Why Put Options Are the Key to Profits This July

There's a lot to be bullish about, despite the headlines, or whether we're in a "second wave" of the coronavirus or if we're not done with the first wave.

If you have a long-term view of stocks, you almost have to be bullish.

The markets have an upward bias that's tough to deny. From the entire period between 1960 and 2019, the S&P 500 has returned an average of 11% - that includes reinvested dividends. In fact, the market only declined in 13 of those years, increasing in the other 46.

In 2020, we've seen markets come roaring back from the March "COVID Crash," and the Nasdaq Composite has even made new all-time highs.

There are trillions of dollars in stimulus sloshing around the markets, like a Labrador in a kiddie pool - everybody's getting wet. Interest rates are as low as they've been since 2009, and they're likely to stay that way for the foreseeable future.

I like the odds of more stimulus, too. The president clearly thinks of it as essential for his reelection in November, and putting cash in everyday Americans' pockets is politically popular, right to left, across a chunk of Congress, too.

That said, as traders, we have to deal with the here and now.

And, while I'm not betting against the markets in the long run, this month my proprietary Money Calendar is flashing a lot of bearish signals that indicate a lot of stocks will be heading lower. Those signals are backed up by the technicals, too.

I'm here to tell you: No need to worry. In fact, I'm pretty excited.

I'm going to make my case for switching to bearish trading. When stocks slide, the profits can be bigger and quicker than when they're going up...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Why Stocks Are About to "Turn Over"

If I were a lawyer, I'd say I just made a pretty strong case for the bull market, but we can't ignore the evidence that points to stocks going lower soon.

For one thing, there's the coronavirus. Stocks are starting once again to key on it; cases are rising in something like 37 states, and the markets are becoming sensitive to it, like they did in early February. And public health experts agree that we are still in the "first wave," and the public health warnings about what we can expect in the fall are getting dire.

We're also not seeing the pronounced "V-shaped" economic recovery we'd been hoping for. Unemployment is falling off slowly; it still sits at a worrying 13% or so. The economy's no longer shrinking rapidly, but growth is slow, too.

Then there's the stock market itself. About 25% of the rebound in the S&P 500 has come from the FAANG stocks - just a handful of company. Twenty percent of S&P 500 stocks have gained just 20% since March 23 - which isn't bad at all, but "just okay" in context.

On top of that, nearly 10% of the S&P 500 is at new lows since March.

This chart is interesting. It shows trading since March in the SDPR S&P 500 ETF (NYSEArca: SPY) that tracks the S&P 500 index.

You can see just above the red cursor that we've had an "island top reversal," where stocks topped, then gapped lower. Then they battled back, and moved lower. That suggests a resistance level in SPY of around $317, or 3,170 on the index itself. Sure enough, we're coming up against that level right now.

Now look at the red line on the same chart. That's volatility. You can see it was sky high in March, near 80, and now it's fallen sharply. It came down near 20 in early June, and now it's rebounding strongly.

We've got trading volume to think about, too. In March, volume was north of 350 million shares a day, but that's fallen sharply, too, to the point where we're barely seeing 100 million shares change hands every day. That's a very bearish signal.

Here's a recent reading of the moving average convergence divergence (MACD) chart.

The MACD uses two moving averages, each of which are the average value of a stock or index over the past few days. It calculates the difference between a 12-day exponentially smoothed moving average (EMA) and a longer-term 26-day EMA.

A second line, called the signal line, is typically a nine-day EMA of the MACD line. The interaction between the MACD and signal lines gives us even more information.

Here, you can see the signal line has crossed below the MACD, and it's spreading negative.

Taken together, this all indicates that the current bull is running out of steam. Stocks are likely to fall for a spell. Time to be bearish.

Now let's look at what the Money Calendar itself is showing us. For those of you who might not know, the Money Calendar looks at the top 250 "optionable" stocks and crunches 10 years' worth of precise performance data to tell us, at a minimum, how to trade. My paid subscribers get the actual recommendations, but this'll be helpful for everyone.

Here's When the Bull Is Likely to Fade

Here's a screenshot of the Money Calendar coming out of the Fourth of July holiday - that's historically a bullish period.

But look just below. On about July 14, you see more and more bearish yellow and red. It starts to get redder the week of the 20th and 27th; that means bearish trades - puts, bear spreads - stand a much better chance of paying off with a minimum of risk.

By July 20th, we're looking at a big, powerful bear run in all kinds of big stocks.

Now we can get some idea of where the overall market could go by using the Fibonacci retracement - the "Fibo." Now, you can read all about the Fibo right here (and I suggest you do, because you'll be a better trader for understanding it) but looking at this screenshot, we can see retracement levels on that SPY ETF I showed you a minute ago:

We can see a 38.2% retracement from the June high takes us down to around $284. 50% retracement puts us just below $273, and a 61.8% retracement puts us at $261 and change.

Those are three areas where traders playing along will want to start covering their bearish plays, as the market slides down to hit these particular targets.

Here's the bottom line: The technicals and the Money Calendar both show that the next big move will happen after Independence Day, and will probably be to the downside, with the SPY landing anywhere from $270 to $280 before the next leg up. Puts on the SPY itself would be a fantastic way to profit here.

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About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

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