Yesterday’s move in the S&P was a strong signal that we are heading to a further decline. After an extended sideways move the S&P broke below the 10 day moving average to the downside. The MACD also crowned and started to point down. Here is an idea on how to play this drop as it continues to crawl downward. Let’s look at the chart:

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Lets put the pieces together. The overall market is in a downtrend that started in January. This means until we see a solid sign telling us otherwise, it will continue to fall. Add to that rising inflation, unrest, high oil prices, etc. There isn’t much telling us things are going to turn around soon.

The recent consolidation was a glimmer of hope that things might reverse but the recent break below the 10 day moving average (circled in green above) along with the curling of the MACD (in the blue circle) tell us that the trend downward will very likely continue.

We should also expect volatility to increase in the near future as it typically goes up as the market goes down. This will increase option prices.

We have talked about inverse ETFs in the past as a good way to trade a declining market. If you take that to the next step and look at options on inverse ETFs some interesting possibilities appear. An inverse ETF of the S&P is SPXU. It is currently around 17. If you look at longer term call options you find some inexpensive positions with potential. Since the inverse ETF goes up as the underlying asset goes down (in this case the S&P) a call option would increase in value as the market continues to decline. Here are the prices of December Call options on SPXU.

The 22 Dec Calls for SPXU are at 2.29. A continued move down could lift that price nicely. The longer term gives the position more chances to see that strategy play out. Keep in mind, even if SPXU doesn’t get all the way to 22, the price of that Dec call could go up as volatility increases and traders believe it could get to 22.

If you are interested in more ways to learn about using longer term options, check out Andy Chambers Market Propulsion book. He does a great job of spelling out how they can be as close to cheating the market as you can get. Click here to get the details.

Keep learning and trade wisely,

John Boyer


Market Wealth Daily