Most of my trade ideas are long trades because it’s easier to be right for big trades that way.
However, today’s trade will profit if the market drops.
And, if by chance, the market is near a top, this trade has a very favorable reward to risk characteristic.
Read below to take advantage of this protective trade that also has a huge upside.
As you’ll see in the VXX chart below, it’s back near its major low level around $25.
The VIX will tend to move in the opposite direction as the SPY so you would expect that with the SPY touching a new high last week that the VXX would touch a new low.
The fact that the VXX didn’t make a new low last week is a sign that if the SPY sells off from its high, the VXX could shoot higher.
It also suggests that the low in the VXX can be used as a good stop level for a trade.
The trade, however, doesn’t trigger until the VXX trades over $27. When this happens then it may be signaling the beginning of a rally in the VXX and a pullback in stocks.
If the trade triggers long, then the stop should be under $24.50.
This trade is a bet that stocks will fall.
A small pullback in stocks could push the VXX to $33, which would be a good place to take some profits.
However, with such a good entry price, I would wait to see if the $33 level is broken because if this happens, the VXX could shoot quickly to the mid-40’s,
This would only happen if the stock market has a significant decline, but that’s exactly what we’re trying to protect ourselves against now when the stop loss on such a trade is so small.
Rick Nartarian, Chief Investment Officer
The American Investor Daily