Good Opportunity to Play the S&P 500

Market Summary

For only the second time this year the S&P 500 index recorded a 1% loss for the day. Traders reacted to the latest concerns related to European debt and monetary policy in the U.S. As confirmed in the SPY 60 min chart below, the benchmark S&P 500 index has fallen in eight of the past 12 trading sessions, dropping below its 14-day moving average for the first time in a month. Traders appear to be turned off by comments in the recently released Fed meeting minutes questioning the need for further quantitative easing (QE)/ Investors have become intoxicated with easy money from the fed which has been a major impetus driving the stock market for the past few years. Without QE, it is questionable whether the economy can grow much more without government intervention.

Investor Analysis

Note in the chart above how recently, every time the S&P 500 index pulled back to its current level, prices recovered soon after. Now might be a good opportunity to purchase some shares at a good price as the current pullback will alleviate overbought conditions, and it is reasonable to expect prices recover again as the first quarter earning season progresses.

Possible Strategy

Investors can take advantage of the opportunity to play a price recovery with  an April option trade. For example trading a SPY ETF April option expiration long $138 strike price call/short $141 strike call debit spread would cost $1.82 per share (based on yesterday's close – buy the $138@2.78 and sell the $141@ .96), but would generate $1.18 per share profit if the SPY gets back above $141 prior to April 20^th (calculated as $141 minus $138 = $3.00 credit, less the $1.82 debit to buy the spread) For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/option-basics/

By Gregory Clay