The January 22nd Couch Potato mentioned "... 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..."
Note in both the SPY and DIA charts below how the RSI and MACD indicators are trying to turn downward from overbought levels. Any price pullback is likely to be minor as buyers who have missed the recent rally will probably step in to buy the dips.
The longer term momentum has clearly shifted to the bulls' camp as the major indexes are near six-month highs. More convincingly, most of the major indexes are flashing a 'golden cross' which is considered a holy grail by many technical analysts. The 'golden cross' signals the shorter-term moving averages are crossing above the longer-term averages. The golden cross associated with the S&P500 (see SPY chart below) suggests the mid-term outlook is increasingly bullish. In the last 50 years, when the S&P500 50-day moving average has risen above the 200-day moving average, the S&P has generated gains six-months ahead 80% of the time. Gains averaged 6.6%, and if the current market is the norm, this means the S&P 500 would be near 1,400, a level not seen since mid-2008.
From a trading strategy perspective, the current trading environment suggests that one can expect stocks to behave similar to 2010. Note in the weekly SPY Heikin-Ashi chart below how the Chairman Ben Bernanke Fed inspired rally catapulted stock prices higher despite a constant barrage of negative economic data globally and in the U.S. You can see the 2011 trading year was basically a series of trading ranges. Our trading strategy is to trade what we see and not what we think, and have a plan if the trade goes against us. But you have to look at the big picture to understand market bias, this helps to understand and plan for risk based on the current market trend. Just like an insurance company evaluates risks and accepts premium based on the current market, we need to follow a similar strategy.
SPY Position Update
SPY closed at $131.82 on Friday â€“ the February position is approx. breakeven
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
This call spread is approx. at breakeven (see tables below)
$134 strike price short call delta is .3231 (68% probability this position will be profitable)
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.
DIA Position Update
DIA closed at $126.45 on Friday
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced ABOVE its 50-day simple moving average (see DIA chart)
DIA moved ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
The January 23rd Couch Potato published a February expiration DIA bear call spread
DIA Risk Analysis
Similar to the SPY above, we have not yet opened a put spread, therefore the risk is prices continuing to advance and threatening the $129 strike price short call.
As with initiating the trade, the decision process for exiting our SPY and/or DIA call 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 ) 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 January 22nd Couch Potato mentioned "...Obviously at this point the major index prices are trending up...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..." As confirmed in the charts above, upward momentum has paused and the technical indicators may be signaling a price pullback. We would expect only a minor retracement from recent highs and will look for the opportunity for a bull put spread.
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.