The January 15th Couch Potato mentioned "... 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..."
The less-bad-is-good mantra appears to be back in vogue again as traders risk aversion is declining. The high volatility from last year caused by traders' fluctuation between 'risk off'' and 'risk on' trading might be fading away as indicated in the VIX chart below. The CBOE Volatility Index, or VIX, which is considered a measure of what investors pay to protect themselves against the risk of losses is at it lowest point in seven months. Technically, now would seem to be a good time for a price pullback, but we need to trade what we see and not outsmart ourselves as overbought conditions can continue indefinitely.
Fourth quarter earning season has been pretty mundane. Of the approximately 70 companies in the S&P 500 that have reported earning so far, 60% have exceeded analyst expectations. By comparison, at this point in the third quarter reporting cycle, 68% had beaten analyst forecast, which is well below the 78% recorded in the second quarter. Next week the market will probably continue to churn higher as there will be a blitz of earnings and economic data along with the Federal Reserve's Open Market Committee meeting. We should expect traders to continue the push for a strong January which some consider a bellwether of how the rest year will pan out. Basically, for us, this suggest that we may have to deal with a different trading environment from the range bound trading that we benefited from most of last year. But this should not be a problem as we can make the necessary adjustments to adapt our trading plan to whatever is the trend.
SPY Position Update
SPY closed at $131.54 on Friday
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 January 17th Couch Potato published a February expiration SPY bear call spread
SPY Risk Analysis
We haven't had the opportunity to open a put spread, therefore the risk is prices continuing to advance and threatening the $134 strike price short call.
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 ) 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.
Obviously at this point the major index prices are trending up. You can tell when there is a strong bullish trend by the constant chatter from the talking heads promoting the next great buying opportunity and the relatively muted response from the bear camp. The major indexes are at overbought levels and we will lie in wait on a price pullback to do a bull put spread to hedge our current bearish position.
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.