Stocks closed out the best week of the year on Friday, this suggests that the recent correction has bottomed out and we should probably expect range-bound trading in the near term. Of course investors continue to be fixated with the European debt melodrama which is hanging over the market like a dark cloud. The market has recovered recently as traders appear to have priced in issues with U.S. economic growth, slowing demand in China and Euro debt. Most of the major stock indexes briefly dropped below their 200-day SMA's and recovered nicely. Basically, the 200-day SMA's held as firm support and unless there is surprising news, there doesn't appear to be any follow-through to the downside. Look at the S&P 500 Index Point & Figure (P&F) chart below and notice the last column of 'O's on the far right (signifies a downtrend.) Note how the downtrend basically ended at the longer term uptrend (blue) line and started the recent uptrend (column of 'X's). The chart below confirms that the longer term uptrend is still intact as it was inevitable that stocks would need to correct a bit to relieve overbought conditions generated from the torrid first quarter. It should not be a surprise if stocks get back to recent highs over the next month or so.
The CBOE table of Put/Call ratios below signals that money managers have gravitated from making predominately bearish bets to more bullish trades. For most of the past few weeks the ratios pointed to high put volume. As confirmed below, call contracts now exceed puts and are trending even higher. As the ratio numbers get smaller this will signal even more of a move toward call contracts (bullish bet). If the ratio gets low enough the excessive calls contracts are considered a contra indicator and a sign of a market top. However, at this point the CBOE put/call ratio numbers support higher near term prices.
Another indicator that supports higher near-term stock prices is the American Association of Individual Investor (AAII) weekly sentiment survey below. Actually, the AAII survey is considered a contra-indicator as many technical analysts believe the results reflect market extremes. As shown in the table below, retail investors are a lot more bearish compared to the bullish and neutral categories. Technical analysts interpret the bearish reading as a signal of a market bottom and expect movement the other way. Retail investors tend to be 'late to the game' and their bearish sentiment suggest they are selling shares to money managers who have recently bid up prices and pushed the market higher.
SPY Position Update
SPY closed at $133.10 on Friday â€“ the June position is approx. $1,000 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 BELOW its 50-day simple moving average (see SPY chart)
SPY is just 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 up (See SPY chart)
The June 6th Couch Potato published a June Quarterly end-of-month expiration SPY iron condor (see tables below)
The May 15th Couch Potato published a June expiration SPY bull put spread
The put spread is approx. $1,000 in the black (see tables below)
$126 strike price short put delta is -.0569 (96% probability this position will be profitable)
SPY Risk Analysis
The June $126 strike price short put expires on Friday. The risk is another market crash returning the S&P 500 to recent lows and threatening the short put.
TLT Position Update ---------------------------------------------------------
TLT closed at $125.21 on Friday â€“ the June position is approx $500 in the black
TLT is priced at its current 14-day EMA (see TLT chart down below)
TLT is trading ABOVE its 20-day Bollinger Band SMA (see TLT chart)
TLT is priced ABOVE its 50-day simple moving average (see TLT chart)
TLT is ABOVE its 200-day simple moving average (see TLT chart)
Relative Strength Indicator (RSI) is neutral (See TLT chart)
Moving Average Convergence/Divergence (MACD) is turning down (See TLT chart)
The May 22nd Couch Potato published a June expiration TLT bear call spread.
The call spread is approx. $500 in the black (see tables below)
$126 strike price short put delta is .2052 (79% probability this position will be profitable)
TLT Risk Analysis
The June $128 strike price short call expires on Friday. The risk is bond prices pushing back up to recent highs and threatening our short call.
GLD Position Update ---------------------------------------------------------
GLD closed at $154.73 on Friday
GLD is priced at its current 14-day EMA (see TLT chart down below)
GLD is trading ABOVE its 20-day Bollinger Band SMA (see TLT chart)
GLD is priced BELOW its 50-day simple moving average (see TLT chart)
GLD is well BELOW its 200-day simple moving average (see TLT chart)
Relative Strength Indicator (RSI) is neutral (See TLT chart)
Moving Average Convergence/Divergence (MACD) is turning neutral (See TLT chart)
The June 6th Couch Potato published a June Quarterly end-of-month expiration GLD bull put spread.
GLD Risk Analysis
The June 6th article actually published both call and put spreads. However, the call spread was not available as gold shares gapped down the next morning and never recovered. Also, the article suggested executing the put spread at lower strikes if gold prices dropped the next day. The risk is gold dropping further and threatening our $148 strike price short put.
June monthly options expire on Friday and we expect to exit our SPY put spread and TLT call spread. In particular, the TLT short call exit rule was triggered a week ago before bond prices pulled back. We plan on taking advantage of the opportunity to exit the $128 TLT short call as it is not worth the risk of bonds rising again.
The SPY $126 short put appears to be in good shape as the S&P 500 index 200-day SMA held as firm support. However, we should maintain a short leash on the SPY put spread and be prepared to exit as the recent large daily price moves could send the market back down in a flash.
The June 3rd Couch Potato Final Comment mentioned "... the stock market tends to move in the direction that inflicts the most pain on the majority of the people. All market trends change and the current trend will probably change when it gets the highest number of folks committed to the bearish move â€“ this could happen next week or next month, but it is going to occur..." As discussed in this article, from a technical analysis perspective it appears the market may have bottomed during the recent correction and stocks are starting an uptrend. As stock prices crashed over the past month or so, it was a more challenging environment for credit spreads. However, as shown in the Volatility Index (VIX) chart below, implied volatility has started coming down and as evidenced in the 'SPY Position Update' above we were finally able to execute both sides of an iron condor position. Technical signals support a trend change to a probable range-bound trading environment and traders are starting to react to positive pronouncements and discount negative news. Unless an unexpected negative event happens, we can expect that credit spreads should be easier to manage going forward.
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.