SPY Bear Call Spread; Indicators mirror start of May 19 decline

We maintain a bearish outlook on the entire market, and are using the 298/299 call credit vertical to assume our bearish position. We are selling the 298 calls while simultaneously longing the 299 calls to execute a risk-defined trade. With a breakeven of 298.37, we make our maximum profit of $37 per contract when the underlying price drops below that of the short strike: 298. We suffer the maximum loss of $63 above the long strike of 299. Using a bear credit call spread instead of a bear debit call spread, we are able to assume a better risk/reward ratio: .58 compared to the put alternative with the same strikes which entails a ratio of .56.

Our bearish outlook is fundamentally driven, but also technically supported as we feel the market is extremely overbought, and many indicators further this notion. The SlowK Stochastic indicator (an indicator from 0-100) read a whopping 95, with the slowK in the 70s, mirroring the readings of May 1st, the start of the major downturn that caused SPY to lose nearly 550 basis points of its value in the month of May. The MACD is showing signs of impending bearish movement as the second derivative is negative. The DI+ is also decreasing at the moment, while the DI- is increasing on the Wilder ADX . The RSI also reached 70, again, just like May. The CCI agrees, as the reading indicates that this security is strongly overbought, with a value of 168, near the 170 seen on 4/29, prior to the drastic down-move. These similarities ought to be duly noted, and are indicative of the strong bearish sentiment that is beginning to prevail.

Fundamentally, there are many key issues that haven't been solved, yet, somehow we are near all time highs. The notion that with trade tensions still present (between not only China, but also the EU and Mexico, among others) all time highs are reached is befuddling to us. Using the CAPE (cyclically adjusted price to earnings multiple) measure promulgated in Benjamin Graham's classic, companies also seem extremely overvalued. Also, we note that the strong jobs report on Friday completely curtails the chance of a 50 bp Fed Funds Rate cut, and lowers the possibility of the 25 bp cut that is priced into rate markets.

Very well and nicely written. Thanks for the post.
LaurenTrading AlexBhatia
@AlexBhatia, Glad you liked it! I’ll post some more analyses soon...follow to stay updated.
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