After the S&P 500's best week since 1974, Ascent Wealth Partners managing director Todd Gordon breaks down whether this is the recovery investors had hoped for.
"The big question on everyone's mind — both traders and investors — is this bounce that we're seeing is it just a short covering bear market rally that will ultimately fail, return to the lows, potentially take us through the lows? Or is the this a "V" bottom and we're moving back up to the highs and potentially through the highs, with this unprecedented economic stimulus package that Congress, and the Fed has put through?" Gordon said on CNBC's "Trading Nation" on Thursday.
The S&P 500 hit a record of 3393 on Feb. 19 and bottomed out at 2191 on March 23. That marked a 35% decline. Since then, it has bounced roughly 27%. Based on Fibonacci retracement, this means it has moved back halfway to its highs, says Gordon.
"We're right up to the 50% price retracement at 2796," he explained. "This 61% which is another key level is at 2939. So, altogether, this is your zone of interest where a possible failure, if this a bear market rally, might occur."
Gordon says he has become more bullish on the stock recovery and has allocated equity to the market. However, he puts it at 50-50 that markets either make new highs or retest lows – based on technical analysis, possibly back to 2016 lows below 1900 on the S&P 500. In case of either, he sees a way to hedge against any more downside using options.
"The trade I want to look at is if we go out to the July options [on the SPY S&P ETF], 100 days out, buying the 225 strike put, selling the 200 strike put, it's a $25 spread for which you will pay $3.16. What that means is this spread costs you $316 per one lot of 225 puts bought and 200 puts sold," he said. "Buying 225, selling 200, costs you $316, max potential profit is $2,184."
He adds that if markets do just retest recent lows before moving back up, the value of the spread will increase above $3.16.
"If you start to move down, the market is sort of holding the lows, you're seeing signs of life, you can certainly take the trade off and trade it just like a stock. That spread trades all day long, so you're not set in this thing all the way to expiration," he added.
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Source: cnbc.com