The Greeks Have Spoken; Now What?

Good Evening, Friends. Today’s session had the potential to be wild and wooly, but the market, in its wisdom, had worked to accurately discount the result of the Greek election, starting from about last Wednesday.   The world didn’t end on Sunday. Instead, Greece will almost certainly emerge with a government dominated by the center-right New Democracy that will do its level best (and probably ultimately fail) to adhere to the austerity program demanded by the “Troika” (European Council, European Central Bank, International Monetary Fund) in return for ongoing financial support.

The market was euphoric for a couple of hours, but as the price action indicated, this result had been more or less anticipated, with many short positions in the Euro covered. In any case, the risk was asymmetrical; if the leftist Syriza party had emerged victorious, it would have been deemed a disaster for (in no particular order) Greece, the Euro, and European banks. That didn’t happen, of course, but with catastrophe off the table for the moment, Greece still faces monumental difficulties, and the much larger Spain remains very much in the market’s crosshairs.

So, where are we now? The chart above is a daily chart of the E-minis, and it is still indicating a downtrend despite the recent surge higher that represented, I suspect, short-covering ahead of the election rather than people getting long. There’s still plenty of headline risk, as the G-20 heads of state are meeting in Mexico, but the price action indicates, I believe, that the retracement from the low has just about run its course. I would be inclined to sell as close to the 61.8% Fibonacci retracement as possible, since a move above that level would indicate a possible reversal of trend. A renewed attempt to the downside would be expected to cover roughly half the distance to the previous low; let’s call it 1310. The presence of the Fibo level makes a tight stop possible; let’s say around 1353, so the risk/reward is approximately 8 points of potential downside versus a potential gain of 38, although of course the stop level is considerably closer to the current price than is the profit target.

An alternative would be to use the SPY ETF as a proxy, perhaps using a bear call spread to take advantage of time decay and possible range trading (or just a simple move lower). A short Jul 135 call, corresponding to 1350 on the SPX, could be paired with a long Jul 137 call for protection, earning slightly more than a dollar premium as of the close today; the maximum gain would be the premium received, while the maximum loss would be the distance between the two strikes, or $2, less the premium, or slighly less than a dollar. Not a bad risk reward, and if the price action in the underlying ETF did push above the 1350 level, the short call could be covered (at a loss) while the long call could be left to run, with a reasonable prospect of doing no worse than a breakeven.

In any case, these aren’t trades that I’m recommending, just things that I’m mulling over. As always, positions taken with a dispassionate view of the price action have a far better chance of success than do those grabbed in response to a headline or a talking head. I get paid to have a view of the market, and to reflect that view to my institution’s clients, but, as one of my large clients told me many years ago, “I never let my convictions interfere with my trading”. That is, I may think that the fundamentals are pointing to Nirvana or to Armageddon, but I’ll be better off responding to the price action, in combination with some of the techniques that Todd teaches us to use as filters.

Best of luck! 

About the Author Brian Keith

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