As most market followers are aware of by now, the major stock indexes suffered a loss for the week after a series of weekly gains. The losses were not that significant percentage-wise and the bulls will argue that the dip helped relieve overbought conditions and should be considered a buying opportunity. In fact, as confirmed in the charts below, prices pulled back, neatly bounced off recent support levels and turned higher at weeks end. But the bears might be coming out of hibernation and awakened to the fact that we have had four bearish distribution days in the past few weeks (down days on higher than average volume). Note the excessive trading volume on days when prices finish lower. Some analysts consider this an early warning sign of trend change. The February 20th Couch Potato Market Summary mentioned "... The most probable trend change is a return to range-bound trading similar to most of last summer..."
The current market theme may be uncertainty. Last weeks price action may be related to the fact that investors are weary of economic uncertainty. They may not necessarily be worried about what is going on in the world today, but investors may be wondering what they will be dealing with six-to-nine months in the future? The Feds QE2 program will be history and I suspect the Republican congress and others would react angrily to any proposed QE3. Statistically, the jobs market is improving but it is nowhere near the level needed to replace the demand provided by the Feds quantitative easing. Businesses are reporting good earnings numbers based more on operational efficiencies versus increased sales. At the end of last year investors started pricing in the current economic data; going forward the expectation might not be so clear. In the headlines are unrest in Egypt, Libya, and possible contagion to other Middle Eastern and African Nations. Domestically, we have labor unrest brewing as state and local budget battles threaten to slow the economy even further. And right on queue, North Korea is threatening to start a war with South Korea again. There are a lot of questions that need to be answered before investors can be more comfortable pricing future economic activity.
SPY Position Update
SPY closed $132.33 on Friday - the March position is approx. $750 in the black
SPY is priced right at 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 bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
The February 7th Couch Potato published a March expiration month bear call spread
This call spread is approx. $500 in the black (see tables below)
$135 strike price short call delta is .2430 (76% probability this position will be profitable)
The February 7th Couch Potato published a March expiration month bull put spread
This put spread is approx. $270 in the black (see tables below)
$126 strike price short put delta is -.1841 (82% probability this position will be profitable)
SPY Risk Analysis
Last week's market pullback notwithstanding, the near-term trend is still bullish and the most probable risk is that the SPY price will return to recent highs and threaten our $135 strike price short call.
DIA Position Update --------------------------------------------------------------
DIA closed at $121.14 on Friday - the March position is approx. $300 in the red
DIA is priced just BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading EVEN with its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See DIA chart)
The February 22nd Couch Potato published a March expiration month bull put spread
This put spread is approx. $300 in the red (see tables below)
$118 strike price short put delta is -.3094 (69% probability this position will be profitable)
DIA Risk Analysis
We have not yet initiated a DIA call spread; therefore the only risk is that a further price correction will threaten the $118 strike price short put.
As with initiating the trade, the decision process for exiting our SPY and DIA credit spreads will be simple:
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. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If one of our short strikes is penetrated (closing price above our short call or below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.
Recent Couch Potato articles discussed how "...from a trading perspective is to be prepared to pull the trigger on put spreads whenever the trade is set up properly... the current market is providing limited opportunities to execute low-risk put spreads; the smart move is to be ready when we get the chance..." There was still over three weeks left before March option expiration, which was sufficient time to be patient, stick with our ordering rules, and wait for the proper trade setup. As noted in the chart above, after opening our DIA bull put spread, the price bounced off support and is trying to turn up. Ideally prices will return to recent highs and we will be able initiate the bear call spread to complete the DIA iron condor position.
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.