The September 18th Couch Potato mentioned "...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"... We should expect the next few weeks to possibly provide an answer on which direction will be the next trend..."
Despite the carnage that happened to prices this week stocks remain in the recent trading range (albeit at the bottom). The trend is undeniably bearish and as mentioned above a breakout below the current trading range would be the most probable trend change. The other alternative is upside breakout which certainly could happen, but which would be unexpected and surprise most folks if it happened any time soon.
The Federal Reserve's latest plan to stimulate the economy dubbed Operation Twist apparently has disappointed most everyone. Fed Chairman Ben Bernanke probably did not do himself a favor by last month's grand announcement that the Fed will extend the Fed meeting an extra day to lay out a new stimulus plan. The gist of Operation Twist is to further lower long term interest rates. But interest rates are already near historic lows and there is no incentive for banks to increase lending. And generally, bank customers who are allowed to borrow have already done so at lower rates. You have to wonder if this weeks Fed announcement is a way of throwing up their hands and signaling to our elected officials to do the job they were elected to do. From a trading perspective the recent Fed action probably signals continued high volatility trading for the near future.
SPY Position Update
SPY closed $113.54 on Friday - the September position is approx. $200 in the red
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 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 bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The September 9th Couch Potato published a September Quarterly expiration SPY bull put spread
This put spread is approx. $200 in the red (see tables below)
$109 strike price short put delta is -.2511 (75% probability this position will be profitable)
SPY Risk Analysis
Quarterly options expire on Friday and the risk is that the price crash continues prior to expiration. If the SPY drops to a new 52- week low the $109 strike price short put will be at risk.
DIA Position Update ---------------------------------------------------------------
DIA closed at $107.45 on Friday - the October position is approx. $500 in the red
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 bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The September 13th Couch Potato published an October expiration month DIA bull put spread
This put spread is approx. $500 in the red (see tables below)
$102 strike price short put delta is -.2981 (70% probability this position will be profitable)
DIA Risk Analysis
We have not yet opened a call spread, and similar to the SPY above the risk is that prices continue to crash and reach new 52-week lows which would threaten the $102 strike price short put.
The SPY quarterly option expires on Friday and we will looking for an opportunity to exit the bull put spread position.
Are we there yet (market bottom)? As mentioned above, stock prices are sitting at the bottom of the recent trading range and we should find out next week if this support level will hold. As confirmed in the stock charts above, what is probably most disconcerting is that the major indexes are not yet in oversold territory. This suggests there is plenty of room for stocks to fall before prices reach a level where you would expect buyers to step in. But just like the recent price plunge began unexpectedly at the end of July, the market always manages to fool most pundits and the next upside breakout will probably happen when least expect it.
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.