Following last week’s upset in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), investors might be wondering whether the reigning bulls have been dethroned after six years.
Seeing the proverbial game ball stolen via a flat return for the SPY ETF, I’d say it’s difficult not to notice this challenge.
One weekly upset in the S&P 500 doesn’t necessarily mean the market has a new champion. But as an options trader and an investor who does rely on the charts for technical guidance, currently I do favor any “rebound” attempts from the bulls as stronger opportunities for trades in the SPY ETF.
Let’s take a look.
SPY Technical Picture
SPY bulls started off this week trying to rebound from the previous week’s loss. On the daily chart, the SPDR S&P 500 ETF has leaped back over the 50-day simple moving average, which many intermediate-minded technicians use to help define the market’s trend.
With Monday’s price jump in the S&P 500, some investors might be quick to conclude that the bulls are back in charge by virtue of reclaiming the moving trendline.
That’s simply not the case.
It’s my interpretation that last week’s fifth break of the moving average support line for 2015 is a wake-up call — one that says the market’s bullish character has changed.
It’s hard to say whether this is the top in the SPY ETF, but there is a small double top in place that lines up rather well with an over-the-top price gouging in December attributed to an algorithm-gone-wild. Both the pattern and price-spike highs line up with the horizontal line drawn in the SPY daily chart shown above.
SPY Bear Spreads
All of this leads me to be a bit more pessimistic about the SPY right now. At a minimum, the information has me willing to cap the bulls’ upside potential and look at a couple bear vertical spreads as position ideas.
With the SPY ETF’s top-notch liquidity, one-point strikes and weeklies, traders have a fantastic array of combinations to play. Two spreads that are attractive given the circumstances presented are the SPY April $211/$212 call spread and April $207/205 put spread.
- SPY April Bear Call Spread: The first call spread is a limited-risk credit spread, which with shares of the SPY ETF near $208, is trading for 30 cents per spread. The breakeven for this spread is $211.30 at expiration, matching the SPY’s double top and all-time high. If shares of the SPY ETF finish below $211, you receive the credit, good for a 43% return. The risk is 70 cents should the SPY finish above $212. What’s attractive about the out-of-the-money call spread is that it’s a simple bet that the bulls can’t push the S&P 500 to new highs by April expiration. That said, this trade is more neutral than overtly bearish.
- SPY April Bear Put Spread: Another way to participate in 2015’s minor bout of March Madness, but anticipating more technical pressure from the bears, is the April $207/$205 put spread. For a debit of 60 cents per spread, the trader’s breakeven at expiration is $206.40 and aligns itself with a cross back below the SPY’s 50-day simple moving average. The full profit potential is $1.40 and will be realized if the fund closes below $205 at April expiration. That’s not too much of a technical press in the S&P 500 ETF for investors to manufacture. Remember: That kind of modest weakness is only fractionally below Thursday’s close of $205.27. To boot, the March lows are down at $203.49.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in SPDR S&P 500 ETF Trust in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
