In the past few weeks we noted multiple bearish distribution days and last week there were several more as displayed in the charts below. Bearish distribution days indicate that institutional traders are systematically selling shares. Conversely, bullish accumulation days signify institutional buying. The bulls can take solace in the fact that the near term support levels for the major indexes are holding up. For the first time since the beginning of December the major indexes breached their 50-day SMAs, but prices recovered a bit at the end of the week. Typically, a long-term penetration of resistance or support does not occur the first time prices reach that level. We need to see if subsequent price pullbacks will generate a confirmed penetration of near-term support â€“ until that happens the long term trend is still bullish.
Also, as mentioned in previous articles and confirmed in the charts below, stocks have been trading range-bound for several weeks. Eventually prices will break out from the trading range, the obvious question is when and will it be an up or down move. Next week March options expire and may provide more clues about what direction stocks are headed. At this point, all bets are off concerning what the market will do as you can make a solid case either way. For our trading plan, we want the current economic uncertainty to continue generating range-bound trading that benefits market neutral trading strategies.
SPY Position Update
SPY closed $130.84 on Friday - the March position is approx. $2,200 in the black
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is just ABOVE its 50-day simple moving average (see SPY chart)
SPY is well 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. $1,600 in the black (see tables below)
$135 strike price short call delta is .0476 (95% probability this position will be profitable)
The February 7th Couch Potato published a March expiration month bull put spread
This put spread is approx. $600 in the black (see tables below)
$126 strike price short put delta is -.1348 (86% probability this position will be profitable)
SPY Risk Analysis
The SPY price is virtually equidistant between the short call and put strikes. As indicated in the SPY chart above, the price dropped below the 50-day SMA and lower Bollinger band support levels before ending the week just above. The near term trend is down and if the support level is breached again the most probable risk is the $126 strike price short put will be threatened.
DIA Position Update --------------------------------------------------------------
DIA closed at $120.42 on Friday - the March position is approx. $450 in the black
DIA is priced BELOW 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) turned bearish (See DIA chart)
The February 22nd Couch Potato published a March expiration month bull put spread
This put spread is approx. $450 in the black (see tables below)
$118 strike price short put delta is -.2276 (77% probability this position will be profitable)
DIA Risk Analysis
We did not have the opportunity to open a DIA call spread; therefore the only risk is that the price will penetrate the support level and threaten our $118 strike price short put.
March options expire next Friday and over the next few days we will begin issuing orders to close out our short positions. As indicated in the SPY Bear Call table above this spread already triggered the ordering rule to exit the position. On Monday, if prices do not gap up in the initial hour of trading, we should be able to exit the SPY short call at the .05 exit price. If the market does not cooperate on Monday, we will follow this same strategy each subsequent day until the contracts are closed. And obviously we will monitor the SPY and DIA put contracts to look for the opportunity to exit those trades.
As mentioned above, the March options expire on Friday and we expect to exit the SPY and DIA short contracts over the next few days.
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.