How to Play the S&P 500 Downside Price Move

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 18^th (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

How to Play the Current Price On the S&P 500

Market Summary

The S&P 500 index has more than doubled since prices where at the 12-year low and bear market bottom three years ago - on March 9, 2009 the index was at 676.53. The economy is improving and corporate profits are booming. But this is not enough to entice the small retail investor back into the market with a vengeance. Stock investing is dominated by institutional players more than ever as retail investors appear to be somewhat cautious after the 2008 market crash and extremely high volatility experienced in 2011. But what may be a bigger issue with retail investors is the persistently high unemployment level. The White House and some gung ho business analysts may be touting the recent job numbers as a drastically improved job market, but the reality is that the economy is not producing anywhere nearly enough jobs to absorb all those available and willing to work. With retail investors sitting on the sidelines, the Feds easy money policy and money managers sitting on tons of cash is what will drive the demand to push stock prices higher. 

Investor Analysis

As evidenced in the 60 min. S&P 500 chart above, for the past several weeks the major indexes are having difficulty breaching recent highs as the market is pausing and may be setting up for a near-term price pullback.

Possible Strategy

If the stock prices do 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 March option expiration long $137 strike price put/short $134 strike put debit spread would cost .86  per share (based on yesterday's close – buy the $137 put @1.56 and sell the 134 @ .70), but would generate $2.14 per share profit if the SPY dropped below $134 anytime prior to March 16^th (calculated as $137 minus $134 = $3.00 credit, less the .86 debit to buy the 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