The SPDR S&P 500 ETF (NYSEARCA:SPY) narrowly escaped a breakdown and is now poised for a run to $3,000 amid optimism surrounding a coronavirus vaccine. Today we’re taking an updated look at the market’s posture and showing how you can double your money with options on the SPY ETF.
Monday’s glorious gap-n-go was brought to you by a little known biotech company called Moderna (NASDAQ:MRNA). For two months, the market rebound has been fueled by a steady stream of news surrounding reopening economies, improved COVID-19 testing capabilities and vaccine hopes. Monday continued the trend with stocks soaring after Moderna announced glowing data for its early-stage human trial.
SPY ETF Big Picture
Before diving into the daily chart to dissect just how impressive Monday’s launch was, let’s set the stage with the weekly time frame. Ever since the March 23 low, the market gods have smiled upon traders, gifting them with a V-shaped rebound for the ages. Yesterday’s push to a post-crash high officially brought the gain from the bottom to 35%. That’s not bad for two months of work. The speed of the crash and subsequent snapback haven’t really left any pivots to assess, though. And that makes trend analysis a bit tricky. We’ve essentially had two monster swings, one down and one up, as opposed to a series of pivots providing multiple support and resistance zones to trade around.
This is where using multiple time frames is essential. We can drill down to the daily chart to discover price zones that weren’t as obvious on the weekly. More on that in a moment. The SPY ETF is testing the falling 20-week moving average. It brought sellers to the yard last week, but their playtime was cut short by Monday’s powerful rally. Any backing-and-filling in this area is constructive and will help set the stage for the next leg of the recovery.
Our current uptrend was born from deeply oversold conditions. As such, its initial phase was powerful. Shorts sellers running for cover and bargain hunters finally biting combined to deliver a vicious rip. We vaulted above the 20-day and 50-day moving averages in no time. But as time has passed, momentum slowed. It was inevitable, mind you, but is still unnerving to those that pay attention — like the last few clicks on a roller coaster as your cart reaches the top of the first big drop.
We even had a double top pattern form, a so-called “M” for murder that threatened to kill the uptrend. And then, on Thursday morning, the SPY ETF finally cracked support ($279). It was the first such breach since the uptrend began in March. Bears emerged from their dens, convinced that they were finally going to feast.
But it was a trap.
By day’s end, the market had reversed sharply higher. And it hasn’t looked back since. What could have been a disaster, a clear signal that the next down-leg was beginning, has been delayed, perhaps forever. If it wasn’t obvious, the failed support break is bullish.
Double Your Money
Options contracts offer countless strategies to choose from. One of my favorites for capitalizing on breakout setups is the bull call spread. It’s simple and cheap. The latter reason makes it a good fit for something as expensive as the SPY ETF.
If you’re willing to wager SPY makes a run toward $305 over the next month, then consider the following trade structure.
The Trade: Buy the June $295 call, while selling the June $305 call for a net debit of $5.
The cost (and risk) is $500, or less than the price of two shares of SPY. And, if it makes a run for $305, then you can potentially double your money by capturing a $500 gain.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held bullish positions in SPY.