SPY Breaks 50MA — How the Smart Money is Taking Advantage

SPY Breaks 50MA — How the Smart Money is Taking Advantage

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It’s no secret that the SPY has been on a powerful, consistent rally since the October 2023 correction ended. That rally took us from a low of $409.21 to a high of $524.61 (a 28.2% rally) within 104 trading days. 

Not only that, it sent us to a brand new all-time high as the SPY cruised past its $479.98 high from January 2022 to its newest all-time high of $524.61. 

However, more notable than the size of the recent rally is the consistency. From November 3rd to April 12th, the SPY performed a feat that has only taken place 9 other times since 1950: It closed above the 50 day moving average for a total of 162 consecutive days. The entire time, it traded within a tight upward range.

Here’s how the recent rally stacks up to history:

  1. 1/04/95 – 1/09/96: 371 days 
  2. 4/10/58 – 11/24/58: 229 days
  3. 7/24/06 – 2/26/07: 218 days
  4. 11/04/60 – 6/09/61: 218 days (TIE)
  5. 9/02/10 – 3/09/11: 189 days
  6. 11/29/63 – 5/28/64: 182 days
  7. 3/31/89 – 9/22/89: 176 days
  8. 11/23/70 – 5/14/71: 173 days
  9. 1/25/83 – 7/11/83: 168 days
  10. 11/03/23 – 4/12/24: 162 days

However, recently, there were technical warning signs that the end of this near-record rally was drawing near. A massive bearish engulfing candle on April 4th stood out to many traders. At the same time, on the weekly timeframe, a series of 12 consecutive weekly higher lows was about to come to an end.

This immediately spurred smart money buying of bearish exposure in the SPY. The trade below uses a June $493, $489 put spread, bought for a total value of $0.60, which carries a maximum value of $4.00 per spread. That equates to a possible maximum gain of +566.67% by June if the SPY closes below $489 on the expiration date:

So it shouldn’t come as a shock that eventually, the rally was bound to take a turn. Today, on April 15th, 2024, the SPY broke the streak of consecutive closes above the 50MA, closing below its 50 day moving average by a large margin. 

We see the importance that the level holds for buyers as we watch the hourly time frame reaction. On the 12th, the SPY was able to hold this level by a thread, posting two successful bounces off of the level. However, on the 15th, after a long weekend where geopolitical tensions dominated the headlines, buyers finally seemed too afraid to step in, allowing bears to tear through the key level of support for the first time since November 3rd.

When a key level holds for a long period of time, its significance grows. Add in that the 50 day moving average is a highly watched momentum indicator for not only the SPY, but the entire market, and you have a recipe for potential followthrough to the downside.

Now, as active traders, we’re forced to look lower in the SPY to determine what the extent of the damage could be. As the pioneers of unusual options activity, Market Rebellion likes to look at where the smart money is aiming in pivotal situations like this — and lately, there has been a surplus of unusual put buying in the SPY, with the latest massive purchase taking place today.

As the SPY fell from $514 down to $506, the smart money has been rolling herds of 40K+ contract orders lower, and lower, and lower, drawing nearer to what is likely their ultimate destination: The former all-time high, $479.98. It’s a level we moved through without much resistance back when this rally was still going strong, and have never retested since. Logically, it makes the perfect target.

On top of that, when you measure the fibonacci retracement pattern from the low of the October correction to the high of the recent rally, you’ll find compelling confluence, with the former all-time high appearing as the 0.382 fibonacci retracement level. The golden 0.382 level is commonly considered one of, if not the most important fibonacci retracements for measuring when pullbacks are nearing completion.

So then, why would the smart money target out of the money strike prices that were so close to this level? One word: Gamma.

When OTM options begin accelerating towards their strike price, a key options greek called Gamma begins to rapidly rise in unison. 

Gamma is a measurement of the rate of change in another very important option greek called Delta. Delta measures the dollar-for-dollar move in an option against the movement of a stock. For instance, does your option have a Delta of 1.00? Then it’s moving at a speed of ±$1.00 for every dollar that the corresponding stock moves. Does your option have a Delta of 0.50? Then it’s moving at a speed of ±$0.50 for every dollar that the stock moves. 

However, Delta is just one of a handful of option greeks that have a say in the price of your option. Other important greeks, like Theta (which puts a price tag on your option’s lifespan) and Vega (which factors in market volatility) will also have a say. Within that handful of greeks is Gamma. 

As OTM options make quick moves towards their strike price, Gamma can quickly turn a low Delta option into a high Delta option, leading the price of your contract to rally substantially within a short period of time, even if it’s still out of the money. For this to work, the option needs to have enough time remaining until expiration for the market to believe that it’s still possible for the stock to make the associated move. 

In the case above, the smart money is using tens-of-thousands of similarly priced low Delta options to scalp Gamma as the SPY makes a mad dash toward a full retracement of its former all-time high. So far, the strategy is working.

When we look at the price of those May 17th $489 puts bought on April 9th, we see that these options were initially bought for $2.52 per contract. Today, they closed at a value of $4.56 — a gain of +80.95%. The put spread expiring out in June at the $493/$489 strike, initially bought for $0.60, closed today at a value of $0.98 — a gain of +63%. The May 17th $487 puts bought on April 10th for a mid-price of $2.36 are now trading at $4.18 — a gain of +77%. And even the $482 puts bought today for $2.92 with just two hours remaining in the trading session are already trading +15.1% higher to $3.36.

So how can you take advantage? Some may simply choose to follow these smart money moves at face value, jumping in on the trades that the smart money has already made in hopes that the SPY continues its rush towards its former all-time high.

But there’s a problem with this: How will you know if the smart money changes its thesis? Make no mistake, this is an ominous looking pullback. But in part, it’s stemming from a tense and constantly evolving situation in the Middle East. What if the smart money buyers decide to pack up and close these positions in the wake of new developments, or even reverse course and buy the dip themselves? What if the situation changes on a dime?

Often, the smart money buyers are some of the first to react to meaningful pivots like this, just as they did here in the wake of the shift that took place on April 4th. There’s only one tool that would allow you to see this shift happening in real time, and move in sequence with the smart money:

Market Rebellion’s Unusual Options Activity. With the market seemingly shifting under our feet, and new headlines breaking seemingly every moment, there has never been a more critical time to follow the smart money. 

Try Market Rebellion’s Unusual Options Activity today using the cart checkout below to get curated trade ideas based on the latest smart money moves, complete with technical analysis, trigger levels, and more.

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