The bulls and bears are struggling for control as last week began trading on high note following the release of the of ISM Manufacturing Index data. It was another less-bad-is-good thing because the report basically was in line with most analyst expectations. It is interesting in that a few days later traders were less enthusiastic about the December ISM Services Index reading which actually came in stronger than expected. Even more to the point, the same day, Automatic Data Processing Inc.â€™s employment report showed blow-out numbers with employment in the service-producing sector rising 270,000, the largest monthly increase in the series that dates back to 2000. Stocks finished higher that day, but did not have the pop one would expect. Taking some of the steam out of the market was an increase in unemployment claims and less than stellar December retail sales. Holding stocks down at weeks-end was a tepid employment report confirming that job growth fell short of expectations based on a strengthening economy
Bulls are continuing to squeeze the shorts every time the bears think it is their turn to take over. When stocks head south the bulls are clearly frustrating the bears by stepping in at the support level to drive prices back up. Also, money managers want to prop up the market to entice retail buyers as they redistribute their portfolios and dump unwanted shares. The near term trend is still bullish, and we mentioned before that a pause is good for bullish traders because it gives the market a chance to absorb overbought conditions. But there are signs of a change in sentiment, especially since more pundits are becoming bullish and less concerned about a pullback. Technically, stocks are set up for a pullback, when that will happen is the million dollar question.
SPY Position Update
SPY closed $127.14 on Friday â€“ the January position is approx. $650 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. $650 in the red (see tables below)
$128 strike price short call delta is .4012 (60% probability this position will be profitable)
SPY Risk Analysis
The beginning of the week price surge put the SPY right at the $128 short call. The trend is still bullish and unless there is a change we will probably need to adjust the call spread.
The rules for exiting the SPY and call spread 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.
The December 31st Couch Potato Final Comment mentioned "...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...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..." The New Year started off with a bang as stock prices gapped up above resistance on Monday. After the starting blast-off stocks hit a ceiling as traders established $128 as the next SPY resistance level and it sold off whenever it reached that point. But, as displayed in the SPY chart above, the axiom of old resistance becomes new support was valid as buyers stepped in to keep the price from dropping below $126. Obviously we want follow-through on the current signs of a possible price pullback, otherwise we might need to roll out of our call spread.
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.