SPDR S&P 500 ETF Trust: Profit From This SPY Failure

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Bears are running scared following this week’s rousing defeat. The ominous head and shoulders pattern in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the one capturing chartists’ attention all around the Street, has failed. All the angst surrounding its bearish implications is fading into the distance as I type.

Energy SPDRNo time like the present to re-asses the SPY to see what’s in store.

As the accompanying chart will attest, the SPY ETF has soared back above its 50-day and 20-day moving averages taking out key resistance in the process. The $208.50 level, which was the right shoulder of the aforementioned topping pattern, has fallen prey to the bullish stampede.

And with prices back above this level, the head-and-shoulders pattern has officially been rendered moot.

Let this be a lesson that all patterns fail from time to time, which is why the savviest traders anticipate all potential scenarios and have a plan for adverse outcomes. The resistance breach for the S&P 500 has been accompanied by an equally energetic pop out of the Powershares QQQ Trust (NASDAQ:QQQ) and iShares Russell 2000 Index (ETF) (NYSEARCA:IWM).

It’s been a risk-on rally with all the usual suspects participating.

SPY

Source: OptionsAnalytix

The old adage, widely parroted in charting circles, says, “from failed moves come fast moves.” Such wisdom is on full display in the S&P 500 here, and may continue for a while yet.

If you think the S&P 500 can make a run at its all-time highs in the months to come, consider initiating bullish plays.

SPY Bull Call Spreads

This week’s rally is grinding volatility into the ground. The IV Rank for SPY options has descended to 6%, suggesting option premiums are approaching the cheapest levels seen over the past year. This spells opportunity for call buyers.

Buy the July $209/$213 call spread for $2 or better. The bull call spread consists of buying to open the $209 call while selling to open the $213 call.

The max loss is limited to the initial $2 debit and will be forfeited if SPY sits below $209 at expiration. The max gain is limited to the distance between strikes minus the net debit, or $2, and will be captured if SPY sits above $213 at expiration.

At the time of this writing, Tyler Craig owned a put spread on SPY.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/profit-spy-head-shoulders-failure/.

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