SPY Analysis: End of August
アップデート済
This is a daily chart of the S&P 500 ETF (SPY) with its weekly expected move plotted for August 29th through September 2nd.
For those who do not already know, the weekly expected move is the amount that an asset is predicted to increase or decrease from its current price within the current week, based on the level of implied volatility as calculated from the asset's options chain after the close of the prior week but before the opening of the current week. Assuming the asset's price is normally distributed from its mean, there is approximately a 68% chance that the asset's price will close the week within the range of the weekly expected move.
With this said here is my latest SPY analysis:
Set Up Score: 1 out of 10
This score measures the likelihood of a bullish breakout. A score of 0 suggests a very low chance of a bullish breakout and a score of 10 suggests an extremely high chance of a bullish breakout. Currently, the score is 1, which is very low. Therefore, the risk-to-reward is against opening new long positions at this time. One should wait for consolidation to enter long positions.
Weekly Expected Move:
As noted above, there is a 68% chance that the week will close within this price range.
High price: 416.23
Low price: 394.39
Volatility:
The potential for increased volatility remains high. As you can see below, the VIX broke above the weekly EMA ribbon and its Stochastic RSI shows that it has only just begun its oscillation upward.
How high is the VIX likely to go? If the resistance trendlines shown in the chart below continue to hold, then the VIX should begin to retreat once it hits the 30s.
If the weekly candle closes well above 30 then it's likely that we will see yet even more volatility and the June bottom will become vulnerable.
With this said, increased volatility is what we expect this time of year from a seasonality perspective.
Seasonality:
The August to October timeframe typically sees increased volatility.
The S&P 500 usually declines into the close of August relative to its peak in mid-August.
Therefore, in the midst of all the selling that may or may not happen this week, keep in mind that selling is typical for this time of year.
Fibonacci levels:
Price is retracing the bull run from the June low to the mid-August high. Last week closed almost exactly at the golden ratio (0.618) of this move.
The next Fibonacci level below is 396.95 and it is not too far from the bottom range of the weekly expected move (394.39). So these levels could act synergistically to potentially support price, should it fall down to this level.
Regression:
Below are two regression channels that I fitted to the data in a manner that maximized the Pearson scores, and in a manner to reflect both the bear market downtrend and the rally from the June bottom. Regression channels simply help us determine where price is moving relative to its mean or average.
It appears that the June rally is no longer governing price movement and that price is regressing to the mean of the larger bear market downtrend. If price falls to the bear market regression channel mean, I would expect it to find some degree of support at that level.
Weekly Chart:
The weekly chart shows that price continues to retrace downward following a bearish inverted hammer that formed when price hit the Ichimoku Cloud.
Subsequently, price fell below the EMA ribbon - this is bearish.
Therefore, both the weekly EMA ribbon and the weekly Ichimoku Cloud continue to act as resistance to SPY.
As you can see above, now price has fallen below the EMA ribbon while the Stochastic RSI is oscillating down. This is also bearish.
A rare event occurred in early August whereby the K value of the Stochastic RSI reached its maximum value of 100 while price was still not above the weekly EMA ribbon. This rare event typically occurs during economic recessions, but has been also been identified during the recovery stage of market crashes outside the context of recessions (e.g. following Black Monday in 1987).
Monthly Chart:
The below monthly chart shows an inverted hammer candle in which price was pushed right back down to the EMA ribbon.
Inverted hammers after significant selling are actually signs of a bullish reversal. They represent the capitulation phase of the bottoming process. Whenever a candlestick forms a long upper wick after there has been a significant sell off but also after the stochastics have started to oscillate back up, this reflects selling into any signs of strength. The market participants who sell or short into any signs of strength need to exit before a sustained bull run ensues. Since this is still occurring in the candlestick for August, this means that more time (more months) must elapse before a major sustained bull rally is likely to emerge.
Yearly Chart:
Although the yearly candle is not completed, the chart shows that we are precariously sitting on the third Fibonacci extension of the Great Depression high. The Stochastic RSI shows a bearish cross of the K line and D line.
For more details about why this concerns me, you can view the below post for my long term projections.
Stage of the Economic Cycle: Late Stage
(Stages are early, mid, late and recession)
Since the 10Y/2Y yield curve is currently inverted we are in the late stage of an economic cycle.
Below is a chart of how each sector typically performs during this stage.
Credit: Fidelity Investments
We are most likely in Stage 6 of the economic cycle as shown below because stock, bonds, and commodities have all been declining to some degree in the past several months and because the yield curve is inverted. Once the yield curve inverts, economic contraction will subsequently occur. Although the general trend of all assets is down during Stage 6 there can still be rallies before contraction takes hold.
Credit: StockCharts.com
For my thoughts on the coming recession you can view my post here:
Please leave a comment if you find an error in my analysis above or if you'd otherwise like to share your thoughts. Thank you.
For those who do not already know, the weekly expected move is the amount that an asset is predicted to increase or decrease from its current price within the current week, based on the level of implied volatility as calculated from the asset's options chain after the close of the prior week but before the opening of the current week. Assuming the asset's price is normally distributed from its mean, there is approximately a 68% chance that the asset's price will close the week within the range of the weekly expected move.
With this said here is my latest SPY analysis:
Set Up Score: 1 out of 10
This score measures the likelihood of a bullish breakout. A score of 0 suggests a very low chance of a bullish breakout and a score of 10 suggests an extremely high chance of a bullish breakout. Currently, the score is 1, which is very low. Therefore, the risk-to-reward is against opening new long positions at this time. One should wait for consolidation to enter long positions.
Weekly Expected Move:
As noted above, there is a 68% chance that the week will close within this price range.
High price: 416.23
Low price: 394.39
Volatility:
The potential for increased volatility remains high. As you can see below, the VIX broke above the weekly EMA ribbon and its Stochastic RSI shows that it has only just begun its oscillation upward.
How high is the VIX likely to go? If the resistance trendlines shown in the chart below continue to hold, then the VIX should begin to retreat once it hits the 30s.
If the weekly candle closes well above 30 then it's likely that we will see yet even more volatility and the June bottom will become vulnerable.
With this said, increased volatility is what we expect this time of year from a seasonality perspective.
Seasonality:
The August to October timeframe typically sees increased volatility.
The S&P 500 usually declines into the close of August relative to its peak in mid-August.
Therefore, in the midst of all the selling that may or may not happen this week, keep in mind that selling is typical for this time of year.
Fibonacci levels:
Price is retracing the bull run from the June low to the mid-August high. Last week closed almost exactly at the golden ratio (0.618) of this move.
The next Fibonacci level below is 396.95 and it is not too far from the bottom range of the weekly expected move (394.39). So these levels could act synergistically to potentially support price, should it fall down to this level.
Regression:
Below are two regression channels that I fitted to the data in a manner that maximized the Pearson scores, and in a manner to reflect both the bear market downtrend and the rally from the June bottom. Regression channels simply help us determine where price is moving relative to its mean or average.
It appears that the June rally is no longer governing price movement and that price is regressing to the mean of the larger bear market downtrend. If price falls to the bear market regression channel mean, I would expect it to find some degree of support at that level.
Weekly Chart:
The weekly chart shows that price continues to retrace downward following a bearish inverted hammer that formed when price hit the Ichimoku Cloud.
Subsequently, price fell below the EMA ribbon - this is bearish.
Therefore, both the weekly EMA ribbon and the weekly Ichimoku Cloud continue to act as resistance to SPY.
As you can see above, now price has fallen below the EMA ribbon while the Stochastic RSI is oscillating down. This is also bearish.
A rare event occurred in early August whereby the K value of the Stochastic RSI reached its maximum value of 100 while price was still not above the weekly EMA ribbon. This rare event typically occurs during economic recessions, but has been also been identified during the recovery stage of market crashes outside the context of recessions (e.g. following Black Monday in 1987).
Monthly Chart:
The below monthly chart shows an inverted hammer candle in which price was pushed right back down to the EMA ribbon.
Inverted hammers after significant selling are actually signs of a bullish reversal. They represent the capitulation phase of the bottoming process. Whenever a candlestick forms a long upper wick after there has been a significant sell off but also after the stochastics have started to oscillate back up, this reflects selling into any signs of strength. The market participants who sell or short into any signs of strength need to exit before a sustained bull run ensues. Since this is still occurring in the candlestick for August, this means that more time (more months) must elapse before a major sustained bull rally is likely to emerge.
Yearly Chart:
Although the yearly candle is not completed, the chart shows that we are precariously sitting on the third Fibonacci extension of the Great Depression high. The Stochastic RSI shows a bearish cross of the K line and D line.
For more details about why this concerns me, you can view the below post for my long term projections.
Stage of the Economic Cycle: Late Stage
(Stages are early, mid, late and recession)
Since the 10Y/2Y yield curve is currently inverted we are in the late stage of an economic cycle.
Below is a chart of how each sector typically performs during this stage.
Credit: Fidelity Investments
We are most likely in Stage 6 of the economic cycle as shown below because stock, bonds, and commodities have all been declining to some degree in the past several months and because the yield curve is inverted. Once the yield curve inverts, economic contraction will subsequently occur. Although the general trend of all assets is down during Stage 6 there can still be rallies before contraction takes hold.
Credit: StockCharts.com
For my thoughts on the coming recession you can view my post here:
Please leave a comment if you find an error in my analysis above or if you'd otherwise like to share your thoughts. Thank you.
ノート
If you'd like to plot the weekly and daily expected moves for SPY on your chart, try the indicator "SPY Expected Move by VIX", which is calculated from the VIX rather than from the implied volatility of the options chain. The expected moves that I've posted above were manually calculated by me using SPY options chain data.If you're unfamiliar with the concept of expected moves below are some videos that can help:
youtube.com/watch?v=Lhv3wiPv6Ok&t
youtube.com/watch?v=Lhv3wiPv6Ok&t
ノート
So far price has been bouncing off of Fibonacci levels. Remember that once September begins, we switch back to a neutral/modestly bullish seasonality bias which continues until about mid-September when seasonality indicates that volatility picks up again and declines are possible. This bearish bias begins in mid-September and continues into early October. Also, keep in mind that volatility may occur around quad witching on September 16th. I will post updates along the way.ノート
Price action continues to bounce around Fibonacci levels within the weekly expected move. I expect that tomorrow's price will close higher than today's. Anything can happen so do not trade off my predictions.ノート
My best estimate of price action is that we're printing a lower wick right now. The VIX is not validating this move down. Today's candle will likely end up being the bottom for this week. Again, anything can happen so do not trade off of my analysis.ノート
If SPY can successfully print a lower wick off its daily trend line and move back into the weekly expected range, then the bias shifts back to bullish in my opinion. Whereas if this fails along with the 390 level, then the June bottom will become vulnerable. I am adding long positions with a tight stop loss today. If I'm wrong then I lose a little, whereas if I'm right then I can potentially gain a lot. Trading is all about risk to reward and nothing else. (Do not treat this as a trading recommendation - I could be totally wrong as anything can happen).
ノート
As expected from seasonality charts, price rebounded and finished higher. The long lower wick and the fact that price finished back within the "weekly expected move" creates a bullish bias. While anything can happen, it's possible that this is a local bottom. If so, price may continue sideways or move up modestly until mid-September. More volatility can be expected around September 16th (quad witching). ノート
Here's how today looks so far. Looks like the Fibonacci level is supporting price and that it will stay within the weekly expected move. As always, anything can happen though.ノート
Very unusual week. SPY ignored both the weekly expected move and the Fibonacci levels and instead found support on the June resistance levels. VIX broke out this week but then stagnated. The bias is mostly neutral moving forward because we printed two days with nearly the same low price and with lower wicks. The US02Y was falling which is also generally good for risk assets. However, the VIX remains in breakout mode and the SPY continues to be resisted by its moving averages. In my opinion, next week cannot be a repeat of this week, if we are to hold the June lows. As always, anything can happen. Follow the rules of good trading and you will survive whatever befalls us! Good luck with your trades! 
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