The brink of breaking support we discussed yesterday is here. The S&P 500 index closed below 1340 and everyone saw the closing number, now they are looking at today. This is almost to predictable to come true at this point, but it is the number everyone is watching. Thus, the proverbial watch and waiting for the pot of water to boil. The close is 1338 for the index and the futures this morning are currently trading above that level. What will it take to accelerate the sell off? Unfortunately that catalyst is already in place and it is Greece/Europe. The fear factor there is still enough to push investors over the edge and to the sidelines. Too many fresh memories of 2011 and 2008.
How do we deal with this in managing our portfolio. Read yesterday’s post if you missed it no time frame and the impact of the decision process. Today I am looking at the trading opportunities of this move. We posted several inverse plays the last week and they are starting to pay off relative tot he break lower. The following are interesting moves in the various sectors:
1) S&P 500 index break below 1340 is the first we have discussed and deserves our attention if the break lower solidifies and creates more than a short term trade. 1308 is the next support level and then the 200 DMA near 1240. If you play the index short you have to watch the 1360 level above as a stop on a reversal and the target at the 200 day. The downside is 4-5% on the current activity. That is a decent trade opportunity and currently that is all we see it as. The surrounding data will have to deteriorate further to accelerate beyond that level.
2) Europe is the catalyst it has to provide some downside opportunity. IEV, iShares Europe 350 Index ETF broke support at $34.70 last week and followed through on Monday. Watch the acceleration lower towards $32.60 and $32 as support. This could get worse depending on the news from Europe and how Greece deals with the current elections. The ripple effect here is China (FXI) which broke support and accelerated lower on Monday. The downside risk is in play with both and both are trades only at this point. The euro is the other issue which closed near $1.28 on Monday and could move near the $126 support level on FXE. The short play for FXE was triggered on the break lower last Monday.
3) Russell 2000 index broke support on Monday as well. IWM, iShares Russell 2000 index ETF has held support at the $78.50 mark since March. The break is worthy of our attention on the downside as it will accelerate quickly with negative news. The support is the 200 DMA first near the $75.30 mark. That falls in line with the other sectors or indexes mentioned above.
4) Energy accelerated below support last week as well with XLE break support at $68.25 and $67.70. The sector has been the leader on the downside as the price of crude has moved lower and broke $95.50 support on Monday. The stocks in XLE are the bigger short opportunity as they have the greater momentum. DUG is the leveraged short play with Proshares ETF. You have to understand and manage the risk the trade.
5) Financials is the last sector I want to address this morning. The break below $14.90 was the big negative and it move lower on the risk of Greece and the bank exposure to European credit. There was also the JP Morgan problem that continues to show up in the news. The downside in XLF is $14.45 to start and that is hardly worth the risk at this point. Watch the 200 day as the target if it gets through the support. This could accelerate quickly given the catalyst of Europe.
We have been tracking and watching all of these short opportunities. We have posted some to the models and all are moving lower at this point. Don’t assume anything, plan your risk and manage it accordingly. Don’t let greed control the trade and keep your focus on the objective not your predictive powers.