.  My hourly chart data showed the close down 2%, but the daily chart data showed it unchanged. 

That being said the market continues to appear to be very near a short term capitulation and brief rebound.

I ran a filtering of the last 23+ years of SPY data and looked at:

• 2 closes in a row under the lower bollinger band
• Both days were down more than 1%

The results were 35 instances.  33 of them had a higher close within the next 5 days.  

If entering at the close of the signal day (today) and exiting at the close of the first higher close within the next 5 days, or exiting at the close of the 5th day if there were no higher closes, then the EV was 2.37% gain.

So the odds appear to favor an rebound rally in short order.  I would caution, that this does not mean the decline is over.  And a sharp rally for a couple days could be a lower time frame short set-up for another move lower.

Looks to Be At Short-Term Capitulation in Stocks - 12-18-18

Without having much time to post here, today is showing a somewhat unique set of criteria that while infrequent, has on average shown a pretty big short term skew to the upside.

Interestingly the VIX was down about 2% today, while SPY was down 1.5% and closed below the bollinger band and near a 52 week low.

From what I am looking at, it appears more probable for stocks to gap UP tomorrow, and possibly run up from there, BUT if a gap down does occur, the past comparable instances show about a 2/3 chance of closing above the open and with a strong expected value and about 2:1 MAX gain to MAX loss after the open.

Looking at the intra-trade volatility, it appears that using a 3.75% stop loss could be used as a protective measure for a major wipeout move like January or October 2008.

I think there is some risk of that occurring immediately, but I think the odds are a good bit higher for some rebound for 1-2 weeks.

The February low was broken in SPY, DIA, IWM, NYSE but not in the QQQ.

These breaks of lows can be times of capitulation, and so it fits from a charting standpoint that a rebound could occur. 

Back to Back 1% Gap Ups In SPY

Currently the market is in an interesting and somewhat unique position as it has gapped up 1% or more 2 days in a row.

My studies of gaps have shown back to back gap DOWNS to be a bullish short term indicator.  So I wondered whether back to back gap ups was a bearish indicator.

On average after the close of the second day, returns were mildly negative over the coming 1-2 weeks.  So the summary would suggest that we may not expect much more upside reward than downside risk after today, when considering the next 2 weeks of action.

Now, I went a bit further with this scan, and out of a total of 20 back to back 1% gap ups since Sept 1995, I used the trade so far today to look at the future returns of the instances were today was strong after the open.

So I filtered out only the instances where SPY did not trade down more than 1% from the opening priced during the day.  The results left 9 instances which are reflected in the table below.

Click on Table to Enlarge

So these are all unique instances and shows a strong negative skew to forward returns for the next 2-4 weeks. 

I would suggest this implies that our correction is probably not "over" yet, or at least we could experience another retest of the recent lows before a possible uptrend.

The instance in 1999 was occurring at a 52 week high which is not our scenario.  The other instances are more similar to our market, with the year 2000 December instance being the most similar to ours.

I would say this study suggests that we expect/plan for lower lows to come into late January or sooner.

Elevated VIX/VXV Ratio "Retest" 12-7-18 -- Another Test Suggesting Short to Intermediate Term Rebound of 1 Week or More

I create a condition scan today looking at times of persistent elevated VIX/VXV ratios, followed by a "retest" of the ratio to a lower high.

Scan Criteria
10 day avg.VIX:VXV ratio peaked at >1.0 over the last 2 months
Today VIX:VXV single day ratio is >1.0
Today the 10 day avg. ratio is LESS THAN 1.0

The VXV only goes back 11 years, but includes almost all of the last bear market and several major corrections since then.

There was a notable forward positive skew especially at 4-5 days ahead.

Adding the condition of a large down day in SPY or a large 3 day maximum decline, made the skew stronger.  Those conditions fit our current environment.

This scan condition has been excellent as an opportunity to sell puts/premium or write an
ATM or OTM bull put credit spread with 1 week until expiration.