Bulls got the first trading day of 2015’s second half off to a decent start based on the S&P 500 ETF’s (SPY) gainer of 0.9%. That said, a fairly weak 1.0% return in the first half and a market looking technically prone to further downside looks like fair game for a SPY ETF bear put spread.
More flip-flop “Grexit” fodder optimistically embraced a clean bill of health for a takeover in insurer Chubb Corporation (CB) and “Hey, good economic news is good for stocks!” saw the buy-the-dip crowd in action Wednesday in the SPY ETF in front of Thursday’s early monthly jobs report release.
SPY ETF Daily Price Chart
In case you’re wondering, the labeled count of 13 was from June 12 and a prior bearish article on the SPY ETF. I referred to that Friday as affectionately “Friday the 13th.” A penetration of the 50-day simple moving average marked the 13th instance in 2015 and I couldn’t help but notice 13 is both unlucky and a natural number under the Fibonacci framework.
Net, the SPY ETF shaped up as looking pretty bearish from this perch. It turned out I was early. But discussed money management and a detailed August bear put spread did manage to stay the course and is up 10% as of Wednesday’s close.
In the here and now and after two days of consolidating from Monday’s sell-off, shares of the SPY ETF are now firmly below the 50-day SMA.
The next target for resistance will be the SPY’s 200-day SMA, which thus far has been tested successfully as part of a corrective move of 4%. The technical hold also included bullish investors rescuing the SPY ETF at its Dec. 31, 2014, closing price and keeping prices above water.
With the recent pressure in the SPY ETF the takeaway is bears have started to gain control as part of an anticipated correction that’s still not yet finished. While generally agreed upon that corrections can be anywhere from 3% to 10%, we expect the current 4% and way-to-clean hold of YTD gains and the 200-day SMA to buckle.
Additionally, given the six-year run to record highs, steep valuations, ZIRP on its way out and Shanghai in bear market territory, we’re anticipating a 7%-10% correction would be a much healthier pullback to take seriously as one that could eventually lift the SPY ETF to fresh highs.
SPY ETF Bear Put Spread
Checking the SPY ETF options board for position ideas that fit in with our technical outlook; the Aug $210/$200 bear put spread that we originally discussed for a debit of $2.85 is still attractively priced at $3.10.
While a trader needs to pay slightly more, there is now added confirmation for the SPY ETF position and the reward-to-risk ratio is still 2.22-to-1 without factoring in money management.
At this time and as a ballpark estimate, a 2% stop tied to the SPY ETF above $211.65 would keep the spread’s loss to around $1.20-$1.50 in the next couple weeks, if action was required due to a meaningful change in character in the SPY ETF chart.
Conversely, if things go right and the SPY ETF does decline at least 7% from its $213.78 high to $198.81, that would find the spread maxing its profit potential at expiration. As there’s still plenty of time left on the calendar for this spread, making that sort of progress less likely in the near future.
However, given the SPY ETF spread should approach a near double or profit of $2.75-$3 if a correction of 6.4% and test of the well-watched $200 level were to occur; that is certainly a very nice option to consider for making an adjustment prior to expiration.
As of this writing, investment accounts under Christopher Tyler’s management do not own positions in any of the securities or their derivatives mentioned in this article, but may initiate in the future at their discretion. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
