As evidenced in the SPY weekly chart below, prices are reaching overbought levels, but the bullish engulfing candlestick signal suggests stocks can go higher. However, the last time the S&P 500 rose to this overbought level last April prices crashed soon after - see the yellow vertical line in the SPY weekly chart right below (also be aware that this was last time the CBOE VIX volatility index was at its current level). Of course at this time last year investors had be concerned about the impacts on the economy from the Japanese Tsunami, Euro-debt melodrama, U.S. economic growth outlook, and general wariness about the global economy. This year most of the major financial news has been favorable with a myriad of reasons enumerated by market pundits for why stocks should be expected to do well this year. But, you can take it to the bank that prices usually tend to correct when most people least expect it.
There is still a relatively healthy dose of pessimism considering how strong the market has performed this year, but more people are starting to jump on the bandwagon as small retail investors are starting to trickle back into stocks and momentum remains clearly bullish. Eventually stock prices will have to turn down, but it is reasonable to expect that the market will run higher for a while longer before we get a significant pullback. Currently, the major indexes are consolidating at recent highs which from a technical perspective is considered a bullish event as it provides an opportunity for the market to resolve overbought conditions before continuing in the direction of the prevailing trend. Some of those in the bear's camp tend to wake up when prices consolidate with the anticipation of a trend reversal. But as mentioned previously, what has been happening and what will probably happen is the market should continue to plow higher until we get a confirmed price reversal. Even the last week's one-day price plunge turned out to be bullish event as it enticed buyers in the market who have been sitting on the sidelines and waiting for an opportunity to buy at lower prices. One would expect to see several market bearish distribution days (lower closing prices on higher than average volume) and lower lows and lower highs before you could begin to build a solid case of a pending trend reversal - these signals would suggest that money managers are starting to sell off shares.
SPY Position Update
SPY closed at $140.30 on Friday â€“ the March position closed approx. $1,700 in the black
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 bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
The March 14th Couch Potato published an April expiration SPY bear call spread
The February 13th Couch Potato published a March expiration SPY bear call spread
On March 6th we suggested immediately closing out the call spread for an approx. $1,300 gain (see tables below)
The February 13th Couch Potato published a March expiration SPY bull put spread
On March 8th we suggested closing out the put spread for an approx. $450 gain (see tables below)
SPY Risk Analysis
The March 13th Couch Potato published a SPY April bull put spread. However prices gapped higher the following days and the published trade was not available, therefore the only risk is prices continuing to surge higher and threatening the April $143 strike price short call
DIA Position Update -------------------------------------------------
DIA closed at $132.05 on Friday â€“ the March position closed approx. $1,200 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 bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
The February 22nd Couch Potato published a March expiration DIA bear call spread
On March 6th we suggested immediately closing out the call spread for an approx. $1,200 gain (see tables below)
DIA Risk Analysis
We have not yet published an April trade for the DOW index ETF.
As with initiating the trade, the decision process for exiting our SPY bear call position 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.
As mentioned above and confirmed in the chart below, the CBOE VIX Volatility Index is at the lowest point since this time last year. From one perspective this is a positive for trading credit spreads as it signifies relatively lower levels of volatility and should increase the probability of a successful trade. But the other perspective is that this can be considered a negative for credit spreads as we are selling option premium at lower than normal prices â€“ remember, the objective is to 'sell high' and "buy it back low'. The obvious risk to credit spreads at this point is that volatility will have to eventually head higher and if possible you want to try to avoid holding lower price premium that you might have to buy back at a higher price. But we really can't worry about timing market tops and bottoms as that is certain to lead to bad decisions. As long as we understand how the market is trending (and how strong is the trend), and are what is the current risk (and level of that risk) we should be able to hedge our positions and continue to trade successfully.
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.