This cup and handle pattern should not be ignored.
I know that there are several reasons to discount this trade set up, but don’t ignore it. The price pattern is ‘text book’.
Even better, it’s not an individual stock so the trade is diversified.
Better still, there is a very liquid options market, so there’s a good opportunity with call options.
Finally, even If you don’t trade this ETF, following this trade could help your other trades.
Check out today’s trade idea below.
Today’s trade idea is the S&P 500 ETF (SPY).
This trade may be a little early, but the risk/reward opportunity is the reason to focus on it now.
You may also be questioning why consider buying the SPY when the QQQ and IWM are lagging relative to their all-time highs.
My bet is that SPY is about to lead the other markets higher. If it doesn’t the stop is tight. Plus, the opportunity can be leveraged, and the risk managed with call options.
The reason SPY looks so compelling is its cup and handle pattern that bottomed out on the 200-day average.
The handle in this pattern is the consolidation of the last 2 weeks.
The risk is under yesterday’s low, $294.33 that I would move down to under $294.
On Monday, the SPY broke out to new highs, and I said wait for confirmation. Yesterday, the markets consolidated, when they could have easily sold off.
Now, if the SPY breaks out over $297 it should continue higher without trading below $294.
I would not pay more than $297.50.
Ideally, we should see the QQQ also break it’s Monday high. This would make the trade more reliable.
I would not wait for QQQ to reach an all-time high. The SPY is leading, and as I said, the bet is that the other markets will follow.
However, if the QQQ does not follow the SPY over its Monday high within at least a few days, this is a warning sign that the trade is early or wrong. So watch this closely.
With all this in mind, you now have a game plan for how bullish you should be about the market in general even if you don’t trade the SPY.
If this trade is in gear, be bullish.
If you’d like to trade this idea with options, this pattern is capable of setting up a multi-month rally and an initial quick pop.
Choose your option expiration accordingly.
My preference would be the longer-term trade, so I’d look at the October expiration, so you’re under time decay pressure until September.
I’m looking for a 3-5% move by the end of August if this trade works, that would create a 100% or more gain in any of the Oct. SPY calls.
If you use 294 as your stop to exit, the risk should be about 25% of the value of the calls.
That’s a good reward to risk considering there is also the potential for the SPY to move a lot higher than 5% through September.
Rick Nartarian, Chief Investment Officer
Darwin Wealth Creation