Will the S&P overtake 1700? With so many major stops above that level, a test is almost guaranteed.
Equities are trading well below highs Friday morning, on worries that the planned stimulus coming out of Japan may not meet expectations. Consumer Price data out of Japan beat expectations and showed the biggest jump since 2008, causing the yen to rally more than a point.
We all know that a stronger yen puts pressure on the equities market, as traders look for a risk-off trade. We are seeing a flight to bonds this morning as a safety trade heading into the weekend.
(Read more: At last, inflation in Japan is speeding up)
The S&P traded to a high of 1689 on Thursday night before selling off more than 10 points. The market found resistance at the 1686 to 1687 level, trading to a high of 1686.50. A close above here will be needed to provide bullish momentum into the close. Meanwhile, a fall back and close below 1681 will be discouraging to the bull camp.
With a great deal of earnings still to be released and a light slate of data out of the U.S. on Friday, the levels take on increasing importance. A retest of 1689 will likely help the market stick out its head just above there. Bulls can look at the 1676 level as a buying opportunity upon the first test.
(Read more: Why the market is ignoring good news: Pro)
However, what if you're looking for a way to play the downside, without using a stop above the highs? In that case, consider buying out-of-the-money puts on the S&P e-mini. Take a look at the September S&P e-mini 1630-strike puts for 18 points. This gives you short S&P exposure for 47 days, for a total of $900 in risk. Food for thought!