Monday’s action was what you would expect from the first day back from a long Holiday weekend. Remember, the markets are made up of people and today the market looked like it was still heavily dosed with tryptophan from Thanksgiving day leftovers.
Last week I talked about looking for 1400-1410 in the S&P and from there the upside potential would be limited. Well folks, here we are and we got there fast. After 7 vicious selling days the market only needed 6 days to recover most of those loses. The bottom line is the upside doesn’t look pretty anymore. Keep in mind the S&P can still get up to even 1420-25 without breaking this current downtrend.
This is the time to start looking for opportunities to short either by buying puts or selling call credit spreads. Keep an eye on the VIX the next few days. If the VIX can spike down to below 15 again and we get one last burst of short covering look for directional puts in the index ETFs. For directional puts I’d look for delta 70 options in the front money options. If you like to define your risk then go one strike out of the money sell a call credit spread.
John F. Carter