During Wednesday’s trading session, the broad market indexes continued their recovery bounce from last week’s downdraft. While the S&P 500 Index and the Dow Jones Industrial Average have rebounded nicely, the tech-laden Nasdaq 100 Index remains in a precarious position.
The lackluster price action throughout September formed a head-and-shoulders top formation that was both completed and confirmed by the Nasdaq’s Oct. 9 break of the neckline at 2,780. This breach of support was particularly worrisome given that it occurred on higher-than-average volume and simultaneously broke the 50-day moving average.
Click to EnlargeAnd yet, here we are a few days later, and the Nasdaq is revisiting the scene of the crime. Only this time 2,780 is likely to provide resistance, not support. This expectation arises from the popular charting principle that old support becomes new resistance. Since the 50-day moving average is also looming overhead, the bulls have their work cut out for them if they’re going to right the ship in tech-land.
With the heart of earnings season coming around the corner, a positive surprise from Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) or any of the other heavy hitters in the tech space would certainly help.
Investors with overly bullish portfolios seeking a few hedging ideas might consider entering bear call spreads on the Nasdaq 100 Index. Those willing to bet we fail to see new yearly highs in the Nasdaq over the next month could sell the Nov 2,880 call while buying the Nov 2,890 call for a net credit of $1.55 or better.
The max reward is limited to the initial credit received, while the max risk is limited to the distance between strikes minus the net credit, or $8.45. Provided the NDX remains below 2,880 at November expiration, the call spread will expire worthless allowing traders to pocket the max reward.
To minimize the risk, traders could exit the position if NDX rises above the right shoulder of the head-and-shoulders pattern at 2,850.
At the time of this writing, Tyler Craig had no positions in any securities mentioned here.