There are two things that worry me ahead of October. The first is that the week after September options expiration is historically bearish. The Dow has closed lower nearly 75% of the time during the past 25 years

The average loss has been slightly more than 1%. If history rhymes to this tune, the Dow would be pushing support at 16,200 by this Friday’s close. This would be enough to shake the weaker hands out of the market, but I would wait for Dow 16,000 to fail before getting aggressively short.

The second is that another government shutdown is looming if the zombies in D.C. can’t come together by month-end to find a way to keep the government funded. If the knuckleheads can’t agree, federal workers could get another paid two-week vacation, as agencies could be shut down for the second time in three years.

There are numerous issues that the government could fail to agree upon, with the top battle being what to do with Planned Parenthood. The Republicans want to defund the agency, while President Obama has said he would veto any measure if taxpayers don’t keep funding them. We know the track record and history of the two sides actually working together, so this will be a contentious situation.

The last time a government shutdown occurred was in October 2013, and the stock market actually moved higher. The Dow added 1% after making a move from 15,129 to 15,373 from Oct. 1-16 of 2013. While this was bullish, the 16-day government shutdown cost the economy $24 billion. This knocked economic growth down by half of a percentage point, from roughly 3% to below 2.5%. With current expectations for economic growth at just over 2%, depending on what you read, a government shutdown could have fourth-quarter economic growth pushing 1.5%.

Now, let’s talk more about the VIX. In February, I told my Momentum Options subscribers that the VIX could trade below 10 this year. From there, I knew the game would change if the VIX did test 10 because that level usually represents historic lows. While it would have been possible for the VIX to trade into the single-digits for days or weeks, those instances also usually represent market tops.

On Aug. 5, the VIX touched 10.88 before a major selloff occurred later in the month. I warned Momentum Options members that any closes above 15 afterward could lead to a major pullback, and that outcome played out like a fiddle.

Coming into last week, I knew the bulls needed to get the VIX below 22.50-20. The next layer of support lies at 17.50, and last Thursday’s low reached 17.87 before a close above 20. This was the same type of “flash crash” action that occurred in early August.

I wanted to preview a few bearish trades for the major indices if there is continued weakness for the rest of the month and into October. While longer-term index put options have become expensive, there could be an opportunity to use weekly index put options to play a continued pullback.

If the S&P 500 falls below 1,940, it would likely lead to 1,925-1,900 or lower. The 100-day moving average is a point away from falling below the 200-day moving average, which would likely confirm continued weakness.

Bearish traders could target the SPDR S&P 500 ETF (SPY) and the SPY September 190 weekly puts (SPY150925P00190000) for a super-fast trade and possible drop below $190. However, these options expire this Friday. This would require a 2%-3% downward move in the SPY for these options to make a serious return. These put options traded over 24,000 contracts on Friday.

The SPY October 190 weekly puts (SPY151002P00190000) expire the following Friday and would give the trade a little more time to play out. However, the premium is more than double for the extra time than the aforementioned SPY September 190 put options.

The regular monthly SPY October 190 puts (SPY151016P00190000) gained 25% on Friday and reached a peak of $2.85. Volume was explosive, as over 76,000 contracts exchanged hands. SPY would need to be below $187.64 by mid-October for the trade to break even.

I always hope for the best but prepare for the worst when the technical picture is this bearish. If key levels of support are broken, I also won’t mind going short with put options.

I will turn fully bearish if and when the Nasdaq closes below 4,500 or the Russell 2000 fails to hold 1,100 at the close. Otherwise, I still like both bullish and bearish trades if we stay in a trading range.

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