The December 17th Couch Potato Market Summary mentioned "... Trading volume is expected two be relatively light the final two trading weeks of the year. Many traders will be taking time off for the Christmas and New Years holidays as no major economic events are scheduled. Actually, market sentiment has not changed much in the past few weeks..."
Traders basically accomplished most of what they wanted to do a few weeks ago as far as cashing in gains and year-end window dressing. As usual during this time of year trading volume was anemic and volatility was near the 52-week lows. For all practical purposes, substantive trading activity ceased weeks ago. There was enough good economic news (e.g. unemployment claims, housing, manufacturing data) and bad news (China rate increase, Euro-debt issues) to move stocks higher or lower, but prices basically did not budge.
It seems that most of the "talking heads" and other pundits in the media are expecting a price pullback when traders get back to work. Prices will definitely retrench, but no one can say when that will happen, it could be this month or months later. Actually a minor correction should help alleviate the current overbought conditions and possibly set the stage for the next bullish leg. The rationale for the current bullish trend is still valid (e.g. companies are profitable; the fed is supporting the market, low interest rates, etc.). Plus retail investors are still largely on side-lines, retail speculators would be a sure sign the bubble is ready to burst. Of course stocks appeared ripe to take off at the end of this past April, but the market tanked. The point is that the market is similar to that good looking woman who can get away with doing what she wants when she pleases, regardless of the wishes and thoughts of casual observers.
SPY Position Update
SPY closed $125.75 on Friday â€“ the January position is approx. $500 in the red
SPY is priced ABOVE 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 extremely bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
The December 20th Couch Potato published a January expiration month call spread
This spread is approx. $500 in the red (see tables below)
$128 strike price short call delta is .3127 (69% probability this position will be profitable)
SPY Risk Analysis
Upward momentum slowed down during the holiday, but all the major indexes are still near-term bullish. If the stock market picks up steam when traders return to work, our $128 strike price short call might be at risk.
The rules for exiting the SPY and call spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 on our short strike, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If our short strike is penetrated (closing price above our short call) AND after market close, if the delta associated with the short strike is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to higher short strike price.
We should find out pretty quick whether stocks will continue to trade range-bound. Note in the weekly chart below how the SPY has basically traded between 117.50 and 126 since the end of October. Also note how the range contracted even tighter in December. The recent narrow range probably will not hold much longer, the question is whether the index price will finally break through the current $126 resistance level? If the price makes a confirmed break above resistance then we will probably get a continuation of the bullish trend. If resistance holds then the current range-bound trading scenario remains in play. Our strategy is not to try to guess what direction stocks are headed, we trade what we see, not what want. But of course we would definitely prefer that range-bound trading continue a while longer, as this benefits market neutral spread trading strategies.
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.