Equities are looking up this morning but I think that there is a good chance that we see some profit taking over the next few weeks. This would be a normal reaction considering how far the markets have come and have rallied since early November.
The S&P has been trading sideways for a month now so this means that the forces of supply and demand have equalized. Over the past few days the lower side of the range has been tested and this means the level may be breaking.
If the S&P 500 does go lower, there will probably be support around the 2,210 level. That is because that is the level that it was at in early December when the most recent part of this rally began. If I was going to go short that would be my target.
A possible way to play this is to go long SH. This is the ProShares short ETF that trades inverse to the S&P 500. The corresponding level to 2,210 for the S&P 500 is around $37 so that would be my target. The stop-out would be at $36. That corresponds to the recent top of the S&P 500s trading range so if this breaks to the downside it would mean that the market is making new highs.
Buying a short ETF for a short-term trade could have advantages from a Risk Management perspective. This is because if you go short a position and are wrong, in other words it goes up, it makes up a bigger position in your portfolio than if you go long a position and are wrong. For example, if you put 2% of your capital into a stock and it falls 50% it is now 1% of your portfolio. If you short 2% and it goes up +50% this losing position is 3% of your portfolio.