New Highs to Run Dry in the SPY

by Dan January 21, 2020 3:39 pm • FREE ACCESS

I am going to make this really easy, make a near term bearish case for the S&P 500 with pictures.

First, the SPY, the ETF that tracks the S&P 500 Index is up 10% in what feels like a straight line since breaking to a new all-time high back in late October. There are plenty of slight technical support levels above the breakout level, but to my eye, the convergence of the 150-day moving average at that level makes $303isg a massive support level and a likely target on the downside if we were to see a pullback:

The chart going back to 2016 shows the higher end of the uptrend that served as technical resistance for nearly two years:

The last picture Ill offer is that of short-dated options prices in the SPY, the price of options, having just ticked up off of recent 52-week lows, indicating that options prices are cheap:


On new year’s eve I laid out my cautious case for stocks on valuation (read here) and watch on CNBC’s Fast Money:

I am nothing if not stubborn. I suspect with the SPX up 3% on air, no news so far… we might see a “sell the news” once we get to into the bulk of earnings… And I guess most importantly, nothing has changed since I made my case on a few occasions in late December aside from seemingly new slight highs every day for three weeks…

SO what’s the trade? SPY options are cheap… whether they are for portfolio protection or an outright bearish bet…

Bearish Trade Idea: SPY ($331.60) Buy March 330 – 303 put spread for $4

-Buy to open 1 March 330 put for $5.40

-Sell to open 1 March 303 put at $1.40

Break-even on March expiration:

Profits of up to 23 between 326 and 303 with max gain of 23 below 303

Losses of up to 4 between 326 and 330 with max loss of 4 above 330

Rationale: this trade idea has a break-even down 1.7%, risks 1.2% of the etf price and offers profit potential of up to 7% if the etf is down 8.6% in two months. The options market places a 37% probability that the trade is break-even on March expiration, and an 11% chance it is a max value down at 303 on March expiration.