An S&P Bounce Is Coming

After an impressive rally that appeared to be moving the market away from the volatility of October and providing a period of more orderly advance, stocks have returned in part to their old ways. The issues facing GM (GM - commentary - Cramer's Take) have been front and center, raising questions of more bailouts. It's not so much the issue of GM itself, as this stock has been under pressure and had issues for quite some time. It's really an issue of where the handouts end.

While it sounds a bit funny, we could ask the question -- when do we run out of money? We have a new president as well, and while this seemed a great thing on Election Day, the hangover from the celebration has left us with many unanswered questions regarding policy and personnel in this new administration.

All of this has led to another dip across the range. After reaching the first upside S&P 500 objective of 1000 on Election Day, stocks have since pulled back, trading down five out of six days following the election (including today). That pullback has been in the magnitude of about 14%. That is about the most we'd like to see if there is the possibility that the lows made on Oct. 10 and tested on Oct. 24 are meaningful. This would be in the 850-to-860 area for the S&P 500 cash index. We believe there is a low-risk entry for a long trade; we're looking for the index to move back toward the upper end of the trading range, around 930 to 950.

One catalyst for this rally may be some relief following the "redemption selling." This is similar to the tax-loss selling bounce we typically see in November or December. There is a large focus on the 15th of this month, as that's the last day to send in your letter as an investor to redeem an investment in a hedge fund prior to year-end. The issue here is that many hedge funds have already done their selling and will not need to do more, even if they get redemption letters. This presents the opportunity for a relief rally when this deadline comes and goes. We aren't talking about a bull market, but the possibility of a vacuum rally that sucks stocks higher as the selling simply stops.

Ultra S&P 500 ProShares ETF (SSO)

Click here for larger image.

Our favorite way to play this is through the use of the ProShares Ultra S&P 500 (SSO - commentary - Cramer's Take) ETF. We would be a buyer at current levels or closer to that $25 level.

This trade sets up very simply, too. A break of the $24 level would mean it's not working, as the tested lows would be violated. We can use that level as a sell stop.

As far as the upside goes, we are looking for some relief, so any upside can be used as an exit depending on your intestinal fortitude, but the SSO could trade back toward the $30 level on any bounce.

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Know what you own: Hughes and Maragiolio mention the ProShares Ultra S&P 500 ETF. Other leveraged index-tracking ETFs include ProShares UltraShort S&P500 (SDS - commentary - Cramer's Take), ProShares Ultra QQQ (QLD - commentary - Cramer's Take), ProShares UltraShort QQQ (QID - commentary - Cramer's Take), ProShares Ultra Dow 30 (DDM - commentary - Cramer's Take) and ProShares UltraShort Dow30 (DXD - commentary - Cramer's Take).

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.