The key level that the markets are watching right now is 1,040 on the S&P 500, which is the 2010 low for the broad stock index. Sentiment on the Street right now is extremely bearish, and the consensus seems to be that we will finally break through this level on the downside after testing it a number of times already.
The near-term pattern, however, has been for the S&P to trade in a range between 1,040 on the downside and 1,100-1,120 on the upside. During Wednesday’s trading session, we are not seeing big buyers at the bottom of this band, but there are buyers nontheless with all three major averages rising on the day.
Considering the pervasiveness of bearish sentiment, very close support on the S&P at 1,040 and a potential upside catalyst with the non-farm payrolls number being released on Friday, a high risk/reward trade right now would be to load up on high beta names today using tight stops.
Names that will likely outperform during a rally include CF Industries (NYSE: CF), Freeport-McMoran (NYSE: FCX), Alcoa (NYSE: AA), and Caterpillar (NYSE: CAT). The key here with this strategy is to manage your risk.
If we break through the 1,040 level on any kind of volume, it would be time to exit positions immediately. Using very tight stops at these levels on the S&P will likely result in a favorable risk/reward trade, even if the probabilities are not great.
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