Summer Rally Short Setup and Two New Long Ideas

MrTopStep.com

The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. For six of the past eight years this July break has either arrived early or did not materialize resulting in six losses. This year, the S&P 500 is on track for three straight weeks of gains which have pushed many indicators to either near or to overbought readings. 

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July Short S&P 500 (September) Trade History Table


July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for the Dow and S&P 500 indices. Mid-July is also when earnings season typically kicks off, where a strong early month rally can fade, as active traders may have “bought the rumor” on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street. 

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S&P 500 (SP) Daily Bars and ProShares UltraShort S&P 500 (SDS) Daily Closes Chart


Numerous choices exist to execute this trade in the futures market and with ETFs or with options. A short position could be established using the electronic e-mini Futures (ES) or SPDR S&P 500 (SPY). Also, a long position could be established using the bear/short funds, ProShares Short S&P 500 (SH) or ProShares UltraShort S&P 500 (SDS).

As SDS is two times the inverse of the S&P 500, its technical picture is the exact opposite of the index. Stochastic, relative strength and MACD indicators are all signaling oversold and SDS has fallen below its monthly support level (green dashed line). A long position in SDS could be established on dips below its May 22 intra-day low of $37.45 accompanied by improvements in its stochastic, relative strength and MACD indicators. If a long position is established, a stop loss at $35.58 is suggested. This July break could be short-lived so a tight 3% trailing stop loss (based on daily closes) is suggested when the position first becomes profitable. For tracking purposes, this trade setup will appear in the Almanac Investor ETF Portfolio. 

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ProShares UltraShort S&P 500 (SDS) Daily Bar Chart

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By John L. Person, Christopher Mistal, & Jeffrey A. Hirsch

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