The September 11th Couch Potato Market summary mentioned "...Despite all the bearish sentiment that has been permeating the market recently... stocks are still continuing to trade range-bound. ..there is significant overhead resistance to keep a lid on any substantial bullish surge...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..."
Stock prices finished higher five consecutive days for the longest winning streak in two months and the second best week in over a year. Despite the deluge of recent negative financial data, stocks still catapulted higher based on some short covering ahead of next weeks Fed meeting and the potential resolution of the Greek debt problem as U.S. Treasury Secretary Timothy Geithner nudged the European Finance ministers to resolve this crisis.
On August 28th the Couch Potato commented on Fed Chairman Ben Bernancke ...he did strongly suggest that the Federal Open Market Committee will have many options to consider at its' next meeting, even to the point of extending the September meeting a full day to permit a fuller discussion of the central banks possible plans.... Mr. Bernanke may have effectively check-mated the bears in the short term as we will be constantly reminded of the Feds potential to the juice the market higher. Downward stock price momentum was already losing steam and the big tease from Big Ben may have sealed the bottom... The bears may be a little nervous speculating about what action the FMOC will take at its September meeting and whether this will ignite another price rally. But at this point the best bet is probably range-bound trading..." As confirmed in the stock charts below, this analysis tuned out to be valid as stocks remain range-bound and well above recent lows. As mentioned above, stocks had the second best week in over a year and some analyst speculate that current stock prices reflect traders pricing in potential stimulus action from the Fed (buy the rumor, sell the news)?
Inevitably, stocks will break out of the current trading range and the obvious question is will it be an upside or downside breakout. The current trend is bearish and technical analysts would probably expect a downside break to continue the longer term trend. For most of this year stocks traded range-bound until prices crashed at the end of July. But, of course, analysts who rely more on fundamentals will say "don't fight the Fed" and remind us of what happened last fall when Ben Benancke and Co. announced a plan to stimulate the economy. Also, you can make a strong argument that the market has held up relatively well considering the constant drumbeat of bad economic news that we have been hearing lately. Yes, we are still getting the daily triple digit stock price fluctuations, but implied volatility, though relatively high, has stabilized. We should expect the next few weeks to possibly provide an answer on which direction will be the next trend. But whatever happens, as long we trade what the market gives us and not what we want to happen, we should continue to do okay.
SPY Position Update
SPY closed $121.52 on Friday - the September position is approx. $900 in the black
SPY is priced ABOVE at 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 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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning up (See SPY chart)
The September 9th Couch Potato published a September Quarterly expiration SPY bull put spread
This put spread is approx. $900 in the black (see tables below)
$109 strike price short put delta is -.0823 (92% probability this position will be profitable)
SPY Risk Analysis
We have not had a chance to open a call spread, therefore the risk is that prices head south and threaten the $109 strike price short put.
DIA Position Update ---------------------------------------------------------------
DIA closed at $114.86 on Friday -
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE 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 neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning up (See DIA chart)
The September 13th Couch Potato published an October expiration month DIA bull put spread (see table below)
DIA Risk Analysis
Similar to the SPY above, we have not yet opened a call spread, therefore the risk is that stock prices crash and threaten the $102 strike price short put.
As with initiating the trade, the decision process for exiting our put spread positions 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 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 confirmed above we currently have two bullish positions in play. Over the next few days we will be on the lookout for bearish trades to provide an additional hedge in the event of a price crash. You don't want to jump the gun too soon with doing a bearish call spreads because there is the potential for stocks to surge higher following next weeks Fed meeting. If the stock market does jump over the next few weeks, implied volatility will probably increase and as prices stabilize, that will probably be the most opportune time to sell a call spread.
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.