Despite all the bearish sentiment that has been permeating the market recently, as evidenced in the charts below, stocks are still continuing to trade range-bound. However, the path of least resistance is definitely downward as there is significant overhead resistance to keep a lid on any substantial bullish surge. Also note that volume is relatively higher on down days which are considered bearish distribution and suggest that traders are taking advantage of any upward price move and selling shares. The silver lining is that given all the negative economic data and generally bearish expectations from market followers, it might not take much good news to catapult stocks higher. After all, as proven over and over and over again, the market always tends to do what most people don't expect.
SPY Position Update
SPY closed $115.92 on Friday
SPY is priced BELOW at 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 BELOW its 50-day simple moving average (see SPY chart)
SPY is BELOW its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is turning bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
The September 9th Couch Potato published a September Quarterly option expiration month bull put spread. However, as prices pulled back the next day we took the opportunity to select a put spread with lower strike prices. (see tables below)
SPY Risk Analysis
We have not had a chance to open a call spread, therefore the risk is that prices continue heading south and threaten the $109 strike price short put.
DIA Position Update ---------------------------------------------------------------
DIA closed at $109.82 on Friday - the September position is approx. $2,000 in the black
DIA is priced BELOW 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 and 200-day simple moving averages (see DIA chart)
Relative Strength Indicator (RSI) is turning bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See DIA chart)
The August 31st Couch Potato published a September expiration month DIA bear call spread
On September 4th the Couch Potato suggested closing out the short calls for an approx. $1,100 gain (see tables below)
The August 18th Couch Potato published a September expiration month DIA bull put spread
This put spread is approx. $900 in the black (see tables below)
$100.75 strike price short put delta is -.0959 (90% probability this position will be profitable)
DIA Risk Analysis
We closed out the DIA call spread; therefore the only risk is the bottom completely falling out of the market prior to the regular September expiration on Friday and threatening our $100.75 strike price short put.
As mentioned above we had the opportunity to exit the DIA call spread a few days after initiating the trade. The put spread position is set to expire on Friday and we will be looking to close this position when/if our exit rule is triggered.
For the SPY put spread, we will follow the standard exit rule. 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.
The September 4th Couch Potato mentioned "...After stocks begin trading in the morning we normally review 5, 15, and 30 minutes charts to try to get a feel for potential intraday support and resistance levels...Actually, it is probably less complicated to execute trades later in the day when support and resistance levels have already been established â€“ but with the current high volatility and triple-digit price moves you might miss some trading opportunities. Neither strategy is necessary better than the other as it obviously depends on available time, resources and trading plan. It is more important to find a technique that works for you, and stick with it understanding that you might miss some trades, but other opportunities will come your way..." As displayed in the 15 min SPY chart below, Friday was the perfect example of the value of waiting later in the day to initiate trades. Those of us who pulled the trigger early on the SPY put spread had to bemoan the fact that we could have gotten a better deal later in the day. But you can really get yourself in trouble by trying to outguess yourself, if you can maintain discipline and stick with your trading plan you should do okay regardless of which technique you use.
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.