Failure At 2,800 Spells Doom For The S&P 500!

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Includes: CAKE, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, GCI, HUSV, INTC, IVV, IWL, IWM, JHML, JKD, M, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, THC, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Philip Davis
Summary

We're teetering on the edge of a 5% additional drop in the indexs.

A review of the lines we're watching.

5 ways to hedge for the next 5% drop.

This is not good!

The only reason the S&P 500 is holding the 200-day moving average at 2,776 is because the 200 dma keeps sinking. That, of course, is also pulling the 50 dma lower and once it comes down we're only a month or two away from a "Death Cross" and then we would be looking at a very long, very hard climb back for the senior index.

That's why it is very, VERY important that we finish the week back above the 2,800 line on the S&P and the 1,500 line on the Russell and the 12,500 line on the NYSE and the 25,500 line on the Dow and the 7,250 line on the Nasdaq 100. Anything less than that is DOOM!!!!

While we are pretty well-hedged for DOOM!!!! we did add to our hedges yesterday and we'll be adding more hedges on Friday if the indexes don't perk up and get back to their levels which, though nowhere near a recovery, would at least indicate that there is SOME buying interest still out there - something we're beginning to doubt. By all indications, it does look a lot more like we're consolidating for a move down - rather than a move back up:

Of course, that's why we have our bounce lines - they let us know whether a recovery is real of if it's just a dead cat bounce on the way to the next lower band. The lines we've been using all month are:

  • Dow 25,200 is the 5% line and the bounce lines are 25,450 (weak) and 25,700 (strong)
  • S&P 2,860 is the 5% line and the bounce lines are 2,875 (weak) and 2,890 (strong)
  • Nasdaq 7,475 is the 5% line and the bounce lines are 7,540 (weak) and 7,605 (strong)
  • Russell 1,550 is the 5% line and the bounce lines are 1,565 (weak) and 1,580 (strong)

So our goals for Friday are now significantly below the 5% lines and, in fact, if you want to know the retrace goal on each index, you can simply subtract whatever it takes to get to the weak bounce line (about 1%) which would be:

  • Dow 25,200 - 250 = 24,950, now 25,170
  • S&P 2,860 - 15 = 2,845, now 2,790
  • Nasdaq 7,475 - 65 = 7,410, now 7,245
  • Russell 1,550 - 15 = 1,535, now 1,493

Those are our retrace lines and holding those would indicated that the -5% lines are still in play but, with 3 of 4 failing already, a failure in the Dow would indicated that the - 10% lines are now in play at Dow 24,000, S&P 2,650, Nasdaq 7,100 and Russell 1,460 and the Russell is already close and the Dow has the furthest to go, which means it makes the best short to add and we can use the 2x Ultra-Short ETF (DXD) as a new hedge:

  • Sell 5 Macy's (M) 2021 $20 puts for $4.10 ($2,050)
  • Buy 30 DXD July $29 calls for $2 ($6,000)
  • Sell 30 DXD July $32 calls for $1 ($3,000)

That's net $950 on the $9,000 spread that's $3,000 in the money to start so any move down in the Dow will just put you further in the money and you only need a $2 gain (6.7%), so a 3.35% drop in the Dow, to 24,300, would put the spread $9,000 in the money for an $8,050 (847%) profit. The short puts obligate you to buy 500 shares of Macy's (M) for $20 if it's below that price (now $21) but M is one of our favorite bargain stocks and you can offset with any stock you would REALLY like to own if it gets cheaper, like:

  • Intel (INTC) 2021 $40 puts are $4.40 so $2,200 collected for promising to by INTC 10% cheaper than today's price.
  • Cheesecake Factory (CAKE) 2021 $40 puts are $4.70 so $2,350 collected for promising to buy CAKE 8% cheaper than today's price.
  • Gannett (GCI) rejected a hostile takeover offer at $12 and is now back to $7.63, which we think is way too cheap so selling the Jan 2020 $7.50 puts for $1 is an easy call but you'd have to sell 20 to collect $2,000.
  • Tenet Healthcare (THC) 2021 $15 puts are $3.50 so selling 6 of those nets $2,100 and they are 25% lower than the current price on a stock we love when it gets this low.

If, for example, we decide we need to have $45,000 worth of additional coverage in our Options Opportunity Portfolio, then we can simply sell puts on each of the 5 stocks above and buy 150 of the DXD spreads and I think we'll all sleep better over the weekend, right? That's our plan if our levels aren't taken back by tomorrow OR if the Dow fails to hold 24,950.

Remember, these hedges are starting out in the money and the only way we lose on DXD is if the Dow is higher in July and, if the Dow is higher in July then our short puts are probably in good shape - as well as the longs in the portfolio that we are protecting - so we've hedged our hedges!

We've been in and out of Gasoline (/RB) Futures for the last two weeks and /RBN19 (July) is back below $1.90 as the API Report showed a 5.2Mb draw in Oil but a 2.7Mb BUILD in Gasoline. Distillates were down 2.1Mb and that even out the Gasoline and we'll see what the EIA Report confirms at 11 am (due to holiday) but we do like a long on /RB if it crosses back over (ONLY!) with tight stops back below the $1.90 line as anything but a build in /RB should send things higher and, even if they don't - it's the July contract so that holiday should help a bit over the next few weeks.

Remember: I can only tell you what is likely to happen - the rest is up to you... For example, on May 9th, right here in Seeking Alpha, I said:

Powell just made a dovish speech and tanked the Dollar but it's too little, too late as we're selling off hard and fast at the open and that's DESPITE the lower Dollar so NOT GOOD is my summary of the morning action though it is popping our Coffee Futures (/KCZ19) back over $95 and hopefully we'll get another crack to go long Gasoline (/RBN19) at $1.92 as we took an 0.03 ($1,000+) gain and ran yesterday.

Nasdaq (/NQ) will critically test 7,500 and that should line up with Dow (/YM) 25,600, which was a good long the other day and 2,840 on the S&P (/ES), which is VERY BAD (see yesterday's chart) and the Russell (/RTY) is DOOMED below 1,564, as that's the 50 dma and we're already below the 200 dma at 1,563 and the 200 dma is crossing below the 50 dma and that's called a DEATH CROSS and it means we're all DOOMED!!!!

As you can see from the Big Chart, those dma's are failing all over the place so DOOM!!! is the forecast unless a trade miracle occurs in the next 48 hours. Needless to say we'll be reviewing our hedges this morning to make sure they are protecting us adequately – thank goodness we predicted this or it wouldn't be funny at all!

We've been in and out of Gasoline and Coffee and /RB has gone nowhere overall but /KCZ19 just hit $107 this morning and each $1 move up in a Coffee Contract is good for $375 so that's a gain of $4,500 PER CONTRACT in just 3 weeks, so I wouldn't be greedy and I'd take at least 1/2 off the table and keep a stop at $105 on the rest to lock in $4,000 as $4,500 in 3 weeks is just silly money to make on a single contract - so be happy.

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Disclosure: I am/we are long CAKE, DXD, GCI, INTC, M. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas).