A technical indicator known as the “death cross” was breached last week. This occurs when a 50-day moving average drops below a 200-day moving average. Last week, we saw just that on the Dow Jones Industrial Average and the S&P 500 Composite Index.

The Canadian market did not trigger the same signal, but it could this week. The 50-day moving average on the iShares S&P/TSX 60 Index Fund (symbol XIU, recent price $16.45) touched the 200-day moving average at the close of trading last week.

The death cross is viewed as a bearish signal, and has in the past preceded further market slides. In the US, it last occurred in December 2007, after which the S&P 500 dropped 50%. Technicians tell us that the death cross has preceded every bear market since 1972.

Of course, it’s not a guarantee and nothing is failsafe. But it does tend to confirm the fundamental economic indicators, which are flashing warnings of a slowdown in the pace of global economic recovery. And so far, investors have found nowhere to hide. Including gold stocks!

If we accept that the death cross typically precedes a bear market, then we have to ask if the current sell-off is a precursor to a bear market, of simply a correction in a bull market. If the latter, the death cross carries less weight. It might still precede downside action, but the scale of the move may be limited.

Either way, I suspect a move to the downside will occur over the next couple of weeks. For one thing, there does not appear to be any macro event that will stimulate a bullish reaction. And with nothing coming in from the earnings front until after the July expiration, the market will be focused on macro events.

Aggressive traders should look at positions that offer lots of potential with limited risk. Which is to say, at-the-money July puts. One approach is to buy puts on the Canadian dollar hedged iShares S&P 500 Index Fund (symbol XSP, Friday’s close $11.76). The problem with XSP is that the options have limited liquidity. That typically translates into wide bid asked spreads.

On the other hand, XSP is a pure play – albeit hedged back to the Canadian dollar – on the US stock market. If you go this route, look at the XSP July 12 puts and don’t pay more than 50 cents per contract.

A more liquid approach is to buy puts on XIU. Not a pure play, not exactly the same technical signal, but much greater liquidity. Try the XIU July 16.50 puts at 35 cents per share.