The April 15th Couch Potato Market Summary mentioned "...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...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... market corrections start with a trend reversal..."
This market analysis is valid as thus far, price support levels have held and most of the near term technical chart indicators and oscillators are flashing neutral (which suggest further range-bound trading.)
Keep in mind that most of the major stock indexes have generated double digit returns for the year. Putting this in the proper perspective, the S&P 500 index finished flat last year and finished flat for the entire decade! So technically, if stocks stagnate and stay at this level for the next eight months, from a historical perspective it would still be a very good year for the market. The most logical expectation for the rest of the year is sideways movement with stocks climbing a wall of worry with price pullbacks along the way. At this point most of the momentum indicators point to price neutrality. For example, both S&P 500 index P&F and weekly Heikin-Ashi charts below clearly confirm a range-bound trend. Further, the most recent American Association of Individual Investor survey is 31.2% bullish, 35% neutral, and 33.8% bearish. And the Chicago Board of Option Exchange total Put/Call ratio is virtually even.
For our strategy for trading credit spreads, at this point the most probable risk appears to be a downside price correction. The major indexes have topped out near term as prices pulled back from recent highs set at the beginning of the month. And as noted in recent articles, it will be extremely difficult for prices to move much higher while down days are generating the highest trading volume compared to days when prices close up. The bulls have owned most of the first quarter of the year, but as pointed out in recent articles, for the past few years the bears have been taking charge in the spring. Volatility has ticked up bit and stocks have begun recording triple digit moves with increasing frequency. There are still a lot of factors that would seem to keep prices in check (e.g. Fed action, election year maneuvering, good news out of Europe). But a price correction can happen so hard and so fast that most people usually are not prepared.
SPY Position Update
SPY closed at $137.95 on Friday â€“ the April iron condor finished approx. $2,500 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 neutral (See SPY chart)
The April 18th Couch Potato published a May expiration SPY iron condor
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
On April 19th we suggested letting the put spread expire worthless for an approx. $1,100 gain (see tables below)
SPY Risk Analysis
As mentioned above we closed out our April SPY trades and going forward will evaluate the May iron condor position
DIA Position Update ---------------------------------------------------------
DIA closed at $129.98 on Friday â€“ the April position closed approx. $1,000 in the black
DIA is priced at its current 14-day EMA (see DIA chart down below)
DIA is trading just BELOW its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced close to 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 neutral (See DIA chart)
The March 21st Couch Potato published an April expiration DIA bull put spread
On April 19th we suggested letting the put spread expire worthless for an approx. $1,000 gain (see tables below)
DIA Risk Analysis
The April trades are closed and at this point we have no money on the table
As with initiating the trade, the decision process for exiting our SPY May Iron Condor 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 or below the short put) 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.
Exiting this position prior to expiration we will probably â€œleg outâ€ of each trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.
As discussed above the market is trading range bound and this environment is more conducive to trading credit spreads (versus trending markets). If the current trend continues we should be able publish additional May trades. But job-one for us is to manage risk which means not chasing trades and letting the opportunities come to us.
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.