This trade idea was made by studying the current pattern of how the SPY has been bouncing on the 50 ema while remaining above the 200 ema in regular intervals. I'll call this the "Bunny Hop". This is significant because it's a sign of the stock market overheating. If you look through history, the majority of bull runs are spent bouncing across the 200 EMA with slow and steady growth which has been a good area to buy. Considering that the market is going parabolic, it only makes sense to look for opportunities to be bearish. What comes up must come down, and what goes parabolic, must crash. There's also economic factors that play into this.
To start off, I wanted to look through history and see how many times we've been in a similar situation, I found 8. I admit that there was a bit of subjectivity in picking these because some situations were similar, but had larger time differences than the current bull run. Using each of those instances, I measured several things as if I had an omniscient point of view that new exactly when to long and short.
1. How many times we bounced.
2. Average days spent going up from the 50 ema and average days spent going down if you were to immediately switch positions.
3. Average percent gained in both directions.
4. The win rate of each side.
5. How things ended after breaking the pattern.
I averaged out all the instances and came up with an average long of 23 days with an average short of 11 days. I then back tested each instance by blindly going long at the 50 ema for the average days up and switched to going short right after. Longs generally had win rate around 75%, but the shorts would only win about 50% because they had less time to come true. After adding some rules, the short win rate improved to 68%.
1. You can only open shorts at the top of the range (or close to it).
2. You must also be at or past the average long date (23 days), not before.
3. The short position must be held for 18 days.
4. You must close your short once you've hit the 50 ema (or close to it).
5. If the 50 ema was skipped and it bounced again, you'd have to open another short once it reaches the top of the range.
All instances:
Let's also talk about the federal reserve. Since Covid, they've drastically dropped interest rates to .25% and have been stimulating the economy with 120 billion every month by buying bonds. The point of this is to try and boost employment levels by making debt more accessible and keeping businesses afloat. The issue however is inflation. If you take a look at the Producer Price Index along with the Consumer Price Index, it's clear that inflation is going parabolic due to all this printing. If the fed doesn't control these inflation levels soon, there's going to be a less buying due to high prices and company earnings will start to tank. So we don't get to this point, they'll raise interest rates and stop the quantitative easing. They've said this will happen in 2023, but in order to do so gently, they'll begin tapering a year earlier. This could be anywhere from this month to early 2022, but once it begins, I suspect we'll see a 5-10% correction.
Back to the idea, it's pretty simple. Total average time up along with average time up for this current overheating is 23-27 days. At this point, we find a short ONLY if we're at the top of the range which we hold for 18 days unless we hit the 50 day ema in which we sell (or close to it). Since the average amount of bounces is 4 and we're currently on 6 (only one time has reached 7), you could hold it past the 50 ema, but that's a bit greedy so do so at your own risk. I personally went long this month, but I don't plan on doing so again until we see our correction. My next target dates are from Sept 10th - 15th. If the requirements in this post are met, then I'll open another short position.
Last trade I did on this was August 13th which I sold on August 19th for a 50% ROI. This was done by buying deep ITM 1 month DTE puts. Since option IV generally goes higher when things crash, I was able to sell for a higher premium when volatility increased. The reason I'm not doing long options at the 50 ema btw is because of the volatility spike which results in a higher option premium so you can substitute that part with leveraged etfs or regular longs.
Win rate so far: 1/1
To start off, I wanted to look through history and see how many times we've been in a similar situation, I found 8. I admit that there was a bit of subjectivity in picking these because some situations were similar, but had larger time differences than the current bull run. Using each of those instances, I measured several things as if I had an omniscient point of view that new exactly when to long and short.
1. How many times we bounced.
2. Average days spent going up from the 50 ema and average days spent going down if you were to immediately switch positions.
3. Average percent gained in both directions.
4. The win rate of each side.
5. How things ended after breaking the pattern.
I averaged out all the instances and came up with an average long of 23 days with an average short of 11 days. I then back tested each instance by blindly going long at the 50 ema for the average days up and switched to going short right after. Longs generally had win rate around 75%, but the shorts would only win about 50% because they had less time to come true. After adding some rules, the short win rate improved to 68%.
1. You can only open shorts at the top of the range (or close to it).
2. You must also be at or past the average long date (23 days), not before.
3. The short position must be held for 18 days.
4. You must close your short once you've hit the 50 ema (or close to it).
5. If the 50 ema was skipped and it bounced again, you'd have to open another short once it reaches the top of the range.
All instances:
Let's also talk about the federal reserve. Since Covid, they've drastically dropped interest rates to .25% and have been stimulating the economy with 120 billion every month by buying bonds. The point of this is to try and boost employment levels by making debt more accessible and keeping businesses afloat. The issue however is inflation. If you take a look at the Producer Price Index along with the Consumer Price Index, it's clear that inflation is going parabolic due to all this printing. If the fed doesn't control these inflation levels soon, there's going to be a less buying due to high prices and company earnings will start to tank. So we don't get to this point, they'll raise interest rates and stop the quantitative easing. They've said this will happen in 2023, but in order to do so gently, they'll begin tapering a year earlier. This could be anywhere from this month to early 2022, but once it begins, I suspect we'll see a 5-10% correction.
Back to the idea, it's pretty simple. Total average time up along with average time up for this current overheating is 23-27 days. At this point, we find a short ONLY if we're at the top of the range which we hold for 18 days unless we hit the 50 day ema in which we sell (or close to it). Since the average amount of bounces is 4 and we're currently on 6 (only one time has reached 7), you could hold it past the 50 ema, but that's a bit greedy so do so at your own risk. I personally went long this month, but I don't plan on doing so again until we see our correction. My next target dates are from Sept 10th - 15th. If the requirements in this post are met, then I'll open another short position.
Last trade I did on this was August 13th which I sold on August 19th for a 50% ROI. This was done by buying deep ITM 1 month DTE puts. Since option IV generally goes higher when things crash, I was able to sell for a higher premium when volatility increased. The reason I'm not doing long options at the 50 ema btw is because of the volatility spike which results in a higher option premium so you can substitute that part with leveraged etfs or regular longs.
Win rate so far: 1/1