The April 29th Couch Potato Market Summary mentioned "...Recent Couch Potato articles provided market analysis supporting the trend towards range-bound trading...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... Until stock prices make a confirmed break above or below recent highs or lows expect continued range-bound trading... We have noted recently how stocks may be setting up for another springtime swoon...
As mentioned above, price resistance held down stocks as the major indexes continue to vacillate between support and resistance. The S&P500 index Point & Figure (P&F) chart below confirms the recent range-bound trading trend. As illustrated in the chart, new downtrends (columns of O's) reverse at support and convert to new uptrend's (columns of X's). And of course, recent uptrend's turn down at resistance to a new column of O's. The X's and O's have dutifully remained within defined price resistance and support (right side of the chart). But a price break below 1369 would be the most significant downtrend of the year.
Investors have noted the recent trend of the DOW index displaying relative strength compared to the other major indexes. The DOW Jones Industrial Average actually rose to a four-year high this week while the other indexes lagged. This suggests that the so called 'risk-off' trading is in vogue as traders move toward more defensive stocks. As the largest and most stable blue-chip companies comprise the DOW Industrials and these are the stocks investors prefer during an uncertain economic environment. The S&P 500, Russell 2000, and especially the Nasdaq 100 index led the stock market higher for most of the year as money managers were trading 'risk-on'. Now smart investors are cashing in their gains from bets placed earlier in the year and limiting exposure to small cap stocks. And the major fall in the Nasdaq index this week may signal the end of the honeymoon with technology stocks?
SPY Position Update
SPY closed at $137.00 on Friday â€“ the May iron condor is approx. $1,100 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 BELOW 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 turning bearish (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. $900 in the black (see tables below)
$143 strike price short call delta is .1050 (89% probability this position will be profitable)
The April 18th Couch Potato published a May expiration SPY bull put spread
The put spread is approx. $200 in the black (see tables below)
$133 strike price short put delta is -.2231 (78% probability this position will be profitable)
SPY Risk Analysis
The S&P 500 suffered the worst week of the year pushing the index below recent support levels. Now the risk is prices continuing to drop and threatening our $133 strike price short put.
DIA Position Update ---------------------------------------------------------
DIA closed at $132.00 on Friday â€“ the May iron condor is approx. $700 in the black
DIA is priced at its current 14-day EMA (see DIA chart down below)
DIA is trading at its 20-day Bollinger Band SMA (see DIA chart)
DIA is priced at 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 bear call spread
The call spread is approx. $700 in the black (see tables below)
$133 strike price short call delta is .1774 (82% probability this position will be profitable)
The April 25th Couch Potato published a May expiration DIA bull put spread
The put spread is approx. breakeven (see tables below)
$127 strike price short put delta is -.2536 (75% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY above, after a down week for the DIA, the risk is prices pulling back and threatening our $127 strike price short put.
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.
The April 29th Couch Potato Final Comment stated "...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..." As suggested previously, the updated S&P 500 Index weekly Heikin-Ashi below signals investors indecisiveness as stocks remain in a tight trading range. Prices won't remain constricted indefinitely as pressure builds for a trend change up or down. Pretty soon the market should let us know whether a sustained pullback is in the offering or whether prices will continue to climb a wall of worry.
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.