A recollection of my analysis for buying when S&P broke down to 820 today

SPY

S&P intraday

Finally! I have been waiting for a bear market rally for weeks! I decided to go full long after the bounce from 820 today. Refer to that post for details of my entries. In this post, I would like to discuss why the 820 bounce gave me the confidence in going all in despite widespread fear and the many failed attempts myself.

A quick recap of the past week’s action. After the failed rally attempt from 10/28 to 11/04, the market has been brutal to say the least. Any strength failed to stir enthusiasm and has bled down slowly. The market drifted down lower on little volume day after day. If I were to describe the market, I’d say it looked like the last moment of a dying man. This lack of will to move has certainly killed many bulls. I was one of them. I have been stopped out a few times trying to catch this falling knife (more like a grind). I even prepared to exit the last of my holdings if we do break down from this point.

From the beginning of the day, the market looked like it’s going to be another down drift today. But being very near the 10/10 bottom already, I know things are going to move one way or the other before the options expiry next week. And since the Max Pain for the index options are at least 10% higher, I am still looking for a reversal soon.

I mentally noted S&P at 845 is an important level. It was the low of the 10/28 big rally day. The market skid on the 845 level all morning with little volume. That was good because it is testing a support on low volume. I had thought we may bounce from there.

Then I went to lunch just before noon.

When I got back after 1pm, the market has already broken down. However, there are several bullish indication I noticed.

1. the break down volume is higher than the previous bar (Figure 1), but it’s still relatively low. Which means we don’t have panic selling yet.
2. both the TICK and Advance-Decline line moving averages (Figure 2) are relatively healthy for such an important drop. Indicating no broad selling.
3. notice the unusual V shape for the TICK (Figure 2)? We even reached a new multi-day low of -1666. Yet #1 and #2 contradicts this seemingly panic selling, so this depression in price looked artificial to me

Like how the recent rally attempts lacked enthusiasm, this break of 845 and test of 820 looked like it lacked enthusiasm too. Given that this is such a major support level, odds are that we will bounce from here at least for intraday. That is when I made my entry.

Before 2pm, we broke 850, the low of yesterday, with the highest 30 min volume of the week. That is when the rally looked strong to me and my doubt of a bull trap eased. Frankly, I had some tight mental stops and prepared to jump if things deteriorate like the many times before.

The day continued strong with price and volume confirmation. We closed at the high with significant volume. We even reached 700 million volume on SPY, a first since 10/16. I believe an intermediate bottom has been set so I’ll be looking at a longer timeframe (days) for my long positions now.

First expected resistance from this move is 980 on the S&P from the trendline (Figure 1, right). Target is at least the 50 dma, we just haven’t touched it for 2 months. This is as good a time as ever to give it a run for it.

Today is a great example of the need for critical thinking with a clear head in light of a lot of pressure and past emotion. The beaten account, the grim market movement, and the many stopped out trades has nearly made me walk away for the week. But I remained focus on the market and made my decision based on the price action.

Despite renewed optimism, I will continue to practice prudent risk management and to eventually pocket at least most of the profit from today, if not more.

Stock move estimation on expiration day based on option prices

SPX move estimation based on option prices

I’d like to document a useful technique I picked up today from Tom Sosnoff on ShadowTrader. It’s based on the idea that option pricing has become so efficient that it can be used to predict actual stock move.

Since it is expiration Friday this week, the Oct 08 index option are expiring in two days. So for something like, SPX, the Oct 08 call/put has only two days left. Thus, there’s little time decay factored in the price for these options with respect to the actual price. In other words, SPX and SPX options prices are converging.

So if we take the price of the straddle and strangle strike on the money, it should be the expected move for SPX for this Friday. For example, SPX closed at 907.84 today. The price for a straddle at 905 strike is $48.65. The price for a strangle at 900/910 strikes is $45.30. We’ll average the two numbers ($48.65 + $45.30) / 2 = $47.0.

So the SPX is expected to move about 50 points this Friday either up or down.

Back to Basics: Market sentiment via 2-line EMA on S&P500

S&P 500

One of the most, if not THE most, important theme in trading is identifying if we’re in a bull or bear market. It’s easier to “ride with the wave” than to fight against it. While there are an abundance of work, studies, theories, or whatever, on calling out market sentiments, I feel that the most useful way of doing it would be ones that stick to the facts. And the only fact we can be certain of in the market is the price.

So here’s the idea (definitely not original) for guessing market sentiment.

1. Bull market = 50 dma > 200 dma for S&P 500.
2. Bear market = 50 dma < 200 dma for S&P 500.

As with any indicator, this is not a law. It’s just a signal to give you a piece of information for you to intrepret based on the fundamentals and maybe other technical analysis tools.

Reversal with Stochastic, CCI and Keltner Channel strategy

This is a trading strategy to catch a turn in trend using Stochastic, Commodity Channel Index (CCI), and Keltner Channel. Here’s the concept.

Enter position on concurrent signals from the following indicators. CCI (which marks a turn), Stochastic (in corresponding overbought or oversold zone for confirmation), and Keltner channel (relative position of the current price) signals.

To avoid hunting for tops or bottoms in a strong move, do not enter if the current trend is obviously opposite of the entry position. That can probably be filtered by a 2-ema technique, MACD, or by analyzing a higher time frame.

Below are two example charts with all the indicators used illustrated along with the entry signals. Blue dots for long entry, red for short.

If you like this strategy, subscribe to my free RSS feed to receive the latest updates on my other trading signals.

New moving average

I downloaded Hull Moving Average, Adaptive Moving Average, and a Kalmann Filter today.

In the figure, the blue/red is HMA(8), cyan is AMA(10), yellow is EMA(9) as comparison.

Notice that HMA is super fast and follows the price closely. AMA lags more but does a good job of smoothing outt the noise. EMA is as usual and very laggy.

A strategy I’m thinking of is to use 3 different MA’s instead of only EMA to improve the previously discussed 3EMA crossover strategy. The problem with the 3 EMA crossover strategy is that EMA lags too much, so it’s not good for day trading so reaction time is the key to catching / exiting the waves.

Maybe using the HMA as the fast MA, AMA as the base, and something else to verify the trend can work. As I’ve said before, remember to use something to filter out the whipsaws. But don’t use something laggy as it would defeat the whole purpose of a fast indicator.

Also, HMA can be used as a proxy to smooth out some inputs. i.e. RSI(HMA(close, 8), 14) or HMA(RSI(close, 14), 8).