Emini Futures Trading Analysis- 12Aug2017

Hello Folks, the S&P500 Emini futures closed at 2440.50
Last week was outright bearish for the S&P500 index, for whatever reasons. We all know the market has been moving up without major correction, and it was going to come sooner or later. I was up till 2 am last night and back up again early today morning to do my market study. The market is making me uneasy after a long time. We have been long with confidence since Jan-Feb 2016, and whatever stop-loss we had along the way, was due to market whipsaws, but not due to trend change. The upside targets were always intact. However, now that seems to be changing. My upside target of 2500 was almost achieved by the S&P500 index, which made a high of 2490 (just 10 points less than 2500). The futures went till 2488, and reversed, which was a bearish sign. But the next day gave a bullish reversal, which offered support to market, and then we got a 40 point cut from 2470 to 2430 the next day, which has wiped out most of the recent long positions.

Please see this daily chart of S&P500 Index ETF (SPY)
spy-etf-chart-11aug2017

The S&P500 index is literally sitting on support line at 2440. The index has used this support line a few times in recent months to bounce back and resume the uptrend. Every time the index tests the support line, the index will gain some strength, but the support line becomes weaker. One of these times, the support line will give away, and we may get 80-100 point fall within a week. It is this possibility of a sharp fall below 2440 that is making me rethink our trading strategy for August. We wanted to be cautious in August from the start, and the setup is looking weak.

We will have to start a short trade at some point, and I am thinking what that point would be. The market won’t give second chances in a correction, as we saw this week. The short trades tend to be 3-4X faster than long trades, and therefore, its very difficult to catch them midway unless we are already in the trade.

One way to handle such a situation is to buy and hold SPY put options. We have done this in the past, and in case of any large market fall, the Put options work like short futures, at a fraction of the cost of futures.

My recommendation is to hold this put option: SPY Sep 2017 240 Put
https://finance.yahoo.com/quote/SPY170915P00240000

Expiry Date: Sep 15, 2017. Last traded price was $2.60
Contract size is 100. So each Put option contract will cost $260. Traders can hold a few contracts. This will offer good protection/hedge in this market till its expiry, which is one month away, and much of the current volatility would play out by then. If the futures have to go fall by 100 points to 2350, they may do it in the next 4 weeks.

Please note: the above put option is a just a suggestion, and the setup looks suitable to hold some put options. You may consider it a Bonus Trade.

With S&P500 Emini Futures, we will aim to close our long trade between 2450-2460 on Monday/Tuesday, and we will look for a short trade below 2440. The futures have to move above 2475 for the current bearish pattern to end. That’s why I was thinking of staying long with target of 2473, but it looks less likely now, compared to a retest of 2410-2420 level. I will mail you separately for this because my analysis is not complete yet. It is complex when the futures have dropped quickly to a support line, and probability of further correction is high. Please wait for my next mail with specific next steps. Thanks.

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