A pessimistic outlook from the Fed this week spooked the financial markets and sent stocks heading south with a big drop on Wednesday. Both the SP 500 and the Nasdaq are below their 50 day MA and 200 day MA, while the DJIA is below its 200 day MA and hanging on to its 50 day MA by a thread. All of the bearish indicators we mentioned in our last post are still holding, so I’d be inclined to stick with the bearish strategies I have posted recently, like the Bear Call Spread and the Bear Put Spread. For those of you looking for the big score, you can always buy long put options.

JD

Only time will tell if the SP 500 is providing more reliable signals than other indexes, but for now many of them are signaling that the recent bounce is over. Tuesday’s Doji candlestick at the 200 day MA of 1,115 not only confirmed resistance, it also marked a lower high for the stock market. In addition, momentum is flashing a bearish divergence. While that was a good indication for short term traders to place a bearish trade, option investors should be cautious about placing any new trades. That is because the SP 500 continues to trade between its 50 day MA and its 200 day MA.

That being said, this market indecision favors credit spreads like the Bear Call Spread we suggested a couple of weeks ago, a trade that continues to look like it will expire worthless, allowing you to keep the credit you received when you placed the trade. The benefit of credit spreads like this one, or the Bull Put Spread, is that you can profit even if the market does not move from where it was when you executed your trade.

JD