The April 8th Couch Potato Market Summary mentioned "... the major indexes have been trading range-bound since the middle of March... After a spectacular first quarter the question is, are we in for a repeat of what happened in both 2010 and 2011? The yellow vertical lines in the SPY Heikin-Ashi weekly chart below highlight the how strong rallies topped out in the spring of both years and culminated in a dramatic downturn...stocks started strong in 2011 but reversed course reacting to the end of QE2, high energy prices, the Euro-zone debt drama, and uncertainty about the domestic economy. This year, many of the same issues are in play...Most of the major indexes are near their 20-day and 50-day SMA's which are the technical support levels. These support levels should be expected to hold if the bullish trend is to continue before the dreaded month of May. A breakdown below technical support would jeopardize the bullish trend and prices would probably pull back lower and evolve into a range-bound trading trend...
To follow up on last weeks Couch Potato Market Summary, the S&P 500 Index Point & Figure chart below signals the index is in a near term downtrend. Most of the major indexes are breaking down below their technical support levels and the momentum indicators and oscillators are turning bearish. We added a third yellow vertical line to the weekly SPY chart down below. As mentioned above, the first two yellow lines highlight the point where stock prices corrected in the spring of 2010 and 2011. The third line marks the current year where stocks prices have dropped and we may be in the initial stages of a correction? At this point the current market pullback merely suggests that prices may have topped out near term and the most probable trend is range-bound trading. Of course market corrections start with a trend reversal and similar to the previous two years stocks may be starting a longer term pullback? But what has to be a major worry for the bulls are the recent bearish distribution days (down days on higher than normal trading volume). Bearish distribution days indicate that money managers are looking for the opportunity to sell shares.
If you want to bet on second quarter performance following the blowout first quarter, the odds are with further gains. It has been reported that 17 previous time since 1982 when the S&P 500 Index gained 10% of more in a quarter, only twice has the index failed to gain in the following quarter. The only exceptions were the fourth quarter of 2001 and the first quarter of 1991. What needs to happen for stocks to surpass recent highs is higher trading volume to the upside. As mentioned above, down days are generating the higher volume which leads to a downward price spiral. First quarter earning results are secondary as investors appear to be waiting on the next Fed easy money scheme and a possible next round of quantitative easing. After an explosive 30% rise from the October lows stocks were overdue for a breather. But in an election year, you can bet that if the market does more than take pause, we can expect Ben Bernanke and Co to act to get the ball rolling again.
SPY Position Update
SPY closed at $137.14 on Friday â€“ the April is approx. $1,800 in the black
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is priced at 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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See SPY chart)
The March 14th Couch Potato published an April expiration SPY bear call spread
On April 10th we suggested immediately closing out the call spread for an approx. $1,400 gain (see tables below)
The March 14th Couch Potato published an April expiration SPY bull put spread
The put spread is approx. $400 in the black (see tables below)
$134 strike price short put delta is -.2091 (79% probability this position will be profitable)
SPY Risk Analysis
As mentioned above we closed out the SPY call spread, therefore the only risk is a price correction threatening our $134 strike price short put.
DIA Position Update ---------------------------------------------------------
DIA closed at $128.40 on Friday â€“ the April is approx. $300 in the black
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced BELOW 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 neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning bearish (See DIA chart)
The March 21st Couch Potato published an April expiration DIA bull put spread
The put spread is approx. $300 in the black (see tables below)
$126 strike price short put delta is -.2427 (75% probability this position will be profitable)
DIA Risk Analysis
We never executed the April SPY bear call spread and the only risk is prices continuing to drop and threatening the $126 strike price short put.
April options expire on Friday and we will be on alert for the opportunity to close out our SPY and DIA put spreads. Since stocks are in a near term downtrend it is best to keep a tight leash on our short put contracts. Volatility increases with downside price moves plus option expiration increases the risk. If the market goes into full blown correction mode we will immediately exit the put spreads.
As mentioned above, options expire next week and the focus is on managing the remaining April contracts. Also, depending on the price action we will start analyzing and evaluating May option expiration trade setups.
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.