Following up on the November 27th Couch Potato Market Summary which mentioned ... We appear to be at critical juncture in the current price trend... the P&F chart signals the downtrend is approaching the support level highlighted by the blue uptrend line...Technically, what is supposed to happen is the SPY price should rebound from this point...
As confirmed in the updated SPY P&F chart below the index followed recent behavior and did what it was supposed to do by recovering off of the blue line and starting a new uptrend.
The November 27th Market Summary also mentioned ...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... 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... The current downtrend will end; the question is when and at what price level... Take a look at the daily SPY down below. Note that right on queue, the SPY price bounced back from the most recent oversold RSI signal (the fourth yellow vertical line added to the chart). Also, the P&F chart and the daily price chart confirm the recent downtrend has ended. The Weekly SPY Heikin-Ashi chart at the bottom of the page suggests that the major indexes have settled into 'range-trading' territory.
A few weeks ago everyone was talking about how the market experienced the worst Thanksgiving week ever for stocks as the S&P 500 tumbled 4.7%. But suddenly, this past week the news is the market capped the best week for the bulls since March 2009 as the S&P500 advanced 7.4%. If the S&P can continue the recent rally and make a confirmed break through overhead resistance as defined by its 200-day moving average, we may be able to have a valid discussion about a Santa Claus rally. Otherwise, the best bet is continued range-bound trading with triple-digit opening gaps and elevated volatility.
SPY Position Update
SPY closed at $124.86 on Friday â€“ the December position is approx. $800 in the black
SPY is priced ABOVE 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 ABOVE its 50-day simple moving average (see SPY chart)
SPY is still 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 neutral (See SPY chart)
The November 30th Couch Potato published a December expiration SPY bear call spread (see tables below)
The November 14th Couch Potato published a December expiration SPY bull put spread
This put spread is approx. $800 in the black (see tables below)
$116 strike price short call delta is -.1383 (86% probability this position will be profitable)
SPY Risk Analysis
As discussed above the SPY price has recovered from the recent downtrend and is now trending upward. If the uptrend continues the $129 strike price short call will be at risk.
As with initiating the trade, the decision process for exiting our SPY credit spreads 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 above our short call or 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.
Exiting this position prior to expiration we will probably â€œleg outâ€ of each trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.
As discussed above, thanks to global economic uncertainty and the frenetic activity of high frequency traders, stocks are fluctuating wildly. One week stock prices experience a huge drop and the next week we have a monster move to the upside. It is very easy to get caught up emotionally when you see these extraordinary price moves, especially when it goes against one of our trades. But at a certain point, you have to slow the process down, step back, and look at the big picture to get a better idea of exactly what we are dealing with and what is the actual risk. Stepping back from the recent wild up and down price moves, when all is said and done, the weekly SPY Heikin-Ashi chart below suggest that basically, the index has been in a trading range since the beginning of August. Yes it might be a relatively wide trading range between the horizontal green lines in the chart, but if you are following a trading plan of entering call credit spreads at resistance and put credit spreads at support, the trades should have been successful. Again, it gets back to what was mentioned in the November 27th Final Comment ... This past week's price action pretty much confirms our logic and strategy for exercising discipline and hedging our positions in the current high volatility environment... higher volatility equate to higher premiums (more money)...it is critical to set the trade up properly and be prepared to adjust for opening gaps and daily triple-digit price moves... Of course we are hoping the range-bound trading continues as that is the optimum environment for doing credit spreads â€“ the trick is to hold out until the trade setup is properly aligned.
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.