CME Group’s new Micro E-mini futures is a good tool to more safely exploit a potential market top in the S&P 500, writes Carley Garner. See Carley provide a detailed presentation on using the Micros at The MoneyShow San Francisco on Aug, 17, which will be live streamed!
For months, we have been saying we would be willing to turn bearish on the S&P 500 on a move to the 3,000 level. Here it is, and we feel the same way about it. Despite supportive seasonals in the short run (the next few weeks), the longer-term prospects (the next month or two) look questionable. There is trendline resistance near 3,030 to contend with and oscillators are creeping into overbought territory. Specifically, the Relative Strength Index (RSI) on a weekly chart is nearing 70 (overbought). Historically, such a reading has been difficult for the market to maintain.
On the fundamental front, the Fed Funds futures market is pricing in a nearly 100% chance of a rate cut later this month in addition to high odds of further cuts. We continue to believe the interest rate market is ahead of itself. If so, there is plenty of room for disappointment in the stock trading arena.
Bearish traders, who also happen to be risk-averse, could consider selling the Micro E-mini S&P 500 future near 3,000 or just above. At $5 per point, this gives even small retail traders a way to put a foot in the door on a bearish trade with the efficiency offered by the futures market but with manageable risk. For instance, a run to resistance near 3,030 would be a drawdown of a mere $150 before transaction costs. The smaller contract size also allows traders to put on several micro contracts and take partial profits and place stops on their remaining position to a breakeven level, which allows them to maintain opportunity for a much larger move.
That said, the risk is theoretically unlimited when selling futures short. While it is possible the market moves considerably higher, it is not likely.
On the downside, we believe the mid-to-low-2,700s could be in play. Assuming this became reality and a trader had the gumption to hold on for the ride (by splitting a larger position into multiple micros and taking partial profits while moving stops to breakeven), it would be a profit of about $1,250. In our view, the risk is attractive relative to the profit potential. As always, trading futures and options is risky business even when working with small contracts.
Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. She has written four books, the latest is titled “Higher Probability Commodity Trading” (July 2016).
Join Carley Garner for an in-depth look at how to use the new E-mini Micros at The MoneyShow San Francisco on Aug, 17.
