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Bias to the Bear Side but Don’t Overdo It

Make money on the drop - and I give you a put trade to get started


Our indicators are giving bearish to neutral readings, a downgrade from last week’s neutral to bearish, as the S&P 500 has fallen below its 200-day moving average to join the Dow Industrials and Nasdaq. The Dow Transports are completely bearish relative to their key moving averages and the Dow Utilities are about to become so also, providing Dow Theory evidence of an outright bear market possibly looming on the horizon.

Our internal indicators are confirming the bearish direction being taken by the major price indices. We continue to monitor the 200-day Moving Averages Index, which has fallen sharply but is still only bearish to neutral, as its 50-day moving average has not crossed below its 200-day. In the recent past such a cross has been a very dangerous signal. The Cumulative Volume Index and Advance/Decline Index are also bearish to neutral. And six S&P sub sectors have also slipped below their 200-day averages, while volatility indices continue to trend higher.

iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT) continue to reflect the bearish mood swing overtaking the markets. Last week TLT broke out of a “lower highs” trading pattern, and it has been moving higher since that break. A rally in Treasury bonds is a sign that risk is being taken off the table. As is a move higher by the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP). UUP crossed back above its 50-day moving average but ran into resistance at its 200-day average. Could that resistance be an early sign that the current selling frenzy may be about played out?

It is easy to blame the U.S. election outcome for the ongoing sell-off, but that is oversimplifying things. Stocks were due for a pullback regardless of which political party won. And it is very normal for tax-related selling to take place at this time of the year; it’s just that this year the selling has been more intense as some investor-unfriendly tax code changes are in the works. But the calendar is about to work in the markets’ favor. Thanksgiving week is historically bullish as the kick-off for a “Santa Claus” rally. Also, following the recent selling, most financial markets are in a very oversold technical condition.

As markets continue to move into bearish territory, it only makes sense for options buyers to continue to buy puts. But the calendar and oversold technical conditions caution against going too far overboard with your put buying.

And a cheap put option – my favorite kind – that my scans uncovered is in electronics maker Sony (NYSE:SNE).

I recommend buying the SNE Jan 9 Puts 30 cents or lower. After entry, take profits if the stock price hits $8.80, at which point the option price should be about 70 cents. Exit if SNE closes above $10.30, or if the option hits 20 cents.

But a word of caution: History has proven time and again that just when things look the darkest, that is when a rally appears seemingly out of nowhere. Don’t overload on any one name – and in this particular environment it makes sense to scale back the amount you’re trading until some of the political fog clears.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened with a winning streak that goes back to 1984.

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