Recent Couch Potato articles provided market analysis supporting the trend towards range-bound trading. Last week most of the major indexes broke below technical support levels which turned out being a 'head fake' as prices recovered. As evidenced in the charts below, most of the technical momentum indicators and oscillators have retuned to neutral mode. Similar to how the support levels held up prices when stocks dropped we should expect resistance to hold prices in check as the market moves back towards recent highs. And though prices recovered from recent lows, down days still generate higher trading volume compared to days when prices close up. Until stock prices make a confirmed break above or below recent highs or lows expect continued range-bound trading.
The bulls need to offer thanks to the NASDAQ as blowout numbers from Apple and Amazon pushed the technology stocks to their best weekly gain since February and led the other major indexes to the best weekly results since March. Investors are enthused by stronger than expected corporate earnings which has overshadowed the dark clouds hovering over the global economy. The market simply brushed aside disappointing reports on the U.S. economic growth, jobs data, and home sales. And don't forget about the lingering European debt crisis as Spain, France, and Italy have made headline news recently. We have noted recently how stocks may be setting up for another springtime swoon as earning season winds down investors will recalibrate to focus on less than stellar global economic data â€“ plus the fed has taken Q3 off the table!
SPY Position Update
SPY closed at $140.39 on Friday â€“ the April iron condor finished approx. $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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)
The April 18th Couch Potato published a May expiration SPY bear call spread
The call spread is approx. $100 in the red (see tables below)
$143 strike price short call delta is .2691 (73% probability this position will be profitable)
The April 18th Couch Potato published a May expiration SPY bull put spread
The put spread is approx. $800 in the black (see tables below)
$133 strike price short put delta is -.1086 (89% probability this position will be profitable)
SPY Risk Analysis
The S&P 500 index has recovered towards the recent highs, and at this point the most probable risk is prices continuing to move up and threatening our $143 strike price short call.
DIA Position Update ---------------------------------------------------------
DIA closed at $132.00 on Friday
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 neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)
The April 25th Couch Potato published a May expiration DIA iron condor (see tables below)
DIA Risk Analysis
Prices surged the day after the trade was published and the risk is the DIA moving higher and threatening our $133 strike price short call.
As with initiating the trade, the decision process for exiting our SPY and DIA May Iron Condor positions 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 indicated in the S&P 500 Index weekly Heikin-Ashi chart below, the major stock indexes are continuing to condense the trading ranges. Notice how last year on multiple occasions when this chart flashed a similar signal prices usually dropped soon afterwards. Over the next few weeks we will find out if this behavior carries over into 2012.
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.