The October 30th Couch Potato Market Summary mentioned ...The upward momentum could continue into next week as market participants' return for the last trading day of October riding four consecutive weekly gains and setting a pace to be up 13% for the month which would make for one of the stock market's best monthly performances on record...
This past week the momentum clearly changed as the major indexes were down approx. 3% for their worst performance in nearly two months. In particular, note that the S&P 500 price actually pulled back below the lows of the previous four weeks â€“ this was the resistance level for the prior trading range which is considered support for the current trading range. The SPY chart below confirms lower highs and lower lows over the past week which is considered confirmation of a short term downtrend. The longer term trend is still neutral as most of the technical oscillators and momentum indicators are flashing neutral signs, plus the 50-day SMA remains below the 200-day SMA.
The best bet is continued volatile trading next week as the European debt crisis melodrama continues to keep investors guessing on which way the economy is headed. Contributing to the volatility will be lighter than normal trading volume next week due to the Thanksgiving holiday on Thursday. Also, don't forget the 12-member super congressional committee has until Wednesday midnight to come up with a budget deal of spending cuts and tax increases to address the federal deficit. Investors are worried that failure to reach a deal will trigger automatic spending cuts that would harm the fragile economic recovery. The market could easily continue to drop below the current support level continuing the downtrend, or prices could reverse course and head back up toward recent highs. It really depends on how traders interpret next week's financial news, but whatever happens we should expect daily opening gaps and triple-digit moves.
SPY Position Update
SPY closed at $121.98 on Friday â€“ the November position expired with an approx. $1,600 gain
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)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY dropped 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 bearish (See SPY chart)
The November 14th Couch Potato published a December expiration SPY bull put spread (see tables below)
SPY Risk Analysis
We have not had the opportunity to initiate a bear call spread, therefore the only risk is prices continuing to drop and threatening the $116 strike price short put.
As with initiating the trade, the decision process for exiting our SPY bull put 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 our 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 displayed above, our only current position is the December expiration SPY bull put spread initiated last week. Because of the current abnormally high market volatility and concerns about a possible downtrend, the best move is probably to try to avoid another bullish position and wait on prices to recover back to near-term resistance to execute a bearish trade to hedge our current position. Of course, it really depends on whether the market will cooperate as last month we traded a bearish position and waited on an opportunity to hedge that trade with a bullish play that never presented itself. This is why it is absolutely critical in the current high volatility environment to make sure that credit spreads are setup properly, and to make adjustments for opening gaps and triple digit moves before entering the trade.
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.