Thursday, June 30, 2011

VIX Flirting with the Lower Bollinger Band and SPY Up Big in 4 Days



The markets these days are a little crazy and difficult to understand.  It was just two weeks ago that we were playing out an 'end of days' scenario for the markets. Stocks were goin' down, the VIX was risin' fast, and the bearshitters left the forest and were headed to the city. Well, fast forward two weeks... SPY is up a good 3 - 4% and the VIX has dropped a whopping 33% from its intraday high of 24.65 on 6/16/11.  We've gone from uber bearish to ultra bullish in no time!  Some digestion of the recent move would be welcomed.  As the SPY went vertical, the VIX did the opposite and is now looking oversold.  It's been dancing at the bottom of its Bollinger Band (20,2) for two days now, closing just above it. I wanted to see how the SPY performed when the intraday low of the VIX pierces its lower BB (20,2).

Buy SPY after intraday low of VIX pierces the lower BB(20,2) for two days in a row; sell 'n'days later. $10,000 per trade; 1993 to present.
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
     (1,514.88)
90
34
37.78
-4.19
-0.18
         52.81
   (59.12)
0.54
0.89
2
     (1,721.28)
78
32
41.03
-4.19
-0.24
         68.78
   (85.27)
0.56
0.81
3
     (2,409.19)
70
29
41.43
-4.19
-0.38
         90.59
   (122.84)
0.52
0.74
4
     (4,122.83)
69
27
39.13
-6.55
-0.75
         78.46
   (148.60)
0.34
0.53
5
     (3,644.35)
67
24
35.82
-6.55
-0.66
       106.14
   (143.99)
0.41
0.74

Things look a bit bearish over the next five trading days.  It would actually be nice if the SPY headed down or sideways over the next few days. It would give other stocks a chance to set up for future breakouts.

If the VIX had closed below its BB (20, 2), "VIX Has Reached a Level That Normally Precedes an Uptick in Volatility" would be worth a read.

Info on the last 4 days of SPY Action



The SPY was up at least 0.75% each of the last four days, for a total move of 4%.  This is the best four day run since the first week of September 2010. You know, right before it blasted up 22% in 5.5 months. Four consecutive 0.75% up days has happened only 6 times, so not a large enough sample to test.  But if I test three 0.75% up days in row, I get a larger sample size.

Buy SPY after 3 consecutive 0.75% up days; sell 'n'days later. $10,000 per trade; 1993 to present.
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
     (364.87)
27
11
40.74
-2.96
-0.13
      90.93
    (85.32)
0.73
1.07
2
     (930.87)
26
9
34.62
-3.42
-0.37
    100.89
  (108.17)
0.49
0.93
3
 (1,675.01)
26
9
34.62
-4.79
-0.69
    111.04
  (157.32)
0.37
0.71
4
 (2,088.01)
26
10
38.46
-8.11
-0.87
    139.12
  (217.45)
0.40
0.64
5
 (1,575.64)
26
13
50
-8.11
-0.62
    142.97
  (264.18)
0.54
0.54
6
 (1,687.81)
26
13
50
-8.11
-0.67
    141.84
  (271.67)
0.52
0.52
7
 (1,135.66)
25
11
44
-8.11
-0.46
    134.49
  (186.79)
0.57
0.72
8
 (1,311.28)
25
14
56
-9.74
-0.53
    121.88
  (274.33)
0.57
0.44
9
     (859.80)
25
13
52
-9.74
-0.33
    187.28
  (274.54)
0.74
0.68
10
     (250.72)
25
10
40
-9.74
-0.07
    265.99
  (194.04)
0.91
1.37
11
     (189.17)
25
13
52
-13.80
-0.06
    212.05
  (245.49)
0.94
0.86
12
       744.82
25
16
64
-13.80
0.30
    213.29
  (296.42)
1.28
0.72
13
       887.36
25
15
60
-13.80
0.35
    239.35
  (270.29)
1.33
0.89
14
       669.32
24
15
62.5
-13.80
0.28
    279.84
  (392.03)
1.19
0.71
15
       847.02
24
14
58.33
-13.80
0.35
    297.92
  (332.39)
1.25
0.90
16
    1,292.20
23
14
60.87
-13.80
0.56
    330.60
  (370.70)
1.39
0.89
17
    1,730.21
23
13
56.52
-13.80
0.75
    329.76
  (255.66)
1.68
1.29
18
    2,214.92
23
14
60.87
-13.80
0.96
    335.09
  (275.15)
1.89
1.22
19
    1,574.17
23
14
60.87
-13.80
0.69
    324.82
  (330.37)
1.53
0.98
20
    1,560.94
23
15
65.22
-13.80
0.68
    307.42
  (381.29)
1.51
0.81

This study shows that we should expect some weakness in the next week or two. But after that, things look bullish. With the market, anything can happen. These studies can give us a road map of what we might expect.

Trade well and position size accordingly.