S&P 500 is trading in a range-bound by Fibonacci retracement levels. In the last two weeks, we have been trading within a well-defined range between 2,800 (50% retracement) and roughly 2,940 (61.8% ‘Golden Ratio’ retracement). I charted out the levels I am looking at utilizing TradingView’s Fibonacci tools, which you can see below.
Today we traded right up to the 61.8% Fib resistance level, and I am hedging my portfolio against this level, locking in some gains without being overly bearish.
Selling out-of-the-money covered-calls is the best way to lock in gains for a larger portfolio while at the same time not being excessively bearish on the market. Remember that in order to cover one call option on a stock you need 100 shares.
I added a little more risk to my portfolio at close and bought June 19 expiring SPY (SPY - Free Report) puts. I am of the belief that the equity markets are overvalued, and with volatility at a 10-week low, puts are trading at a reasonably priced. I like the S&P 500 2,940 level because it's not only the 61.8% 'golden' retracement level, but it is the resistance we bounced off of the last week of April.
Right now, it would appear that there is a substantial disconnect between the equity markets and the broader economy. I am looking to see the S&P 500 pullback to 2,650 before I feel comfortable buying stocks again.
Check out my article: Should We Remain Bullish In The Face Of An Economic Crisis? for more info on the disconnect between the equity markets and the economy.
Be cautious with your investments at this level. Don't be too bullish on the equity markets quite yet. We are still looking at an opaque economic outlook. I would need more optimistic expectations on job recoveries and vaccine/treatment timelines before I get bullish on the at these levels.
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