We have been on the record since late last week that we think the upward momentum to the equity rally has broken and that as traders, we would be sellers of rallies. Over the last few days, we have taken off single stock shorts in anticipation of what we thought could be a re-test of SPX resistance at 1600/1610 with the 50 day moving average of ~1620 being the line in the sand. Given the near 50% re-tracement off of last Wednesday’s highs and with the SPX nearing its first level of technical resistance, we want to use a little of the dry powder from our recent short covers to start to leg into new bearish positions.
The 1 year chart shows that the major trends have turned, with the 50 day ma and the 20 day ma both looming above, with a large amount of overhead supply from trading in May and June:
The major support level is around 1535-1540, highlighted in red. That’s where we’d look to take off this trade. We view the technical positioning here at 1600 as highly favorable for a short side trade given the overhead resistance at 1610 to 1620, vs. support down at 1540.
TRADE: SPY ($159.85) Bought July 160 Puts for 2.70
Break-Even on July Extirpation:
Profits: below 157.30
Losses: up to 2.70 btwn 157.30and 160 with max loss of 2.70 above 160
Trade Rationale: SPY vol much cheaper than single stock vol that we are looking at, we will look to spread these on a decline back to the 1575 by selling a lower strike put.