Bears are roaming on Wall Street again. Their rampage kicked into high gear mid-week following the highly anticipated FOMC announcement. The selling pressure was enough to take the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) down a quick 2.7% from its Wednesday morning highs before a slow recovery through the rest of the day.
Of course, this latest downdraft has done little in improving the sloppy range that has developed in the SPY. Traders looking for ways to survive the ongoing see-saw behavior should look to the options market for answers.
The bear call spread may be just the ticket for a situation such as this. Consider these three important technical developments in the SPY ETF.
1. A pair of lower pivot highs. The twin peaks from Jan 9th and Jan 22nd near $206.50 formed at a lower resistance level than the previous rally. The formation of lower pivot highs is always a little disconcerting as it reflects an increased aggression by sellers. If selling pressure continues to ramp up on subsequent rallies they will be short-lived indeed.
2. Moving average rollover. The persistent downward slant of the ongoing chop fest in SPY has driven the 20 day moving average into a downtrend. What’s more, the downward bias of the range has lasted long enough to turn the pivotal 50 day moving average lower. Falling moving averages are not healthy and may well stymie further rally attempts.
3. Weakening support. The $198.50 price level in SPY has been a bastion of strength for bulls. Buyers successfully defended the area yet again on Thursday morning. Keep in mind, however, the more times a support level is tested the more susceptible it becomes to failure. This support zone has been tested no less than five times over the past two months, raising concern about how many more attacks it can successfully defend.
SPY Option Trade
With the price action of the S&P 500 ETF suggesting the path of least resistance is sideways or lower, selling out-of-the-money bear call spreads is now attractive.
Sell the Feb 27 $207/$211 bear call spread for 79 cents credit. Consider it a bet the SPY remains below $207 for the next few weeks. The reward is limited to the initial 79-cent credit. The risk is limited to the distance between strikes minus the net credit, or $3.21, and will be lost if SPY rises above $211.
To minimize the loss, I suggest existing if SPY breaks above resistance at $206.50.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
