The November 20th Couch Potato Market Summary mentioned ... the momentum clearly changed as the major indexes were down approx. 3% for their worst performance in nearly two months. ... The SPY chart below confirms lower highs and lower lows over the past week which is considered confirmation of a short term downtrend...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...The market could easily continue to drop below the current support level continuing the downtrend...we should expect daily opening gaps and triple-digit moves...
We appear to be at critical juncture in the current price trend. The column of 'O's on the right side of the SPY P&F chart below confirms the S&P 500 has been in a downtrend. Of course we really didn't need this chart to tell us what has been obvious from recent price action. But the P&F chart signals the downtrend is approaching the support level highlighted by the blue uptrend line. If the SPY makes a confirmed break below the trend line without a price recovery, this might suggest that the market is set up for a longer term correction.
To emphasize the point that prices are at critical technical level, take a look at the SPY daily chart down below. Notice that at 36.75 the Relative Strength Indicator (RSI) is at oversold levels. Technically, what is supposed to happen is the SPY price should rebound from this point. To illustrate this concept, look at the three yellow vertical lines drawn through the most recent days when the SPY was oversold as signaled by the RSI. The price immediately bounced back each time the SPY was oversold. If the SPY fails to immediately recover from the current oversold level, combined with a possible break through the uptrend line in the P&F chart, more people will be betting the bulls are in for longer term pain. The major indexes have already broke through support of what was the recent trading range, AND experienced the worst Thanksgiving week ever for stocks as the S&P 500 tumbled 4.7%. If the market remains oversold and continues to head south we need to start talking about a possible full-blown correction with prices heading to new lows.
We discussed in the past how a trend change usually occurs when most people don't expect it and is not necessarily due to any technical or fundamental event. Regardless of what some folks might advertise, no one can really predict market tops or bottoms. The current downtrend will end; the question is when and at what price level?
SPY Position Update
SPY closed at $116.34 on Friday â€“ the December position is approx. $2,200 in the red
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 BELOW its 50-day simple moving average (see SPY chart)
SPY is well 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 November 14th Couch Potato published a December expiration SPY bull put spread
This put spread is approx. $2,200 in the red (see tables below)
$116 strike price short call delta is -.4948 (51% probability this position will be profitable)
SPY Risk Analysis
The SPY price has pulled back all the way to our $116 strike price short put. If the downtrend continues over the next few days we will probably need to adjust the trade.
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.
The November 20th Final Comment said ...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..." This past weeks price action pretty much confirms our logic and strategy for exercising discipline and hedging our positions in the current high volatility environment. We definitely believe there are opportunities out there, as higher volatility equate to higher premiums (more money). But as we have been constantly alluding to lately, it is critical to set the trade up properly and be prepared to adjust for opening gaps and daily triple-digit price moves.
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.