The January 8th Couch Potato mentioned "...Stock prices will breakout (eventually), but the market still seems to be fixated with headline risk. Next week is the start of the 4th Quarter earnings cycle and we have to see whether investors' attention will divert away from Europe back to the U.S. fundamentals ... What is interesting is that even though the market is leaning bullish, the bulls might be getting weary of trying to break through to the upside and one negative news event could send prices crashing...
The major stock indexes did break through near term resistance. Now the next question is will there be follow through or will prices be constrained in an expanded trading range. Next week 4th quarter earning reporting begins in earnest and we have to see if stocks can build on their modest gains from this past week. Per usual, the headline news out of Europe is still acting like deadweight, hold back stock prices from moving substantially higher.
It may not seem like it, but the stock market has actually been on a nice run lately with S&P 500 up over 7% in the last three weeks and 2.5% for the month. Traders have had a chance to pull back, with the S&P downgrades in Europe, some earnings misses and negative other negative economic news. But investors are reacting favorably to bad financial news, which suggest stocks should continue to 'climb a wall of worry' before we get any substantial price correction. This view is confirmed by the weekly SPY Heikin-Ashi chart below. Heikin-Ashi candlestick charts are designed to filter out market 'noise' in effort to better identify trends. This type of candlestick chart is great for confirming the market trend and potential reversal points.
Note the difference between the SPY weekly Heikin-Ashi chart above and the typical candlestick down below. You would need to draw trend lines and make certain inferences to clarify the trend in the chart below. Whereas in the chart above, you can easily see where prices are going and identify support and resistance levels.
SPY Position Update
SPY closed at $128.84 on Friday â€“ the January position closed with an approx. $1,200 gain
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 priced ABOVE its 50-day simple moving average (see SPY chart)
SPY moved ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
The December 15th Couch Potato published a January expiration SPY bull put spread
On January 4th we suggested closing out the January put spread for an approx. $1,200 gain (see tables below)
SPY Risk Analysis
We have no money on the table as we are currently in the process of analyzing February option expiration trade setups.
As mentioned above, we have already closed out all of our open positions.
The January 8th Couch Potato Final Comment mentioned "...Over the past few weeks, every time we have published a January SPY call spread it was not available at an acceptable price in subsequent days...index remains in the tight trading range from the past few months. From the Couch Potato perspective, this is the ideal trading environment for our market neutral trades...But we still have relatively high volatility, so even though the current trend is our friend, it is important to make sure the trade is set up properly. This is important because if/when prices break out of the trading range you want to be able to easily adjust the trade if necessary..."
As discussed above in the Market Summary, the major stock indexes punched through the months-long resistance levels and are currently trading slightly higher. The paragraph directly above is still valid, but it might be important to point out the comment "... it is important to make sure the trade is set up properly...". Currently we don't have any trades in play because quite frankly, the market has not cooperated. Regular investors cannot control what happens in the stock market, but you need to be able to respond to whatever is going on at that point in time. Not trading IS a viable strategy if market action suggests a higher level of risk associated with getting into a particular trade â€“ especially compared to trading just because one believes they need to always have a trade in play. January options expire next week and recent range-bound price action suggests that over the next few days we may be able to start setting up February trades.
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.