Market Summary
Three yellow 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 culminating in price corrections. The third line marks this year where
stocks prices have dropped and we may be in the process of another downturn
that appears to happen this time every spring? Similar to what is happening with the DOW Jones Industrial Average, the current market pullback suggests that a trend
reversal similar to the previous two years is underway. 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 - which further pushes down prices.
Investor Analysis
Most
of the major stock indexes are breaking down and until prices reverse course
the near term trend is down.
Possible Strategy
If
the stock prices do continue downward, smart investors are considering a simple
strategy to profit from the S&P 500's possible move lower. For example, buying
a SPY ETF (Exchange Traded Fund) May expiration put option – SPY represents S&P
500 Index. Purchasing the $136 strike
price put would cost $1.82 per share (based on yesterday's close, but would
generate gains the further S&P 500 dropped below $136 anytime prior to May
18th. For an explanation on the basics of option
trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/
By Gregory Clay
