I SPY a dip

Just before the close, I got some SPY Jan 20th 223/220 Put Spreads for $.94 each. Here's why:

- After the recent swing high, there was a period of consolidation (12/16/16 - 12/27/16) followed by a break out to the downside.

- Two days ago, the daily candle formed a bearish engulfing signal after a doji, and closed below the daily 8 EMA.

- Todays candle closed even lower and formed a Doji Sandwich, using today's candle and the previous two days. This pattern suggests more downside.

- Today we closed below the 20 day SMA (green).

- The DI- crossed up over the DI+ (see the ADX/DMI subchart).

- I don't pay too much attention to volume as an indicator but you can see there was the most volume in the last 9 trading days (see volume subchart). This is another confirmation the other bearish signals are for real.

I see possible support at the 50% Fib, which is close to the 50 daily SMA (red), which is close to the bottom Bollinger Band (light blue), which also is close to previous resistance/support between 11/25/16 - 12/6/16. 220 is a conservative target.

The risk is the cost of the spread, $94 each. The reward is most of the width of the spread 223-220 = 3. So, the risk:reward is approximately 1:3, which is fine. And of course, my total risk is limited to the cost of the spreads, which I can keep to 2% of my account or less. If you want to risk 2% of your account, you just multiply .02 by your account balance, then divide the answer by the cost of one spread. For example, if you have $30,000 in your trading account, then .02 x $30K = $600. And $600/$94 = 6 option spreads.

I entered 2 exit orders. One at $2.90 limit order if the value of the spread gets that high. The other is when SPY share price drops to 220. I think price will go down to at least the 50% Fib at 218.36 but possibly after a bounce off the 50 day SMA (red), which could create a significant time delay while price rolls back over. So, I'll go with a more conservative target of 220 for SPY.

VIX possible bounce Update 3

Well, things are looking better for this trade. The VIX went as high as 14.68 today (according to my IB chart). Two days ago was a bullish engulfing candle, a bullish signal. Yesterday's candle closed above the 8 daily EMA. Today's candle confirmed that bullish signal by closing higher. But, we closed right on the 20 SMA. As you can see, looking back over a few months, the 20 SMA (green) has been a resistance level. Other bullish signs include the 3 day EMA (pink) crossing up over the 8 EMA (orange),  and the DI+ crossed up over the DI- (see the ADX/DMI subchart). You'll also notice the stochastics still have plenty of room to run.

On the other hand, in addition to the possible 20 SMA resistance, there may be a couple more trading days to the Santa Claus Rally, depending on how you define it.

My Jan 27/32 VXX Call spreads are still negative, but I will stay in longer to see what happens from here.

VIX possible bounce Update 2

Well, VXX is looking ugly for this trade, but we have a defined risk (cost of the Put Spread) and expiration isn't until Jan 17, which is just late enough into Jan to maybe catch a reversal. Since a change in sentiment could happen overnight due to news, and the Santa Rally is defined to end the second trading day of Jan., and we saw a significant sell off of equities last Jan 2016, I'm going to hold this position. Also, it is not a large position.

The VIX is at 11.50 as I write this 11:45am ET 12/22/16 and is higher than the open. We're still very near summer 2016 lows. I would exit any position if my thesis (reason for entry) is proven wrong, but I don't think we're there yet.

VIX possible bounce Update 1

As you can see in the VXX chart above, the Morning Star candle pattern didn't form. The 12/8/16 candle fell back and closed as a Doji. Then 12/9/16 gapped up at the open but also fell back and closed below the 12/8 low but above the 12/7 low.

One lesson here is to not rely on how a candle will close based on its action while still forming.

If this was a scalp trade I'd be out because the actual behavior didn't match the expected behavior. However, this is a swing trade with a controlled maximum risk, and there is an FOMC rate decision on 12/14/16. I've heard on financial news the futures market assigns a 100% chance the Fed will raise rates. I still need to learn how that calculation is done, but I've heard enough different sources that I believe it. 100% sounds extreme. VIX and VXX are both still off their recent lows. The VIX is still very low and resting on the lower Bollinger Band. The VIX daily chart is in a BB/KC squeeze (see VIX chart below) (BB/KC squeeze is when the Bollinger Bands[20,2,ema] come inside the Keltner Channel[20,1.5]). A break out from a squeeze can yield a sizable move.

So, I'm going to hold on to the position and see what the reaction is to the FOMC decision on 12/14/16. And if its a fizzle, then the end of the Santa Clause Rally is within the life of the option spread, so I'll probably hold on for that as well. I made sure the position is not greater than 2% of my account, so I can lose the full position and not threaten my account.

VIX possible bounce

This is chart of VXX 12/8/16 at 12:17pm ET. After looking at volume and assets under management of the top volatility ETF's I decided to use VXX because it has the highest volume and assets under management, even though it has a built-in value decay over time.

I got some VXX Jan 20th 27/32 Call Spreads for $1.10 each. Max risk is the premium I paid for them (cost). My target is around 31-33 either mid-Dec 2016 or early Jan 2017. The VIX was 12.49 and the VXX was 26.63 at the time I bought the spreads.

Here's what I was thinking:

VIX hit 11.30 this morning pre-market and bounced.
VIX low since 2008 is 10.28. We're pretty close.
VXX weekly chart easily hits the 20 SMA when it pops. The weekly 20 SMA will be approximately 33 in my opinion if volatility pops.
VXX daily chart easily hits the 50 SMA on a good pop. It will be approximately 31 if it pops soon, in my opinion.
The Risk:Reward for this trade is about 1:5.
At the time of the trade, you can see on the chart above:

• Stochastics (14,3,3) and Stochastics (35,10,3) are under 20 and rising.
• Price bounced off the bottom Bollinger Band yesterday.
• There is a possible Morning Star candlestick pattern forming.

Also, according to recent tweets from the Stock Trader's Almanac (www.stocktradersalmanac.com), there is a seasonal dip in equities in mid-Dec and the Santa Clause Rally ends the second trading day of Jan.

And, the market is crazy to be complacent in the current crazy new world.