Welcome back to the bear market, Evolvers!
As I warned about last week, it’s looking like ‘the September effect’ is in full swing this year.
Ever since the major indexes hit hard resistance on August 16 — only to fail AGAIN at critical levels on August 25 — the bear market rally we’ve been experiencing since mid-June has been unraveling.
Just look at the charts for some obvious evidence of this. The S&P 500 ETF Trust (NYSEARCA: SPY) has dropped almost 5% in the past month.
Even more notably, the SPY has only closed green on one day so far this month, September 1.
For ‘hold-and-hope’ investors, this is terrible news.
For Evolvers, however, this should be music to your ears.
Bottom line: I think this bear market has further to drop this year before all is said and done, which could be a potential options-trading goldmine if you know how to take advantage of it.
And the timing of this reversal — aligning perfectly with the beginning of what is historically the worst month of the year for stocks — couldn’t be any more perfect if you scripted it.
I can’t say I’m surprised … I’ve been talking about how fragile I thought the rally was for a few weeks now.
Now, it’s time for us to capitalize, which is precisely what I did at the end of last week by buying weekly puts on Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL).
Keep reading and I’ll break down the whole trade for you…
Topping Signals and Key Rejections
Heading into the beginning of last week, I was noticing some topping signals — certain technical indicators that were leading me to believe the market was about to reverse to the downside.
The most important signals were the SPY’s inability to break key resistance levels…
First, it failed at $430 on August 16. Then, it failed again at $420 on August 25.
You can’t ignore these perfect round-number rejections. If a stock fails at an important level, it almost always drops further soon thereafter.
(If you’d like to dive deeper into the finer details of my strategy, check out my brand-new ebook by clicking right here.)
This phenomenon is even more noticeable within the major indexes because every trader on the planet is watching the same chart and the same levels.
SPY is the most important chart in the world.
$127k in just 24 hours?! 😳
Did you catch the Shadow Trades Summit with Tim Sykes and Mark Croock?
Mark pulled back the curtain on his shadow trades strategy…
Detailing step by step how he was able to make $127,000 in just 24 hours, during the middle of a market crash!
All this to say … When I see SPY failing to crack resistance multiple times in a row, I’m looking to get aggressive on the short side.
And what are two super-liquid stocks that are major components of the SPY?
You guessed it … MSFT and AAPL.
Why (and How) I Traded MSFT and AAPL
I chose to trade puts on MSFT and AAPL because they’re two of the most heavily-weighted stocks in the SPY…
In other words, I figured if SPY was gonna drop, MSFT and AAPL would need to drop as well.
NOTE: I could’ve just as easily bought SPY puts to simplify this trade, but I chose to spread it out over two legs to diversify the position.
So, on Thursday, September 1, I bought the following contracts:
- MSFT 9/19/2022 Puts for $3.64
- AAPL 9/2/2022 Puts for $1.03
Then, on Friday, September 2, I sold both legs of the trade to take solid profits for the following gains:
This trade wasn’t anything fancy. It’s a simple example of an instance where I took advantage of major downside in the overall markets.
And since I think stocks are gonna plunge further this year, I want you to think about how you can potentially execute similar plays in your account.
Identify charts that are breaking down and look for topping signals.
Then, if you find yourself in an options trade that opens much higher the following day, follow my lead and take profits quickly.
I love seeing this sort of penny stock volatility in large cap stocks.
Better yet, I think there’s more of this to come in the following weeks.
Don’t ignore the opportunities this historic bear market reversal is setting up.