Market Summary
The November 7th Couch Potato Market Summary mentioned "...Take a gander at the SPY and DIA charts below and notice how extremely overbought are the RSI's (Relative Strength Indicator), plus the prices are way above the upper level of the Bollinger Bands. Normally this would be considered a high probability sign of a price pullback..." Right on queue prices pulled back a bit and the major indexes experienced the first losing week in over month. After stocks reached new 52-week highs investors appeared to be in the mood to cash in some profits. Most of last week's financial news was generally positive, but investors used the news about China raising its interest rates and debt problems in Ireland as a rationale to start selling.

Probably the best sign that stocks were due to pull back are the readings from the American Association of Individual Investors (AAII) and the Investors Intelligence Advisors. Both groups reported bullish sentiment at the highest level since early 2007. Excessive bullishness is considered a contra-indicator that may indicate that traders are ready to start selling to retail investors who are buying near the top? But at this point we have to assume that the current price action is just a healthy correction in the context of a near-term uptrend. If stocks have another down week then we have to consider the possibility that the current bullish move may have reached a firm resistance level.

SPY Position Update
SPY closed $120.20 on Friday – the current November position is approx. $1,400 in the black
SPY priced just BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY is also ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)

SPY Bear Call Spread
The October 21st Couch Potato recommended a November expiration month call spread
This spread is approx. $350 in the black (see tables below)
$122 strike price short call delta is .2581 (74% probability this position will be profitable)

SPY Bull Put Spread
The October 21st Couch Potato recommended a November expiration month put spread
The November 8th Couch Potato mentioned closing out the put spread for an approx. $1,000 profit (see tables below)

SPY Risk Analysis
November options expire next week and we expect to close out the call spread within the next few days. Until we exit the call spread there is the risk of a price spurt threatening our $122 strike price short call.

DIA Position Update
DIA closed at $112.16 on Friday – the November position is approx. $1,000 in the black
DIA is priced just BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading at its 20-day Bollinger Band SMA (see DIA chart)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is also priced ABOVE 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 bearish (See DIA chart)

DIA Bear Call Spread
The October 25th Couch Potato recommended a November expiration month call spread
This spread is approx. $500 in the black (see tables below)
$114 strike price short call delta is .1844 (78% probability this position will be profitable)

DIA Bull Put Spread
The October 28th Couch Potato recommended a November expiration month put spread (see tables below)
The November 8th Couch Potato mentioned closing out the put spread for an approx. $450 profit (see tables below)

DIA Risk Analysis
Similar to the SPY Risk Analysis above we expect to close out the DIA call spread within the next few days. Until we exit the call spread there is the risk of a price surge threatening our $114 strike price short call.

Exit Plan
We closed out our SPY and DIA put spreads for a nice gain. As mentioned above, November options expire next week. We will try to wait a few days to see if stock prices will continue to pull back. When the current downward move bottoms out we will exit all of the call spreads and take our profits off the table.

Final Comment
Stock prices appear to be reverting back to the mean after being extremely overbought several weeks ago. Prices can remain overbought indefinitely but the Relative Strength Indicator (RSI) that we use to gauge market strength was excessive. Fortunately for us the overbought condition is correcting itself at exactly the right time. Our November call options expire next week and unless there is a dramatic reversal we should be able to exit all of our positions with a decent gain. The caveat is that anything can happen during option expiration week, therefore we will put a short leash on our call spreads and be prepared to exit at the first glimpse of a reversal.

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.