Market Summary
At this time last week many market watchers were lamenting the fact that the major stock indexes dropped below support levels. Most of the technical indicators pointed south, the bears were out of their cages and raring to go, and all lot of the prognosticators were predicting gloom and doom. Actually, all the pessimism is good sign that prices were set to recover. More than all the technical indicators, analyst predictions, fundamental analysis, the one truism is that most people usually guess wrong about market direction. And of course, with so many folks saying stocks were headed down, the major indexes generated the highest weekly gain in over a year.

Second quarter earnings season begins next week. Depending on how investors interpret the results will determine whether stock hold on to the recent gains. After the initial batch of earnings reports we should know whether stocks have bottomed. If we have a firm support level, then the next question is whether stocks will exceed recent highs, or trade range-bound. But it probably would not take very much for some negative stimulus to drive prices back down to recent lows. The recent gain was on extremely low volume, and generally traders are selling into strength. But whatever is the market direction, we should do fine. Our risk management trading strategy is getting results as most of our trades the past few months have generated gains.

SPY Position Update
SPY closed $107.96 on Friday – the entire position is approx $3,400 in the black
SPY raised ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading at its 20-day Bollinger Band SMA (see SPY chart)
SPY is BELOW its 50-day simple moving average (see SPY chart)
SPY is priced BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turned neutral (See SPY chart)

SPY Bear Call Spread
These spreads are approx. $2,200 in the black (see tables below)

SPY Bull Put Spread(s)
These spreads are approx. $1,100 in the black (see tables below)
The July option expiration put spread $100 strike price short put delta is -.0440 (96% probability this position will be profitable)
The July 8th Couch Potato recommended closing out the entire July expiration put spread ($104 short/$99 long strike) for an approx. $500 gain

SPY Risk Analysis
We have closed out all of our short calls and at this point the only risk is to our $100 strike short puts. July options expire next week and the four-day stock price advance suggest that over the next few days we may be able to close out the short put for close to the maximum gain.

DIA Position Update
DIA closed at $102.11 on Friday – the entire position is approx. $3,400 in the black
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is just BELOW with its 50-day simple moving average (see DIA chart)
DIA is priced just BELOW its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning up (See DIA chart)

DIA Bear Call Spread
These spreads are approx. $2,200 in the black (see tables below)

DIA Bull Put Spread
The put spreads are approx. $1,100 in the black (see tables below)
The July option expiration $95 strike short put delta is -.0380 (96% 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. Within the next few days we expect to close out our $95 short put.

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

As mentioned in the SPY and DIA Risk Analysis sections above, unless stocks plunge drastically over the next few days we expect to exit our bull put spreads. After closing out the remaining spreads all of our June and July trades will be closed for profit.

Final Comment
The July 4th Couch Potato Final Comment mentioned "...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..." This past week stocks did a complete reversal which might suggest that prices found a bottom. Volatility is still relatively high and the recent gain is based on very low volume. We will continue to manage our risk and take advantage of what the market gives us by "legging" into call spreads when prices approach resistance – or legging into put spreads near support. This strategy works well during high volatility; the key is to be patient and wait on the optimum trade setup.

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.