Following up on comments in the February 27th Couch Potato Market Summary "... prices pulled back, neatly bounced off recent support levels ... 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...The most probable trend change is a return to range-bound trading similar to most of last summer ...current market theme may be uncertainty... investors may be wondering what they will be dealing with six-to-nine months in the future..."
Last weeks market action supported the analysis above. In fact, as displayed in the daily charts below, the major indexes added two more bearish distribution days. Many technical analyst consider distribution days (whether bearish or bullish) to be one of the most reliable indicators of a trend change. And as evidenced in the 60 minute DIA chart below, the major indexes are trading range-bound after reaching multi-year highs in the middle of February.
The question is what will be the impetus to drive stock prices higher? The bears are trying mightily to take control and drive prices lower, but traders view the dips as buying opportunities. When the Feds Quantitative Easing program ends, will there be sufficient demand to support higher stock prices? The White House and media types are trumpeting the recent employment report as evidence of an economic recovery. The question from an investor perspective is, even if this is accurate, will this translate to additional demand in the stock market? As noted in the employment report, there was no increase in employee wages or hours worked. And even Ben Bernanke admitted to near term inflationary pressure; workers that do have jobs are spending more of their disposable income on energy and food. Plus, Americans have gotten religion concerning saving as more people try to save and/or pay down debt (versus having funds available to put in the stock market). It is not as if the employment report represented 'gangbuster' numbers that signaled robust economic growth. The point is that if/when the Fed steps back, how will that impact the demand side of the equation in the demand/supply interaction of the stock market?
As we have discussed many times before, the stock market moves to its own beat and tends to behave like a temperamental diva. But investors need to form some opinion concerning what is currently happening in the market. And of course we are hoping for continued range-bound trading as the spring and summer tend to be slower trading months. We did well last spring and summer as prices trended range-bound; as mentioned above traders can make a strong case for expecting a near-term trading range. But as we have seen over the past few years the market is notorious for doing the unexpected.
SPY Position Update
SPY closed $132.47 on Friday - the March position is approx. $1,400 in the black
SPY is priced right ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading EVEN with 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 turning bearish (See SPY chart)
The February 7th Couch Potato published a March expiration month bear call spread
This call spread is approx. $900 in the black (see tables below)
$135 strike price short call delta is .2039 (80% probability this position will be profitable)
The February 7th Couch Potato published a March expiration month bull put spread
This put spread is approx. $500 in the black (see tables below)
$126 strike price short put delta is -.1382 (86% probability this position will be profitable)
SPY Risk Analysis
There are several firm support levels that would need to be breached before the SPY price would get close to the $126 short put, therefore 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 $121.47 on Friday - the March position is approx. $350 in the black
DIA is priced at its current 14-day EMA (see DIA chart down below)
DIA is trading just BELOW 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 neutral (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. $350 in the black (see tables below)
$118 strike price short put delta is -.2130 (79% 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.
The February 27th Couch Potato Final Comment section mentioned "...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..." The regular March option series expires in a few weeks, therefore we probably need to target the end-of-March quarterly option series for doing the DIA 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.