SPY: Thoughts for Next Week

Good morning everyone,

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.

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.


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

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!


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