I’ve spent the past couple weeks targeting bearish plays on the Financial Select Sector ETF (XLF) and the S&P 500 via the S&P 500 ETF (SPY). Let’s look at downside opportunities on the Nasdaq today.
The Nasdaq made another run at 4,900 and resistance at the 200-day moving average, but it got weaker as the week progressed and made lower highs and lower lows. To make matters worse, a death cross is close to forming, as the 50-day moving average is just a 6-pack away from falling below the 200-day moving average. The index is down 90 points for the month after starting at 4,776.
The best way to trade this would be to use the PowerShares QQQ Trust (QQQ). The 50-day moving average is less than $1 from falling below the 200-day moving average and confirming a death cross. All of the major moving averages are starting to curl lower, and resistance is at $105, followed by $106-$106.50. Friday’s high reached $105.01, with the low checking in at $102.28. A move above $102-$100 could lead to a retest of the mid to low $90s.
The QQQ October 98 puts (QQQ151016P00098000) were active on Friday, as more than 2,000 contracts traded. The puts traded to a low of $0.48 before surging to a high of $1.06. There is an opportunity to trade these puts if $102 is breached, but we will need to be quick to take profits if backup support at $100 holds.
The QQQ November 90 puts (QQQ151120P00090000) are nearly $13 out of the money, but they were active on Friday, as well. More than 5,400 contracts exchanged hands, with a range of $0.93-$0.59. These put options provide more time for a breakdown in the Nasdaq, and half profits could be taken on a drop below $100. If this level holds as support, traders could then set a stop to protect profits.
The market will likely stay range-bound into third-quarter earnings season, which starts next week. However, as of this moment, there seems to be more risk to the downside than there is reward to the upside for bullish traders. Bearish traders are champing at the bit to go short, but I an still waiting for 1,100 on the Russell and 4,500 on the Nasdaq to crack before joining them.
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