SPDR S&P 500 (SPY)

[Fox13]

When I wrote “…shorting some overpriced pigs , when taken UP by the sector indices, is also rewarding and perfectly honorable” I had in mind a recent interesting trade which I will briefly analyze below. This is an easy discussion since the trade was substantially helped by luck. LOL! It was based on a strategy proposed Larry Connors and Linda Raschke and modified by me.

It started with a daily SYNA chart 1, on which programs detected an interesting 4 days evolution (white rectangle). Day 4 was an inside day and also had the narrowest range of all these 4 days). Very important: on day 4, “Hist. Vlty Ratio (4/100)” was less than 0.5 (0.42 at that time) Also, RSI 2 had just dropped from 94.4 to 74, but was still in the red zone. MACD gave no signal yet! OK, this was DAY 1 of the trade = only “get ready!” for a signal (purple vertical line).

Next day, the SHORT signal appeared on both daily and 130 min charts [where my FIB MACD (3,8,13) also gave a SHORT signal], when, after kissing the BB, the price fell inside the purple FB.

On both charts, the entry price is market in red. I usually do it safely, under the entry of the 130 min. chart 2. Out of the money front month puts were the best bet: Aug 30 puts QYGTF. What happened today is obvious. The only minuscule disadvantage: when I negotiated the sale of the puts, which were now deeply in the money, a small amount was lost due to the increase of the spread.

Some observations: this strategy is no voodoo. It is based on some logical connections between the used parameters and indicators. The 1 to 4 monitored days can be varied but I usually keep the correlation between “Last = Narrowest Day of N Days” & “Hist. Vlty. Ratio, N/100“: in this case N= 4 (my modification). Sophisticated software helps but the narrowest day can be easily noticed by “observation” on daily charts. Instead of screening algorithmically a large number of candidates one can concentrate on a few stocks that the analyzer actively likes or dislikes. Finally, the same method, but with opposite action in the trend indicators, can be applied for going long, when the impulse should carry the price in the opposite direction.