The May 6th Couch Potato Market Summary mentioned "... 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...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..."
The column of O's on the far right side of the updated S&P500 index Point & Figure chart below confirms the price break below the trading range that has been in place since early March. Most of the major stock indexes have penetrated near-term support levels culminating in the most significant downturn this year. The market is not yet to the point where we need to bring out the life preservers or lower the life boats, but the waves are starting to pound against the deck.
What has to be a serious concern for the bulls is that most of the major indexes are selling off from 'triple-tops'. A triple-top is a pattern used by many technical analysts to predict a price reversal when the market is trending upward. The pattern is identified when prices create three peaks at virtually the same level. The price pullback off resistance at the third peak is considered to be a sign that buyers have become exhausted. Trip-tops are considered more difficult to overcome compared to other topping patterns, requiring much more time and volume to reverse. Also, most of the major indexes have sliced through their 20 and 50-day moving averages setting up prices to test the March/April lows â€“ if stocks break below this level the longer term trend converts from bullish to bearish.
The most obvious question at this point is whether the current price pullback will evolve into a major correction in excess of 10%. Even when stocks reached a new bull market high on the first trading day of May, investor sentiment was not over exuberant which is what you would expect prior to a hard correction. And though last weeks jobs number reported weak hiring, the index of consumer sentiment rose to the highest level in more than four years. Also, keep in mind the Fed Chairman Bernanke commented last month "we remain entirely prepared to take additional balance-sheet actions as necessary to achieve our objectives. Those tools remained very much on the table and we would not hesitate to use them, should the economy require that additional support." And the most recent CBOE index Put/Call ratio is 2.07, this is an excessively bearish reading from what is considered a contra indictor and may signal a market bottom. As we have suggested in the past, the current market pullback is overdue as stocks basically catapulted straight up from the November lows. Until we a longer term trend change, it is reasonable to expect prices to reach a bottom and then convert to range-bound trading again.
SPY Position Update
SPY closed at $135.61 on Friday â€“ the May iron condor is approx. $1,200 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 bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The April 18th Couch Potato published a May expiration SPY bear call spread
On May 7th we suggested immediately closing out the call spread for an approx. $1,000 gain (see tables below)
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 -.2545 (75% probability this position will be profitable)
SPY Risk Analysis
As mentioned above we closed out our call spread, therefore the only risk is prices continuing to drop and threatening our $133 strike price short put.
DIA Position Update ---------------------------------------------------------
DIA closed at $128.18 on Friday â€“ the May iron condor is approx. $500 in the black
DIA is priced at BELOW its current 14-day EMA (see DIA chart down below)
DIA is 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 bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The April 25th Couch Potato published a May expiration DIA bear call spread
On May 9th we suggested immediately closing out the call spread for an approx. $1,000 gain (see tables below)
The April 25th Couch Potato published a May expiration DIA bull put spread
The put spread is approx. $500 in the red (see tables below)
$127 strike price short put delta is -.3697 (63% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY above, we exited the call spread and the risk is prices pulling back and threatening our $127 strike price short put.
May 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 confirmed downtrend we will closely monitor our short put contracts. If the market goes into full blown correction mode we will immediately exit the put spreads, or if prices merely encroach on our short strikes doing a trade adjustment should minimize risk.
The May 6th Couch Potato Final Comment stated "... 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..." Following up on the question about which way prices will break, the updated S&P 500 index weekly Heikin-Ashi chart below appears to provide the answer as prices broke below the recent trading range and are starting to trend downward. As mentioned previously, most of the technical chart indicators are flashing bearish signals. The next question is whether the current price pullback has legs and continues the downward trend or is this head fake with stocks snapping back into another trading range?
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.