A continuation trade of Wednesday’s bearish round-turn has set up some more downside for the SPDR Dow Jones Industrial Average ETF (DIA). For traders looking to capitalize, diamonds may not be an investor’s best friend right now, but a long put strategy in “the Diamonds” (DIA) should afford some bling and glitter moving into the portfolio in the weeks ahead.
Blame the DIA’s performance and decline of -0.65% on media companies — and as many of those same companies market pundits did on Thursday. Dow component Disney (DIS) was in fact off nearly 2% following yesterday’s selloff of 9%, but Friday’s chief villain was Viacom (VIAB).
Shares of Viacom were off 14% and hit four-year lows after the company doled out a weak sales confessional. Fingers were pointed at Viacom’s once-lucrative cable TV business, which is now under stress due to other mediums such as Netflix (NFLX) and video game consoles that can access most entertainment needs for a lot less money.
DIA ETF Daily Chart
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Now and for the past couple weeks, with the DIA trading below and finding its 200-SMA acting as pattern resistance in bear territory; I believe the market’s technical ducks are lined up to confirm a full-fledged bearish Dow Theory signal.
With Thursday’s modest decline in DIA, shares are just above their corrective low from late July. We view the positioning as poised to break down to fresh lows of $170-$171 before bulls might put up a challenge. This tight zone is comprised of the 50% retracement level from the October low and February’s year-to-date low.
Supporting the thesis the DIA is headed lower is the VIX, the market’s volatility or “Fear Gauge” is not overbought at this time. Not only is a reading of 13.77% just removed from Wednesday’s year-to-date low, the price is historically low and relatively speaking; the distance from its 10-SMA isn’t wide enough to generate any cowbells that it’s time to be a bull.
Regarding a short-term signal of excess fear in the market and the DIA, a differential of +15% or more between the VIX and its 10-day SMA is where things get more interesting. This is because the instrument is mean reverting and unlike a stock, can’t go to zero and unlike some other stocks, can’t go up perpetually to infinity and beyond.
DIA Long Put Strategy
As implieds are overall cheap right now, and based on our technical outlook for lower prices in DIA, a long put strategy is an appropriate-looking strategy. In reviewing the DIA options board for ideas, the Sep $170 put for $2.10 or better fits in nicely with our views.
For a debit of $2.10, the DIA put contract should gain at least 50% if the DIA makes a move to retest the $170-$171 initial support zone. At that point, either selling one-half to two-thirds of the position can allow for the balance to be carried with little to no risk. Likewise, this trader could opt to sell below-market puts to leg into a very nicely-priced bear vertical.
Were the DIA to test the outlined support area, the total correction from the May highs is still just under 7%. And with many on Wall Street seeing a 10% correction long overdue, an adjusted position sounds like a smarter approach to trading the trend in bear territory during seasonal weakness.
Disclosure: As of this publishing, investment accounts under Christopher Tyler’s management do not own positions in any of the securities or their derivatives mentioned in this article, but may initiate in the future at their discretion. 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. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
