A recap of some of the comments from recent Couch Potato Market Summaries is "... At this point the best bet is range-bound trading...the price stalled at resistance turned down steadily, resting at near term support. Also looking at the daily chart down below, you can see...volume has been relatively higher on down days..."This analysis is still valid as over the past week the major indexes have been in a tight trading range...it is not unreasonable to expect the current resistance and support levels to hold.
As indicated in the daily SPY chart below, over the past week the trading range has contracted to point where there may be a trend change. Note that the SPY price has dropped below the bullish channel line from the March low (dark blue line). The short-term bearish trend from the May high is in play until prices snaps back above (green line).
May is generally considered to be a weak month for the stock market as earnings season winds down. Traders have to shift the focus to economic news which has been uninspiring. Upward bullish momentum is definitely waning, but this does not necessarily signal a hard fall is imminent. Institutional investors are flush with cash; they may utilize some of these funds on merger activity, stock buybacks and the like. And the commodity trade is all the rage right now, but if equity prices pull back enough, it is reasonable to expect fund managers to buy shares. Plus, Uncle Ben Bernanke has pretty much signaled the Fed is committed to do everything in its power to support the stock market â€“ remember, don't fight the Fed. For our trading strategy, range-bound trading is what we want; range-bound trading is what we got. There are plenty of fundamental and technical reasons to suggest that range-bound trading will continue, but the stock market tends to do what most people don't expect, regardless of what the 'experts' think. Of course, as long as the trend is rolling our way, we will roll with it â€“ but if it changes we need to be prepared to make adjustments.
SPY Position Update
SPY closed $133.61 on Friday - the June position is approx. $400 in the black
SPY is priced just 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 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 down (See SPY chart)
The May 16th Couch Potato published a June expiration month put spread
This put spread is approx. $400 in the black (see tables below)
$129 strike price short put delta is .2487 (75% probability this position will be profitable)
SPY Risk Analysis
We have not had the opportunity to initiate a bear call spread, therefore, thus far the only risk to the current June position is that a confirmed downtrend develops and threatens the $129 short put.
As with initiating the trade, the decision process for exiting the bull put 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 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.
We are on the lookout to initiate a bear call spread to complete the SPY iron condor position. If prices recover and the short $137/long $142 call spread is available, we will probably look to pull the trigger (depending on price/volume action and whether an acceptable price is available). There is no need to force the trade, even if the market does not cooperate over the next week or so, you have the option of pushing this trade out to the end-of-June quarterly option series. As mentioned in the past, quarter months are great because they provide another alternative for initiating trades or doing adjustments.
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.