"...I SPY ...".

SPY 15th January 2010.

Since August 2009, the SPY has been demonstrating some very interesting patterns. In summary here are some observations from the above chart :.

1. The SPY has stayed well within a two standard deviation regression channel, which has a correlation co-efficient of 98.2%.
2. Similarly, the SPY has ridden the Bollinger bands in almost a classic pattern of comming off the lower band and making a rapid rise to the upper band and riding this until the price hits the upper regression channel.
3. Note that at this point, the price, upper Bollinger and the upper regression line all coincide. Then within days, the SPY gaps quite dramatically down to the mid line in the regression channel.
4. Once the SPY has reached the mid line of the regression channel, it is a make or break situation. Either the price rises again to retest the upper regression line and Bollinger band, or the price breaks through the mid regression line and gaps quite suddenly to the lower regression line and lower Bollinger Band.
5. In all the time since August 2009, the SPY has only once broken through the mid regression line support to reach the lower Bollinger and lower regression line. Mostly the mid regression line holds firm as a support line and the SPY begins to rise within a day or two back up to retest the upper regression line.
6. Finally, in an obtuse sort of way, the 50 day moving avarege also acts as a loose support level for the SPY as well.

The SPY pattern in the chart above is almost an oscillation. One impressive feature of the charting package, Advanced GET,  is the uncanny accuracy of the ellipse study. Notice how each of the supports also coincide with the ellipse projections.

Interestingly, every ellipse for the upper resistance points misses the target. The upper ellipse studies are not plotted on the chart. In this instance, the ellipse is very accurate in projecting the support and turning points, but totally inaccurate in projecting the upper turning points and resistance levels.

So how can we use this information. Well depending on implied volatility, (which is another problem all together), we could do a slightly out of the money, Calendar or Butterfly around the 1155 level, and allow the SPY to creep up into our trade zone. This strategy assumes that the oscillating pattern of the SPY continues, attempts to optimise the theta decay. In addition, we are also assuming that the mid line of the regression channel will continue to have a reasonable probability of acting as a firm support to keep the price above the 1100 lower level of a trade.


Cheers