Remember that when your favorite stock cuts theirs.
I think the rally currently underway in the after hours market (S&P E-minis up ~2%) will run for two to three days, pushing the indices into extreme overbought levels. Still, I do not want to get long here. I also do not want to be short, yet.
Recently completed testing on the SPY, going back through all data available on the ETF, shows a ~78% chance that the market closes beneath today’s close, in the near future. The average winning trade would last 9 days. I like them odds, but do not relish the idea of a 4 or 5 day drawdown, as the market rockets to the top of its recent range, before pulling back.
I think there is a good chance that the market gets pushed into extreme overbought levels due to the enthusiasm surrounding the Bad Bank setup coupling (pun intended) with the Econdomic Stimulus (that’s not a typo). If this occurs, revisting this study may help determine a profitable path over the next few days: Floating Relative Strength: Bears Have the Edge. Jeff Pietsch also gives overbought markets a good treatment here: RSI-Mon Says ~ This Pullback Was Way Overdue!
Bottom line, the market has been basing for long enough that this next move may be rather explosive. With the 10 Period Average True Range on the SPY reading 3 points, the markets could easily move 1.5 ATRs tomorrow, which would mean a SPY close near $89.00 (885 on the SPX). I do not want to be short for that type of move. I also do not want to be long because as sure as I hate American Express for getting my tax dollars for their bailout, there will be a pullback.
So are you just waiting to go short at 89 SPY, or are you waiting for a pullback from there to go long?
_______
I don’t think this rally will even last 3 days.
Jake, unless tomorrow reverses and closes down, I’ll begin shorting Thursday’s open. 90 ish would be a great place to sell. Who knows if it gets there or not. Hell, we could rally straight for a month.
I will consider longs again if a pullback can keep higher highs and lows.
Ryan, hard to say. I would enjoy it if we rallied for a few days, get the bulls all frothy, and then pull the rug back out.
I think (the market being sadistic) it’ll drop below 83 before it hits 89.
No numerical confirmation, just Taleb’s maximum pain theorem.
Wood-
Can you give easy explanation what the “recently completed testing spy to 78% chance drop” is all about? Not questioning the prediction, just wondering what the testing considers, e.g., beyond what typical indicators show us.
Thanks for the info. Wood. I think SPY will rally to 870 – 875 by Friday. Monday we head down and break through 800 next week.
Bob, good question. It is really an easy concept. Take a technical indicator with a proven edge (most do not have any statistical edge). As I’ve lately been messing with CCI(8) we’ll use that one.
As CCI(8) moves between +150 to -150, what happens X days after an overbought reading? For CCI, overbought may be anything more than 100, or maybe you use 125.
The point is, take an indicator with a statistical edge, set a threshold where the edge is the most robust, and then track what happens to the market after the threshold is breached.
As systems should be, it is really simple, with very few variables.
I’m with you Wood. There are too many subtle indicators that are flashing red; not red enough to short or hedge. The tell will be today and tomorrow about 2 hours before the close(s); 850 holding those two days and new buyers willing to take on some risk. The trending t-bill stuff is another issue.