Market Summary
Three vertical lines are highlighted in the S&P 500 Index weekly chart below. The first two yellow lines highlight the point where stock prices topped out in the spring of 2010 and 2011 and culminated in price downturns. The third line marks the current year where stocks prices have dropped and we may be in the initial stages of another downturn that appears to happen this time every spring? At this point the current market pullback suggests that prices may have topped out and a trend reversal similar to the previous two years may be starting? Another major worry for the bulls are the recent bearish distribution days (down days on higher than normal trading volume). Bearish distribution days indicate that money managers are looking for the opportunity to sell shares.
Investor Analysis
Most of the major stock indexes are breaking down below their price support levels and the technical momentum indicators and oscillators are turning bearish. Until prices reverse course the near term trend is down.
Possible Strategy
If the stock prices do continue to pull back, some investors are considering debit spread strategies to profit from the S&P 500's possible move lower. For example, trading a SPY ETF (Exchange Traded Fund) May option expiration long $137 strike price put/short $134 strike put debit spread would cost .81 per share (based on yesterday's close – buy the $137 put @$1.12 and sell the 134 @ .31), but would generate $2.19 per share profit if the SPY dropped below $134 anytime prior to May 18th (calculated as $137 minus $134 = $3.00 credit, less the .81 debit to buy the spread) For an explanation on the basics of option trading and description of how the trade is set up go to http://www.theoptionplayer.com/strategies/
By Gregory Clay
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