What had been a mediocre, oversold rally failed right where such rallies normally do several days ago -- at the declining 20-day moving average. Then everything changed to a much more bearish scenario after President Trump's announcement of tariffs. Be sure to roll deeply in-the-money options, says Lawrence McMillan, editor at Option Strategist.
It just so happened that the 200-day moving average of the S&P 500 (SPX) was in the same area as the 20-day. That was just over a week ago. Then SPX quickly declined to the lower edge of the trading range (near 5,500) and found support once again.
Prior to the tariff announcement, the market seemed ready to rally. But in the mere 36 hours after that announcement, SPX (or the S&P futures) lost 530 points.
The red line on the SPX chart is where the S&P futures traded overnight on Thursday night, and in particular on Friday morning prior to the NYSE opening. The magnitude of the decline is shocking, especially when one considers the fact that the tariff announcement was about what Trump had said all along it would be.
Now, we are seeing indicators smashing down into oversold territory. But “oversold does not mean buy.” The market can remain oversold for long periods of time while it is declining sharply. So, we will have to wait for confirmed “Buy” signals, rather than try to pick a bottom in front of this bearish freight train.
This move downward has established a pattern of lower highs and lower lows on the SPX chart (pink lines). That is bearish and might even be the beginning of a bear market – although it’s probably too soon to be able to declare that.
In any case, a “core” bearish position is warranted as long as this downtrend is in force. A move above 5,800 -- or perhaps even 5,700 -- would probably be enough to break the downtrend. But that seems difficult to achieve after the demolition that has taken place.
Bottom line: We are watching for confirmed buy signals, or even oversold conditions that abate and present short-term buy signals. Be sure to roll deeply in-the-money options. With puts being so expensive, you are not receiving a large credit on rolling down, but it still needs to be done.
