The major indexes eked out gains and avoided seven consecutive weekly losses for the first time since May 2001. The obvious question at this point is when the current price pullback will end. After reaching 52-week highs at the end of April stocks have been in a steady downtrend. As confirmed in the SPY chart below, what is especially notable is the consistently higher volume on down days (bearish distribution). This is considered a sign that institutional investors are dumping shares. The S&P 500 bounced off its' 200-day moving average on Thursday and finished the week approx. 1% higher from its lowest point. Next week it will definitely be interesting to see if the 200-day SMA holds as firm support. The Greek tragedy continues to unfold and roil the markets â€“ Jim Brown wrote a great article this weekend that lays out why this situation is having a profound impact on stocks. Plus this week we have the upcoming the Federal Reserve Board meeting, including Chairman Ben Bernanke's next press briefing (I wonder if he is regretting committing to these press conferences)?
Most of the government and industry financial reports generally have been negative lately. But actually, this has been the case for most of the year, investors apparently have preferred to look past the negativity and focus on company earnings. With company earning season starting up again in few weeks, if companies continue to do well this might be the impetus to lift prices higher next month. Stocks showing the first weekly gain since April may be signaling a bottom, or it just may just be a pause on the way to new lows â€“ next week should tell the story.
SPY Position Update
SPY closed at $127.05 on Friday - the June position is approx. $1,300 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 down below)
SPY is BELOW its 50-day simple moving average (see SPY chart)
SPY is still ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The May 16th Couch Potato published a June expiration month bull put spread
On June 15th the Couch Potato suggested closing out the entire call spread for an approx. $2,300 loss (see tables below)
The June 15th Couch Potato published a June End-of-Month Quarterly expiration month SPY bull put spread (see table below)
SPY Risk Analysis
Until prices recover and we have the opportunity to initiate a low-risk call spread, the risk continues to be the current downtrend continues the $125 short put will be at risk.
DIA Position Update --------------------------------------------------------------
DIA closed at $119.74 on Friday
DIA is priced at its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is still ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The June 14th Couch Potato published a July expiration month bull put spread (see table below)
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 $117 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 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.
As noted above we published a July expiration DIA put spread. The rationale is that unlike most of the other major stock indexes, the Dow Jones Industrial Average has held up better during the recent market downturn. While the other indexes have approached or actually breached their 200-day moving averages, the DOW has not yet sunk to that level and as noted in the DIA chart above, the RSI and MACD are actually trying to turn up. We need to be very careful when doing put spreads as volatility generally increases when prices breakdown and it is more difficult to do trade adjustments. At this point the obvious question is where/when will price find a bottom and we are banking the DOWs relative strength compared to the other indexes.
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.