Could Go Lower

The market sold off quite hard today with the SPY closing down 2.54 points to 198.82.  For the year, SPY has been down 5.05 points.  Not quite what most expected as the year opened.  Normally, there is lots of new money coming in as investors position themselves for the new year.  This year, however, opened down due to turmoil in Chinese markets, keeping buyers at bay.  As the chart shows, we rallied just slightly yesterday but price did not even hit the shortest (4 day) moving average and then price continued down sharply today.  This does not look like a pattern that will soon reverse course.

Looking through the various standard deviation readings over a number of time periods, I noticed that the 50 day standard deviation closed today at -2.57.  I was curious to see when was the last time we were this oversold and what happened next.  The following is the chart of the 50 day standard deviation.

The occurrence happened at the beginning of the chart.  You can't see the negative 2 reading because the over the next three trading days, standard deviation dropped to nearly -5!  That was back in August when the market broke.  It was one thing to be right in positioning oneself to take advantage of the down move, the problem was that you couldn't cash in and take profits.  The option spreads, the difference between the buy price and sell price of the option, was so wide that securing a profit was impossible. 

Not saying that the same thing will happen in the coming days but the momentum is down.

I remain holding some March puts as well as the Iron Condor positions spread out through June to take advantage of time premium. 

Good luck on your trading