Q1 2015 is officially in the history books, and the performance of the S&P 500 was lackluster, to say the least. U.S. stocks closed out the quarter up a whopping four-tenths of a percent.
Yawn.
But today’s second-quarter kickoff is a great time to reassess the charts of the U.S. markets to map out expectations for the road ahead.
We’ll let the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) be our guide.
The past few months in the SPY can best be described as a chop-fest interrupted by one dramatic rally. The rally, of course, arrived in February, scoring a 7% trough-to-peak run before finally petering out. It was the lone standout amid an otherwise dismal three-month stretch.
Since then, we’ve seen sloppy conditions return. The top two developments that should be of most concern to stock bulls are as follows:
- Short-term downtrend: Increased aggression by sellers have led to the formation of a pair of lower pivot highs. Until the SPY ETF escapes the bears’ clutches the path of least resistance is lower. Look for a break above resistance, currently sitting at $208.65, to reverse the downtrend.
- Breach of the 50-day moving average: The 50-day MA serves as a quick reference point for the intermediate trend of a stock. When SPY is above the 50-day, the bulls should receive the benefit of the doubt. When we’re below it, the bears possess the upper hand.
Well, we’re below it. Let’s see if sellers press their bets.
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Play the Chop With SPY Call Spreads
Traders looking to profit from continued SPY weakness — or at least an inability to rise much from current levels — could sell May bear call spreads.
Provided the call options used in the trade remain out of the money, you stand to capture the original credit received at trade entry.
Sell the May $213/$217 call spread for 60 cents. The max reward is limited to the initial credit and will be pocketed if SPY sits below $213 at May expiration.
The max risk is limited to the distance between strikes minus the net credit, or $3.40, and will be lost if SPY rises above $217.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
