The February 5th Couch Potato mentioned ..."most of the major stock index are at or exceeded their multi-year highs from last summer... 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... 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...this market is obviously headline driven ...any number of Global or U.S. economic headline news could easily halt the current bullish leg in its tracks..."
Now the question is, are prices beginning to pull back or will there be sustained overbought conditions? Notice the yellow vertical lines in the SPY weekly chart right below. The yellow lines highlight the most recent overbought levels over the past year and you can see that each time this happened, prices dropped soon afterwards. But you can also see on the chart how prices can remain extremely overbought for an extended period of time (look at the end of 2010 through the beginning of 2011). In our daily SPY chart you can see that the price along with the momentum indicators and oscillators are starting to lose momentum and are actually trying to turn down. Over the next few days we should know whether this is a headline inspired 'head fake' with prices immediately recovering or is the market starting to pull back from the current overbought level.
SPY Position Update
SPY closed at $134.36 on Friday â€“ the February position is approx. $1,300 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 is 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. $1,300 in the red (see tables below)
$134 strike price short call delta is .5483 (45% probability this position will be profitable)
SPY Risk Analysis
The $134 strike short call price has been breached and the February 9th Couch Potato published a SPY call spread trade adjustment, however stocks gapped down at the start of trading the following morning and prices never recovered. We held off doing the trade because the opening gap modified the risk and prices. February options expire next week and we expect to do a trade adjustment over the next few days as we want prices to stabilize prior to adjusting.
DIA Position Update
DIA closed at $127.85 on Friday - the February position is approx. $300 in the black
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 is 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. $300 in the black (see tables below)
$129 strike price short call delta is .3123 (69% probability this position will be profitable)
DIA Risk Analysis
February options expire next week and we need to be on the alert for prices returning to recent highs and threatening our $129 strike price short call. Unless prices pull back we expect to exit this position over the next few days.
February options expire next week and if prices don't pull back over the next few days we will need to exit the SPY and DIA call spreads.
As mentioned above, February options expire next week and we need to keep a wary eye on the stock market. Our SPY position is currently at a price where we need to do a trade to exit the short call and the DIA call spread also may get to that point over the next few days. The SPY Risk Analysis above discussed how the published trade was aborted because the equity market gapped down the following morning. Note in the SPY 60 min. chart below how prices started trading significantly lower on Friday and never recovered to fill the gap. Market action over the next few days will dictate how to handle exiting the SPY and DIA positions. The optimum scenario for us at this point is for recent history to repeat and we get a price pullback. As discussed above in the Market Summary, it is reasonable to expect some selling from the current overbought conditions which would push prices down.
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.