On Thursday bulls found themselves gasping for air as they all but drowned in a a sea of red with the S&P sharply lower and the Dow down by triple digits.
Commodities also rolled over, sending the CRB index to its lowest level since December.
Investors took risk off the table in a big way - after weak data out of China and a gloomy outlook from the Fed triggered new worries about global recession.
And with so much panic and selling driving the market, what should you do?
Option Monster Jon Najarian tells us, take a deep breath – because odds suggest the right trade is the hard trade - hit the buy button. That’s right, Jon Najarian is convinced the market is going to bounce and the time to establish new long positions is right now.
Here’s his thesis:
First and foremost the market has held the August lows of 1120. That in and of itself, is a bullish sign, he says.
But on top of that Najarian also finds the action in the Vix constructive.
He says, “the spot price versus the 3-month December futures contract has only blown out to an 8 point backwardation. That is, the December futures are trading around 32.80 versus the spot which is north of 41.”
That sounds bad, but it's actually bullish.
Najarian goes on to explain that ”when our nation’s debt was downgraded by S&P the spread blew out to a 20 point backwardation.” And he says, although bears have tried to drive the fear index, they can’t get the spread much above 8.
”We haven’t come close to blowing out to the 20 level at all. If we don’t break through these technical levels, I believe the S&P lows hold,” says Najariuan.
But don't go long blindly. Najarian also suggests placing your bets with options so you can define you risk. But the bottom line, he adds, is that, “The odds favor a trades with a long bias working out.”
When it comes to a key market ‘tell’ trader Steve Grasso absolutely agrees that investors should be watching 1121. He says how the market behaves at that level is absolutely key.
That’s because 1121 is the 50% retracement between the 2007 high of 1576 – and 2009 low of 666. As a result, investors who follow technicals closely have clustered around this level.
Although he’s bearish, trader Gay Adami says if you skew bullish then “now’s the time to make a list of things that might be interesting – stocks that might have been oversold.”
He says if the S&P can hold these key levels, Freeport McMoRan may be worth a look, it’s trading at 2-years low. “If the S&P can hold 1121 – we can bounce right back up to 1200.”