All systems are 'Go' for the bulls as stock prices across the board continued to climb higher. The January 29th Couch Potato mentioned most of the major indexes are flashing a 'golden cross' which is considered a holy grail by many technical analysts... The golden cross associated with the S&P500 suggests the mid-term outlook is increasingly bullish...
And as indicated in the charts below, most of the technical chart indicators and oscillators are extremely bullish to overbought. In addition, internal strength indicators such as the NYSE Bullish Percentage Index (BPI) are flashing strong bullish signs. This past October approximately only 20% of the NYSE stocks were on BPI buy signals (80% were sell signals). But as of this past week the NYSE BPI is now showing approximately 68% BUY signals. Obviously this suggests that buyers are overcoming sellers near term resistance and bidding up prices. And of course, we are in an election year and clearly this administration is desperately trying to do everything possible to stimulate the economy. And then there is the so called 'January Barometer where the notion is whenever the stock market rises in January it should be expected to finish the year higher. According to the Stock Traders Almanac the January Barometer has a 95% accuracy rate when the S&P 500 is positive for the January. And last but not least, recall that a few weeks ago the Federal Reserve Board signaled their intent to utilize every tool at their disposal to further stimulate economic growth.
Now the question from a trading perspective is what is the risk involved when you consider specific investment strategies? As confirmed in the weekly SPY chart directly below, most of the major stock index are at or exceeded their multi-year highs from last summer. The NASDAQ is actually at an 11 year high bringing back memories of the last tech bubble. But as noted in the weekly chart, there was a significant price correction the last time stocks reached these levels and overbought conditions. The SPY and DIA daily charts below are extremely overbought, this would suggest some form of price consolidation or pullback is needed to bring relief to the current overbought conditions. But as we have discussed in the past, overbought conditions can continue indefinitely and as the January 29th Couch Potato mentioned "...Any price pullback is likely to be minor as buyers who have missed the recent rally will probably step in to buy the dips... We would expect only a minor retracement from recent highs..." Also, this market is obviously headline driven as indicated by euphoric reaction to Friday's job report. On the surface the jobs report made great headlines, but looking 'under the hood' it is clear the jobs picture may be improving but is still very dismal. The point is that any number of Global or U.S. economic headline news could easily halt the current bullish leg in its tracks. As an investor it is prudent to ride with current trend, but smart thing to do is to hedge bullish bets as there is plenty of a headwind.
SPY Position Update
SPY closed at $134.54 on Friday â€“ the February position is approx. $1,500 in the red
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 extremely 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. $1,500 in the red (see tables below)
$134 strike price short call delta is .5687 (43% probability this position will be profitable)
SPY Risk Analysis
The $134 strike short call price has been breached and we should plan on doing a trade adjustment over the next few days. As mentioned above, the SPY is overbought and we want prices to stabilize prior to adjusting â€“ if you adjust too soon you increase the risk of having the adjusted trades go against you. Fortunately, we have several weeks before February option expiration and there are a variety of trade adjustment strategies available.
DIA Position Update
DIA closed at $128.37 on Friday - the February position is approx. $200 in the red
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 extremely 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
This call spread is approx. $200 in the red (see tables below)
$129 strike price short call delta is .4171 (58% probability this position will be profitable)
DIA Risk Analysis
The recent stock market surge has pushed the DIA price up to threaten our $129 strike price short call.
Our SPY short call strike price has been penetrated and the DIA short call is being threatened. If prices don't pull back over the next few days then we will need to analyze trade adjustment alternatives.
As we discussed previously, the primarily range-bound environment that we traded for most of 2011 has given way to a strong bullish trend. From a historical fundamental perspective, 2012 is lining up to be somewhat similar to 2010 where the market basically trended straight up unabated from the lows earlier that year. We are absolutely NOT predicting a market direction as a trend change can happen at anytime and usually does when most folks least expect it. But we need to 'trade what we see' which currently is a bullish trending market and we will probably need to 'tweak' our trading strategy to recognize the risk typically associated with doing credit spreads in the current environment.
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.