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"Time to Buy Puts on the S&P 500 (SPY) for a Greater Decline Ahead?" | Main | "Ring around the Rosie, Pocket Full of SPY Put Options"

Posted on December 30, 2014 -
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By John Reizner |

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As I stated in my December 10, 2014 post here, when the S&P 500 mini futures closed at a price of 1992.5, that buying SPY puts was indicated in order to hedge a potential decline in U.S. equities prices. I based the potential success of hedging at that juncture on an “end of uptrend” or “sell” signal from the early onset trend indicator in the S&P 500 e-mini futures on that date.
The early onset trend indicator, created by Alexander Elder,  has an admirable track record in spotting the termination of an uptrend in bull markets. The ensuing market decline, if that occurs after such a sell signal, does not give forewarning of the depth of a potential decline.
In fact from December 11th to the 16th, the S&P e-mini futures declined to a low of 1961.5 – roughly a 2% decline from the sell marker.  I said in my earlier post that I would look for a two standard deviation volume histogram bar on the e-mini futures to show that a bottoming range for the market was being probed.
This type of bar represents a defended price level and a line of defense and support in the market. It may be best paired with Camarilla pivots for best analysis of the e-mini futures. I call the relative volume standard deviation indicator that I described in my previous article a potential “bottom indicator.”
On December 16, the day of the bottom, the e-mini futures just missed by a hair posting a two relative volume two standard deviation volume histogram bar – and just missed calling the bottoming range of the decline. However, the SPY ETF, which is the ETF for the S&P 500, recorded a significant two standard deviation volume histogram bar also on the same day, accurately signifying the price range of the bottom in the SPY ETF for that decline. That defended price level represented a line of defense and support (as well as potential resistance) in SPY, marking the ending area of the decline. SPY, on which I had bought puts, declined from 203.16 on December 10th to 197.91 on December 16th.
While the market and SPY were plunging, my hedging profits increased markedly while I maintained my equities positions. As the e-mini futures were just missing posting a significant volume histogram bar, and as I noted that SPY was posting such a defended price level – I hesitated. I hesitated because the previous instruction that I received regarding using the relative volume standard deviation indicator paired it for the purpose of interpretation with the e-mini futures.  Thus, I looked for a two standard deviation bar to mark the bottoming price range on the futures, not the SPY ETF.
With this in mind. I looked at the data going back two years on SPY and the indicator, and it showed that a two standard deviation volume histogram bar signified the bottoming price range of significant price declines in SPY 80% of the time. Thus an 80% success ratio just on the ETF over the last two years! Thus I gather that it may be sufficient to look at the SPY ETF as well as the S&P e-mini futures for such an indication of a potential halting point to a market fall.
Sadly, my hesitation on December 16th regarding the meaning of the indicator on SPY turned my hedging maneuver from a potential rousing success into a wash. Live and learn.
I would like to wish my readers a very happy, healthy and prosperous New Year!


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