After a colossal five-month rally, the markets experienced a modest pullback in April. Despite just a 6% dip, all major indexes swiftly bounced back, nearly reaching all-time highs. Yet, I’m wary. We’ll review a trade that wins if the market pulls back again. Unless there’s a solid fundamental underpinning this surge, I doubt its sustainability. Inflation has been stubbornly high for months, and today’s hotter-than-expected producer price index report only reinforces that notion. Wednesday’s CPI data release might offer further insight, but judging from Tuesday’s PPI report , I anticipate a similar trend. PPI reflects the costs producers pay for raw materials; if those costs rise, they’re typically passed on to consumers, as reflected in the CPI. Adding to the caution, we’re witnessing an interesting chart pattern known as the “double top.” This formation, appearing after an asset hits a high price twice with a moderate decline in between, signals a bearish reversal. This pattern is evident in ETFs tracking the major indexes like SPDR S & P 500 Trust (SPY) , SPDR Dow Jones Industrial Average Trust (DIA) and the Invesco QQQ Trust , as illustrated in a nine-month daily chart of SPY. It is prudent to wait for confirmation of the double-top pattern before considering a bearish trade though. Confirmation occurs when the neckline is breached, which will be marked by a break below the $513 support zone. This breach signals a shift in momentum, validating the pattern and potentially opening up opportunities for bearish positions. The trade setup: SPY 513-512 Bear Put Spread The trade structure I am using here is called a “bear put spread”. Assuming that $513 support is broken, I will be looking to buy an ATM (at-the-money) put spread. For an ATM put spread, I like to wrap the price between my strikes. So, irrespective of where SPY is trading, my long strike would be above the current price and the short strike would be below the current price. Here is my exact trade setup: Buy $513 put, May 31 expiry Sell $512 put, May 31 expiry Cost: $50 Potential Profit: 50 (add more contracts to increase risk/reward) Profit target: If SPY trades at or below my short strike by the expiration date, this trade can yield a 100% ROI on the amount risked. With 10 contracts, this equates to risking $500 to potentially gain $500. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
A trade that wins if too-high inflation knocks down this stock market again
May 14, 2024
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