Once in a Blue Moon Short/Put Set Up

Note: This article was originally published on July 31 before the Fed's rate announcement.

The charts we will look at in this update suggest that this is a perfect shorting setup that you see "once in a blue moon." On the 3-year chart for the S&P500 index we can see that it has essentially been trending higher all year, but has now arrived at an important double target-at the upper boundary of its giant broadening pattern, which may also be called a bullhorn or megaphone and is normally bearish in purport, and also at the top of a Dome pattern. It is no coincidence that it has arrived at these targets at exactly the time of a Fed statement (today) and since it has risen ahead of this meeting this should be a classic "sell on the news" event, especially if the Fed only does a 25 bps reduction in rates, as the market will have discounted it. If they do the "full Monty," a 50 bps cut, while it may superficially be viewed as music to the markets' ears, then the market may construe it as the Fed seeing something bad coming down the pike, making it feel moved to use up all its ammo. So this is probably going to be a lose-lose outcome for the markets.

A perfect vehicle for speculators to use to capitalize on the drop that is thought likely to gather momentum after the Fed statement is SPY, whose chart for the same timeframe is shown below. The Puts in this are very liquid with narrow spreads. There are several approaches-one is to buy a stack of cheap near expiring Puts and then "keep your fingers crossed," next is to buy expiries further out, which are more expensive but have more chance of success, another is to sell nearby Call strikes, buying in addition a higher strike to limit loss if wrong, and still another is to do a straddle which is a combination of Calls and Puts-the trick here is to only buy sufficient Calls to cover your Puts loss if the trade doesn't work out. A Put that we will light on as an example to track the performance of the trade is the August 28th expiring $290 Puts, which is at (last trade) $1.31.

Keep in mind that if the Fed does drop rates by 50 bps we might see a whipsaw where the market spikes briefly and then does an about face and drops hard. If this happens, ride it out.

IMPORTANT FOOTNOTE: the options trades suggested here should only be considered by those with the requisite experience in this area.

Posted originally on CliveMaund.com at 1.40 pm EDT on 31 July 2019.

Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years' experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.

Do you want the latest investment ideas delivered to your inbox? Sign up to receive the FREE Streetwise Reports' newsletter.

Newsletter Sign-Up

Disclosure:
1) Statements and opinions expressed are the opinions of Clive Maund and not of Streetwise Reports or its officers. Clive Maund is wholly responsible for the validity of the statements. Streetwise Reports was not involved in the content preparation. Clive Maund was not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
2) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer . This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
3) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Charts provided by the author.

CliveMaund.com Disclosure:
The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr. Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stock market analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund's opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.