While the S&P500 did indeed break below 1,120 early last week before bouncing off of 1,101 it only stayed below 1,120 for all but 15 minutes or so. So for four trading days in a row, 8/8-8/11, SPX held 1,120 as a firm low. That is why we feel 1,120 is a key level to watch in the near term, and be it as SPX closed Monday at 1,124, it is very close to breaking this level. In the event it does break below this level we think the markets could quickly find themselves retesting last weeks lows. Should it stabilize and bounce higher from here, look for resistance to come into play around 1,150.
There’s one major market “tell” that we’re watching closely in the days ahead and that is the action in copper. Copper, sometimes referred to as “Dr. Copper” due to its role as an industrial commodity, is especially sensitive to economic growth around the world. More than being sensitive to economic growth, it is especially sensitive to perceived future economic growth. So far, copper has managed to maintain above its May lows, signaling that the market is not 100% sold on a double dip recession. Should copper start to break down below its current base (key support is $3.75), it could be further evidence of the market pricing in a recession.
If Tuesdays does bring a breakdown in the S&P500 and other indicators like copper we think the best way to take advantage of the expected downside volatility would be with weekly puts on SPY. Specifically, we like the 112 put strike which closed Monday around $1.80. The reason we like this strike is because if SPX breaks 1,120 (that would theoretically be 112 on SPY), we would anticipate a swift move down to 1,100 (110 on SPY). Such a move would bode well for the 112 put strike since there are still a few days until expiration and we would expect that the premium would appreciate by at least 30-50% if we get the 1,120 breakdown.
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- SH @ the bell 10/20/2011: Copper and oil signal potential for big sell off in SPX
- Stockhaven @ the bell 8/8/2011: Markets to remain in fragile state
- Stockhaven @ the bell 8/22/2011: Markets enter week in precarious position
