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The Average Squeeze

This market has been an ugly, mean-reverting, trendless, binary, news-driven mess.

And if you've recognized it as such, it's been a good few months.

However if you've been playing for the breakouts, you have been punished.

A Little Math

The data below showcases the average move higher in the $SPY. As the markets have seemed to put in a short term bottom, now is a good time to figure out upside expectations.

So the average move higher has been 8% and takes place over 5 calendar days.

If we extrapolate that onto the current move, that would put our expected resistance between 116 and 116.50.

These levels line up nicely with some other technical resistance:

Around these levels are two key moving averages: the 20 and the 50, both of which are pointing down. There is also a descending trendline (not shown) that coincides with these levels.

How to Hedge

As we come into this area, if you did play the bounce, that would be a good time to peel some positioning off, or potentially put on some hedges. My weapon of choice is the bear call spread, which is short delta and short vega. If the market runs higher, vol will drop, so the vega will help to offset any directional losses you may take.

The Caveats

Of course, these levels are not set in stone. These are mathematical levels and not necessarily based on "true" levels of supply and demand. Also, this extrapolation assumes that the mean reversion will be very similar to the past 2 months, and it doesn't have to be.

Pattern failure is just as important as pattern fulfillment. If the market shows no respect towards these technical levels-- if liquidity trumps market structure, then the characteristic of the market will have changed, and the squeeze could run even higher.

by Steven Place

Steven Place is the founder and head trader at