What a week we just had!
The Federal Reserve announced its first interest rate cut since 2008 on Wednesday, lowering its benchmark rate by a quarter percentage point. But this outcome had clearly been baked into stock prices and traders sold the news.
Stocks rebounded Thursday and were on track to recover Wednesday’s losses when President Trump threatened to slap an additional 10% tariff on $300 billion in Chinese imports starting in September. The market immediately turned south and extended its decline Friday, with stocks logging their worst week in months.
I can’t recall the last time we this kind of major market-moving news back-to-back. Can you?
Of course, we knew the Fed news was coming. Traders had been waiting with bated breath for weeks leading up to the central bank’s scheduled meeting. Trump’s escalation of the trade war, on the other hand, came out of the blue, as U.S. and Chinese trade representatives had just resumed talks in Shanghai earlier in the week.
But this is the reality we live in now. To make money and avoid steep losses in a market like this, traders must be nimble.
One of the best ways to do this is to trade options.
Options allow you to make money no matter which way the market trades on a given day. Plus, when used properly, they can limit your risk and provide amazing leverage that can turn a small move in the underlying stock or ETF into gigantic gains.
To illustrate the power of options, especially in a market as choppy as this one, I want to go over my most recent Trade of the Day, which had the potential to make traders 84% in 90 minutes.
As you may already know, my preferred trading vehicle is SPY, the highly liquid ETF that tracks the S&P 500. (Sticking to liquid securities is another way traders can stay nimble, but more on that another day.)
Here is what I sent to Trade of the Day members 30 minutes prior to the market open:
“SPY is very close to the 50-day simple moving average line. It’s trading about $0.40 above it as I’m typing. One could say that’s an easily identified support level, but keep in mind that, on Thursday, SPY broke the 50-day simple moving average line to the upside as resistance, then broke it to the downside as support on tariff news about two hours later. So anything is possible!
“Indicators are all over the place today (it’s a news market, not a technical market), so I’m working strictly with support and resistance levels today. Above SPY $295, there’s about $2 of gap up room. Below $292.50, there’s about $2 of gap down room. Given the uncertainty and overseas markets, I’d be very suspect of a pop near the open, which is likely to be short-lived.
“Don’t be afraid to approach the open with some patience. Then, I believe it’ll be time to look for a head and shoulders and buy to open put options.”
Of course, as I do each day, I provided members with a specific option, SPY August 7 293 Puts, which I thought would be the best bet for their money that day.
Friday’s action played out just as I predicted it would:
A short-lived pop at the open was followed by a head and shoulders (if you’re not familiar with this powerful pattern, check out the recent article I wrote).
Once the pattern formed, SPY went straight down, slicing through the $292.50 support level I mentioned and falling to its low of the day at $290.90 around 11 a.m. ET.
Traders who followed my Trade of the Day alert had a chance to book up to an 84% return in an hour and a half. And keep in mind that this was on a 1.3% move in SPY. Talk about leverage!
Looking ahead to next week, I will continue to watch SPY’s 50-day simple moving average, which is the red line on the chart below.
If SPY stays above its 50-day SMA on Monday, we could see a bounce back the $300 area. If it falls below it, there’s room for a gap down to $280, which is more than 4% below where we closed on Friday. A drop to this level would also erase all of a buy-and-hold investor’s gains since early June.
Luckily, that’s not how I play the markets. And it shouldn’t be the way you do either.
Next week is a fairly light week on the economic calendar, but we can’t rule out the possibility of unexpected news rocking the market… possibly even between now and Monday’s opening bell.
But you can bet your bottom dollar I’ll be monitoring the news and the charts closely as I put together Monday’s Trade of the Day.
If you’re ready to get off the sidelines on down days and start levering them into big profits next week, I suggest you join me.
America’s #1 Premarket Trader,