High Probability Set Up In Stocks - Short Term Rebound Expected 10/3/19

SPY has closed below its lower bollinger band for 3 days straight.  That itself produces a robust signal with high probability of short term skew to the upside in stocks in coming days.

Factoring an uptrending market into it improves the signal.

Also as of today we are seeing some extreme readings in the put call ratios.  I have looked at these readings coupled with a variety of other combinations of data from today's session, and there consistently is a high probability of a higher close in coming days.

There is approximately 90% probability of a high close than today's close within the next 5 days.  Including any losers, the average trade return is quite good - depending on the scan combination, around 1% expected value or higher.

Most of the scan combinations I looked at had higher expected values by holding for either 2 consecutive higher closes OR two higher closes within the next 5 days.  This strategy dropped the win percentage down to the 80%+ range but produced a higher expected value on most criteria combinations.

In summary, I expected some chop and volatility into next week, possibly with lower closes yet to come, but the odds appear to be high for a higher close above Thursday's close within the next week.

Cotton Showing Extreme Trader Positioning - Suggests Major Rally Is Imminent

While I do not trade futures, I follow many commodity ETFs and am most comfortable and profitable with trading those markets, in addition to stock indexes. 

Currently, cotton is in an extreme positioning where the producers (red line on bottom panel) are actually net LONG.  These are the farmers, etc who produce cotton and who typically are using the futures as a hedge against their physical product. 

So they are almost always net short.  For the data breakdown going back to the mid 2000's, there is not another time that producers have been net long.  So given that price is hovering right near a 10 year low and the producers are indicating they don't need to hedge, I think this market is on the brink of a bear market low, or at least a major rally.

Speculative short interest is at an all time high, so there is plenty of "fuel" to feed a major vertical type rally if/when it gets going.  Short covering can lead to quite large and rapid upward spikes off major lows.

The last major rally in this bear market was about 10% in 2 months.  But a short covering rally off a low like this could be more like 20-30% in 2 months or less.

Click on Chart to Enlarge

Silver and Bonds Look to Have Completed "Blow-Off" Tops

Both silver and bonds have recently spiked into a common type of blow-off top pattern, some off which I have highlighted on this blog in recent years.

Sentiment and large trader positioning is ripe for a trend reversal or stall.

If you are one to get caught up late in a trend when it is obvious, my suggestion is that this trend has run its course.  And now is time to exit on an intermediate term basis, certainly NOT to get sucked into what WAS a strong trend.

Pete

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.