My indicators continue to give bearish readings this week, unchanged from last week. And with market breadth — or the ratio of advancing stocks to declining stocks — weakening, I remain in the bearish camp.
Daily Chart of the S&P 500 Index (SPX) — Chart Source: TradingView
As you can see in the chart of the S&P 500 above, the index rebounded on Tuesday to test the underside of its 50-day moving average (red line). However, it gave up all those gains and then some on Wednesday when the index dropped another 3%. It ended just slightly higher on Thursday.
This weakness should not have come as a surprise. As my regular readers know, since 1987, August has been the worst month for stock returns.
Historically, September is not much better, as this is when a lot of traders are away on vacation and there is a lack of liquidity in the market. That makes the markets much more susceptible to large drops.
That is the case right now, and if the S&P falls further — particularly if it falls below its 200-day moving average (blue line) — it could fall a lot further.
Stocks in the basic materials sector continue to struggle as the trade war with China drags on. And one stock in this sector that looks particularly weak is Cabot Corporation (NYSE:CBT).
As you can see, the stock fell below a critical support level at the $40 level last week, and it remains below both its 50-day and 200-day moving averages, which is a very bearish sign.
It has been consolidating in a tight range since then, but it looks to me like short-term support at $37.50 is on the verge of giving way.
The next major support level won’t come into play until about $32.50, so a break of support should result in a big downside move.
With that in mind, I recommend you…
Buy to open the Cabot Corporation (CBT) Oct. 18th $35 Puts (CBT191018P00035000) at $1.70 or lower.
To receive further updates on this trade, as well as an alert when it’s time to take profits, sign up for a risk-free trial of Power Options Weekly today.
InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.