Let's see what sense we can make of SPY this week.
First, recap:
SPY hit my 380 target for a bounce last week. If you have been following along you would know what I saw that was special about this level but let me recap. 380 marked -3 Standard Deviations away from SPY's 1 year trading average. -3 Standard Deviations is pretty unheard of for SPY. The last time it hit this level was the COVID crash and then again in the 2007/08 crash.
Each time there was hard rejection, even during the 08 crash where there was uncontrolled selling, SPY dramatically bounced at this point. Its essentially just a 'technical' bounce or relief, as some call it. Or as others call it a 'dead cat bounce'. But I assure you, SPY is very much alive.
To be honest, with the bearish momentum SPY had, I completely anticipated SPY just barreling through that 380 down into the 370s, pushing it to beyond -3 Standard Deviations away. Again, this has only happened during times of absolute crisis (COVID and during the massive liquidation stent in 08 when a bunch of banks filed for bankruptcy), so it didn't happen here. Which is good. It means that the market is still reflecting the reality of our situation. Which is, its not good. Its not good at all. But its not '"banks going bankrupt, economy collapsing, people dying in the streets of an unknown virus" kind of bad.
Overall, I remain extremely short biased on SPY. My outlook is that this will continue to fall. However, shorting from 380 is just poor technical and fundamental planning. It doesn't make sense. SPY needs to have a bit of relief before making lower lows. The extent of this relief is TBD but let's get into that next.
Current Status SPY closed slightly above -3 SDs away from its 1 year trading average. A tremendous stress on SPY.
Not only that, but SPY is now officially approaching oversold in the weekly RSI and we can see two other recent ish times this has happened and the results:
We are still stuck in that megaphone pattern and, in fact, despite dipping slightly below, the bottom support of this megaphone pattern acted as a trampoline and bounced this price aggressively up:
The bounce we saw on Friday before EOD was not sufficient to bring SPY out and away from being highly oversold and over extended to the short side. This concerns me for 2 reasons.
1) If SPY were to aggressively drop from here, if we go into Monday and SPY just continues to tank, the market would have appraised our current climate and situation as catastrophic. And I don't use this word lightly. If this is the case, we can anticipate huge panic selling to follow and similar to COVID selling. To extend a stock that much without a technical bounce and relief would mean that the market thinks the world is ending essentially. Like I said, in my analysis I have only seen that kind of selling during times of catastrophe. Serious economic instability has not been able to get those kinds of results and that is what I would place our situation at currently, economic instability. Again, we are getting close to catastrophe (i.e. recession), but I don't think we are quite there yet. We are heading to that precipice Velma and Louise style though =).
2) SPY is extremely heavy and struggling to make any kind of bullish movement. However, its just not sustainable for SPY to continue the course of selling it has seen thus far, absent serious external catalysts. I would like to see SPY be able to stabilize itself away from being so oversold so that we can make a smooth sell off down. SPY has been moving too aggressively in the downward direction with little to no relief. Its too much stress. If this were to continue, we would ultimately need to see a massive rebound like we saw in April of 2020. Essentially what I am saying is, its super hard to be so short biased when there is absolutely no bullishness. We can't short an index like SPY to 0 absent the literal end of the world.
VIX I don't use the VIX to plan my SPY trades, I don't find it all that helpful, but people swear by this and constantly scream at me to look at it (in the spirit of my Family Guy references, this is how I feel about people telling me about VIX). So I thought I would take a look at it. I don't like it from a chart perspective, but I LOVE it from a statistics perspective. If we get rid of all those nonsense chart patterns and JUST look at VIX in terms of ZScore and Standard Deviations, its actually quite beautiful:
If you look at this chart, you can see that VIX generally finds hard resistance between 1.5 and 2 Standard Deviations. Anything over 2 Standard Deviations is HARD rejection back down. Right now its almost resting at 1.5 standard deviations. And you can see its sort of triple topping/head and shouldersing. I anticipate a move towards 1 standard deviation away, placing the VIX in the 26 price point range. It has spent a lot of time in this area of resistance and it appears to be getting tired.
Ranges:
Trading Range based on my adjusted ranges for volatility places the range tomorrow between 380 and 398.
Bullish Break: Above 395 Bearish break: Below 383
Sentiment: So my sentiment models have been off. It gave me hard false bullish readings on one of the most bearish days we have had. So I had to spend hours fixing this, updating this and re-back testing this. Was really annoying but I got its accuracy back up to the 80s.
Again, its too early before I see how futures opens, but basically what you need to know, in order for us to have a nice bullish day without a retest of 393, we need an aggressive futures open. We would need probably at least an open of 4015 in futures tonight for this to keep safely away from 393. Anything below that, we can expect to see 393 again on Monday.
An open around 3950 would give us high probability of seeing a low below 393 and a high above 393.
But I will run these numbers when the time comes.
That's it! Those are my thoughts. Lots of interesting things going on I guess.
have a great rest of your weekend everyone! Take care and leave your questions/comments and critiques below!
Just curious whether you heard about Melvin Capital going under and liquidating all their assets. Thoughts on that? They were caught up in all that GameStop nonsense so could be a one-off, but I know you've been talking about the lack of catastrophe in the market. I saw that a couple days back and I'm wondering if they're the canary in the coalmine. I'd be surprised if they're the only one out there in that situation.
Steversteves
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@stein3d, Thank you! That is the one I was referring to in my post but couldn't think of the name and didn't care enough to look it up! LOL! THanks! Yes! But I haven't heard of any others. I think they would be coming out by now with the massive selling we have had. But its always possible we see a bunch randomly pop up. I think if it does happen, it will happen when the word recession gets cemented by the feds and governments though.
Steversteves
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@stein3d, Oh no. It seems like you should probably have followed along after all :O. I cashed out my positions but unfortunately still stuck in my HSU trade on the TSX (leveraged SPY 2X shares). I just need this to hold out till tomorrow so I can exit that haha. But yeah, very nice gains, very nice gains indeed. Option type gains with shares which is really nice (I only went in with like 100 shares of each, SPXL, HSU, UDOW and DFEN), so like, the gains I got considering how few shares I bought were ridiculous. Took some off of HSU and DFEN on Friday and then I am out of everything except HSU (remaining 50 shares). And of course, intra-day I have been scalping this but I left one long runner with a price target of 395 (my bullish break level) which ended up getting stopped out (on trailing stop). But likely will re-enter for that. When is your short expiry? And what is your short strike price?
stein3d
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@Steversteves, Haha, if I had caught the full bounce on Friday maybe but I was already done trading for the week. Just can't resist a small side bet :D but I closed it out this morning. House money from previous profits last week. 2x May 25 372 puts, definitely not expecting that strike to hit but in the event of a large gap down or sell-off today they would have been up pretty nice. Still looking for this to sell off, but I'll take a more serious position once that move starts. Lack of follow-through this morning so far confirms my suspicion that there is no serious bullishness.
Steversteves
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@stein3d, I don't think so, its still completely bullish. But I am sure its having a fun time taking everyone who is shorting its money :P. I guess we will see what happens. It brought itself up from -2.8 to -2.4 SDs. I would like to see another higher close tomorrow and maybe bring this up to at least -1 range, like even -1.8 before it decides to fall again. Otherwise we are just going to have annoying, haphazard falls that are staggered between bearishness and bullishness and that is no fun.
stein3d
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@Steversteves,This is supposed to be fun?? :D But yea, it ended up holding pretty well today. I got a decent long and short scalp in, but then got stopped out on another long attempt so a pretty uneventful day. A long day trade from open would have been the better play. On the plus side, last week I found where my broker was hiding all the conditional orders so I've been having some good success setting up contingent orders on the underlying index to trigger trailing stop orders. This might have another day of upside in it, but we've been in a well defined downward channel since mid-April. There's room until maybe 399? After that it breaks out which would at least show a little commitment from the buyers, but idk, we've seen this same setup twice before this month and the results speak for themselves. Maybe third time is the charm?
Steversteves
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@stein3d, Haha I only got one trade in, a long scalp. Power hour I was itching to go long but the setup was not there. It was too bullish through the day with no sufficient pull-back. And i didn't want to take any of those short entries because my bullish break was done and shorts are usually diminishing returns at that point (when it breaks bullish break, even if I take a trade and get caught in hard pullback, I am 100% fine leaving it because 99% of the time it will come back around and I will get out even for a marginal profit, whereas when I short on a bullish break I have to stop out on anything that doesn't go my way because there is no bearish conviction and I easily get shaken out on these). But not too upset about it. My swings were great and I am still in a long swing on SPY. I think that yeah, we could end up tanking. I would like to see 399 broken. It stayed confined to my trading range today which was great but who knows what will happen. I am itching to get into a short swing but at this point I don't see bearish conviction yet.
Steversteves
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@stein3d, Which makes me think you shouldn't have stopped out your long because you would have gotten it back on that gap up just before close. Bullish break levels are worth a million dollars, seriously. These levels tell you all you need to know ;).
stein3d
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@Steversteves, Haha, well in this case it might have been worth about $100 but yea if I held until close it would have saved me the loss and I'd have been slightly up. I've been setting my trailing stops really tight because I just don't trust this market. Actually what I've been doing is setting my contingent order for a couple points on the underlying in the direction of my trade, so then when that gets triggered it becomes a tight trailing stop limit since it already reached a target where I'd be happy to take profit so if it runs further that's just icing. For that long position though, I opened it around 1:15 after 395.30 seemed to be holding well, but I was a little premature and got faked out by that quick dip just before 1:30 before I had even finished setting up my conditional sell order so I panicked. PTSD I guess. But yea, you totally nailed it on those swings, really nice trades. I know you'll judge me but I did start scaling back in to some short positions for end of week, if we gap up again tomorrow so be it but it's a bear market so I think bearish conviction is anything less than complete and absolute bullish conviction.
Steversteves
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@stein3d, Tisk tisk tisk, its okay. I mean I don't know. I am actually getting kind of anti-TV right now because everyone's short bias is really starting to rub off. And I find myself listening to people a little more than I should. It just so happens the most stop outs I have had was since I started really listening and caring about what people said on TV. So I may actually take a bit of a break from it and distance myself. The point being, you need to do and play what you see and not what others see. So if your analysis is that you should be shorting it, then short it. I ultimately paid for my house and my SUV following my trading plans and analysis, so there is no reason to listen to people on T.V.'s opinion ;). You are smart that you stick to your own analysis and your own stop outs, etc. etc. and not blindly follow idiots like me :-). So not judgement, just respect!