The markets have taken a beating over the last few weeks and it looks like they are going to have a hard time finding support to stop the slide. The S&P looks like it is going to plunge below its 50 day moving average today which is where we would expect it to find a footing. As that gets slippery, we could be looking at that bigger drop that gurus and headlines have expected for the last 18 months.
The challenge is to now secure gains for the rally we have had and find positions to leverage the drop. An easy trade is to use an inverse ETF to generate income as the market drops. Inverse ETFs move opposite of the equity or asset they track. SDS, for example, is an inverse ETF that tracks the S&P. You can see on the chart below that is looks like an upside down chart of the S&P.
In fact, you can also see that it is about to push above its 50 day moving average. This is a classic sign of a breakout to the upside. The caveat is that this is a bit like a room full of mirrors. The action driving the movement on SDS is the movement on the S&P which is a reflection of the movement of the 500 stocks it tracks. The good news is that ProShares, the company that manages SDS does a good job of keeping it correlated pretty closely to the S&P.
As we start to cross these key price points to the down side, it is good to consider exiting some positions and taking a smaller position that leverages the downside.
You can simply grab some SDS and use it to offset a drop until we confirm this is truly a bigger reversal or you can also look at call options on SDS. An Oct 22nd call on SDS with a 9.50 strike is only $.15 this morning. By taking a position in SDS and then adding the 9.50 call you are creating a relatively inexpensive cushion if the market does start to plummet.
Keep learning and trade wisely,
Market Wealth Daily
PS-Be sure to grab Wendy Kirkland’s How To Trade Options to learn other ways to protect your account and grab income no matter which way the market moves.