Market Summary
All signs point down as we may be well past the normal "correction" phase and headed towards a full-blown bear market. Most of the technical indicators are overwhelming negative – take your pick, RSI, MACD, Stochastic, Chaikin Money Flow (CMF). The moving averages are trending southbound, plus the charts are flashing the dreaded death-cross where the shorter term moving averages are dropping below the longer term averages. This event last occurred in December 2007 when the S&P 50-day moving average crossed below the 200-day average and prices eventually declined to 12-year lows. Plus, depending on the time frame you are looking at, some technical analyst have identified the head-and-shoulders chart format which many consider a strong bearish indicator.

"It is the economy stupid" or I guess it should be "it is jobs stupid". Our leaders in Washington appear stupefied about the populace need for good, dependable work, and what policies and incentives would support job creation. Not to dismiss the need for changes to healthcare system, but I sense that many people are wondering if the politicians in Washington had used the effort and time spent on the healthcare debate to try to create jobs instead, how much further along the would be the economic recovery? Investors may believe that the current economy is as good as it is going to get for the near future, every time the few remaining bulls attempt to push the market higher; traders are consistently selling into strength.

Stocks breakdown below their recent trading range is reflected in our trading results. We have been cashing out with close to maximum gains from our short positions (call spreads). Our long positions (put spreads) have not hurt us – yet. But our put spreads have not profited nearly as much as the call spreads, plus we are watching closely the short puts to make sure that we limit any potential loss.

SPY Position Update
SPY closed $102.20 on Friday – the entire position is approx $1,800 in the black
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW to its 20-day Bollinger Band SMA (see SPY chart)
SPY is well BELOW its 50-day simple moving average (see SPY chart)
SPY is well BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)

SPY Bear Call Spread
These spreads are approx. $2,200 in the black (see tables below)
The June Quarterly (Qty) expiration $114 strike short call expired worthless (we keep the entire premium)
The June 29th Couch Potato recommended closing the $116 strike short call for an approx. $800 gain

SPY Bull Put Spread(s)
These spreads are approx. $500 in the red (see tables below)
The July option expiration bull put $104 strike price short put delta is -.6168 (39% probability this position will be profitable)
The June 29th Couch Potato recommended closing out the June quarterly expiration put spread and opening a lower strike price July expiration bull put spread
The July option expiration bull put $100 strike price short put delta is -.3452 (65% probability this position will be profitable)

SPY Risk Analysis
We have closed out all of our short calls and at this point the only risk to our short puts. The SPY price has already dropped below our $104 short put. Technical indicators are flashing oversold conditions, but this situation can continue indefinitely before prices recover. We have enough time to wait a day or two to see if prices have bottomed or if there is a dead cat bounce. A trade adjustment will probably be necessary in a few days after we get an idea of the probable short-term support level.

DIA Position Update
DIA closed at $96.87 on Friday – the entire position is approx. $2,400 in the black
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is priced BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)

DIA Bear Call Spread
These spreads are approx. $2,200 in the black (see tables below)
The June 30th Couch Potato mentioned closing out our July expiration $107 short call for an approx. $900 profit

DIA Bull Put Spread
The put spreads are approx. $250 in the black (see tables below)
The June Quarterly (Qty) expiration bull put $104 strike price short put expired worthless (we keep the entire premium)
The July option expiration $95 strike short put delta is .3487 (65% probability this position will be profitable)

DIA Risk Analysis
Similar to the SPY Risk Analysis above, all of our DIA short calls have been closed out. The only risk is that prices continue downward and our $95 short put will be threatened.

Exit Plan
The rules for exiting the SPY and DIA credit spreads are:

Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread.

If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. As mentioned above we expect to do a trade adjustment to modify the risk related to our $104 SPY short put.

Final Comment
Market volatility has edged up higher the past week and stocks did a downside breakout below the recent trading range. Stock prices are obviously trending down and the question is how low will they go? The recent strategy of "legging" into put spreads when prices near support have helped protect us from the market breakdown. Our overall SPY and DIA positions are still doing well and we are not doing many trade adjustments.

Gregory Clay

Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.