The market setup for the next week appears bullish but there are roadblocks in the distant future. The odds for a post Fed rally are pretty good since they basically stepped to the sidelines and lowered their projections for future hikes.
The market could recover from the sideways volatility we have seen since March 7th and move higher in the days ahead. The S&P closed over resistance at 2,020 and appears ready to tack on some more points on Thursday. The futures are up +7.50 on Wednesday night.
We already have a full portfolio of longs that should benefit from any continued move higher. With the futures up strongly any new long recommended today would probably be filled on a gap higher and that would not be in our best interest. Instead I am going to recommend a play that looks forward a couple weeks and could capitalize on the eventual summer doldrums and the Sell in May cycle. This bearish play may not be triggered immediately but it will be there when the time is right.
NEW DIRECTIONAL CALL PLAYS
No New Bullish Plays
NEW DIRECTIONAL PUT PLAYS
SPY - S&P 500 ETF - ETF Description
All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.
Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.
The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.
The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.
I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.
This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.
Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.
With a SPY trade at $207
Buy June $200 put, estimated premium $4.50, initial stop loss $213.
If the market continues higher I plan on adding to that position at $210.