Reported corporate earnings and revenue came in strong during last weeks earning blitz, lifting stocks across the board. The major indexes finished April on an upswing at multiyear highs. The Federal Reserve meeting went as expected with no surprises. Actually, the Fed meeting announcement seemed somewhat anticlimactic as the main event was Fed Chairman Ben Bernanke's press conference after the meeting. The Fed chairman did not necessarily provide new information, but he confirmed that the Fed will stay the course concerning quantitative easing. The market reacted positively, pushing stocks higher all the way through the months end.
Obviously the near term trend is bullish as the major indexes started bouncing off support during the middle of the month. Solid earnings and mostly favorable economic reports catapulted stocks from support through resistance without a hint of pullback. Now that the major indexes have broken past the recent trading range, we have to see how much juice is left in the current bull move. The indexes are approaching overbought levels, plus earnings season is winding down. Investors will have to begin focusing on economic data to find the motivation to move the market. Not many people are talking about a correction, as the Fed signaled that for the near future, institutional investors will continue to have 'easy money' available to invest in the market. With yields on treasury securities going even lower following the Fed meeting, commodities and equities are the best deal in town. The April 23rd Couch Potato Market Summary mentioned "... We will probably get nominal 'new highs' as indexes probe above resistance levels, but there will be price pullbacks as traders sell equities to rotate into commodities..." Recently, we discussed how for the past few months stocks have basically traded range-bound. Over the next week or so we will find out whether a new uptrend is confirmed or if stocks are settling into an expanded trading range.
SPY Position Update
SPY closed $136.43 on Friday - the May position is approx. $2,500 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 well 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 bullish (See SPY chart)
The April 20th Couch Potato published a May expiration month call spread
This call spread is approx. $2,500 in the red (see tables below)
$136 strike price short call delta is .5456 (45% probability this position will be profitable)
SPY Risk Analysis
The SPY price is already above the $136 short call which is also the near term resistance level. In a few days we should know whether resistance will hold and turn the price down, or will there be a change in polarity with former resistance converting to support as the SPY moves higher. We anticipate doing a trade adjustment, and fortunately we have time to wait for the market to confirm support and resistance so that we can attempt to minimize the risk.
As with initiating the trade, the decision process for exiting the bear call spread position 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 the short call) AND the delta rises to .65 we will look to close out this spread (buy back 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.
As mentioned in the Risk Analysis section above, we will probably need to adjust the SPY call spread. Fortunately, we have approx. three weeks until May options expire and we should be able to do a few additional trades to hopefully end up profitable for the month. A lot can happen in three weeks, we just need to be patient, stick with our ordering rules, and take what the market gives us.
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.