So far for the month of January, the broader market is marginally lower. However, that does not tell the full picture. We started out the month with a sell-off of around 3%, only to then bounce back and regain all of those losses in a matter of days. Now, we are at an important juncture for the market. Currently, the SPY is sitting right at its 50dma. In addition, it is right above gap support at 204 (where coincidentally the 50dma is too). Its inability to hold this level over the coming days will be a sign that we will come back to test the $200 level (100dma). I am in the camp that we will see more downside.

Now, all of this can change after we get a few earning reports, which could get a boost from low oil prices. However, besides potential earning beats I do not see that many positive catalysts for the market. First, oil does not seem like it wants to bounce, and in fact, seems like it is ready to take another leg lower. Second, almost everyone on the planet expects the ECB to launch their own version of QE on January 22^nd, so assuming they do, I think it is mostly baked in. If they do not do so, or the amount that the ECB does is less than expected, I expect to see a dramatic sell-off. I will probably buy some FXE (euro) puts for the announcement, but only for a flip. Lastly, US bonds are starting to rise rather quickly, which means investors are starting to seek safety at a faster pace than in previous months.

The reason the next few days are so important is because the technicals of the market look bearish to me. Arguably, there is a head and shoulders topping pattern on the SPY, with a neckline at 200, and a target of 195 (200dma). This all changes if the SPY is able to breakout and hold 208. In addition to this bearish pattern, the MACD is still negative, the –DI line is above the +DI line on the ADX (w/ +DI, -DI), and the RSI is continuing to see lower highs; all of these are bearish signs. If the market is not able to gain some significant positive momentum over the coming days, I believe that we will see a 5% pullback. While I am bearish at the moment, I will flip my stance if I see the SPY hold this 204 level.

For the SPY to hold the 204 levels, I think a few things must happen. First, the financials must re-gain some strength. We have seen over the last week many financial names, like BAC, GS, and JPM, fall over 5%, even though the SPY is only down .5%. For the market to rally, it needs the financials. The second sector that is troubling is Technology. Almost every high-flyer, except for TWTR, is testing their December lows. Names like GOOG and PCLN have been hit very badly and show no signs of bottoming. For both names, they must hold the $500 and $1050 level, respectively. Failure to do so would indicate a test of new lows. Lastly, the Transportation Sector (IYT) has shown relative weakness vs. SPY. This sector is known to be a barometer of the economy and in turn the broader market.

With many different sectors showing tremendous weakness vs. SPY (Financials, Tech, Transports) it is hard to see the SPY sustaining any move higher. Before I feel comfortable buying the SPY I want to see some broad participation in the market. 

Ways to Play for Downside:

Buy the SPY February 195/200 Put Spread for $1.05. Target exit: $2.10 (100% profit). 

Buy the SPY February 190/195/200 Put Butterfly for $.40. This trade has the chance to make over 1000%. This trade is meant to 'time' the market. For this trade to be very successful you would either want to see a big pullback now, down to 190 and then a slow bounce back up to 195 by February expiration. Or, you would want to see the market consolidate for a few weeks and then breakdown in the middle of February. I like this trade better than the put spread because of the risk/reward. This trade is profitable on expiration day from 190.40 to 199.60.