The June 10th Couch Potato Market Summary mentioned "...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...recovered nicely...Look at the S&P 500 Index Point & Figure (P&F) chart below ...The chart below confirms that the longer term uptrend is still intact ...It should not be a surprise if stocks get back to recent highs over the next month or so...at this point the CBOE put/call ratio numbers support higher near term prices...retail investors are a lot more bearish compared to the bullish and neutral categories..."
Basically, the analysis above still appears to be valid as the current market price action is being driven by the latest global economic headlines. Below is the updated S&P 500 Index P&F chart which is now flashing a buy signal (column of X's on the far right moving higher than previous column X's). Also, the CBOE put/call ratio numbers have moved to neutral as is the latest AAII sentiment survey is showing retail investors are now equally bullish and bearish (they were predominantly bearish last week).
We have discussed this in recent articles, but it is probably worth noting again how the S&P 500 Index is setting up compared to last year. On the S&P 500 Index daily chart below, the yellow vertical line on the left marks June of last year and the yellow line on the right is this year. It is uncanny how similar the current chart signals resemble how the charts looked at the beginning of last summer. You can see how at this current time last year the RSI (relative strength indicator) and MACD (moving average convergence/divergence) technical chart signals were pretty close to where they are now. And you may recall that at this time last year stocks experienced daily triple digit price moves which is what we are now getting. The obvious question is whether the market will crash later on in the summer like last year (and the year before).
Similar to this time last year and the year before, uncertainty is dictating price movement. U.S businesses are concerned about how the European debt crisis and Asian economic slowdown will impact operating results. Add the uncertainty about whether a divided U.S. Congress will hold off large tax increases and draconian spending cuts scheduled to take place next year. And of course don't forget the pending Supreme Court healthcare legislation decision and how it could potentially create even more confusion about how much companies need to spend on health cost. The result is that not many people expect businesses to add as many new employees this year or make capital investments typically associated with this stage of an economic recovery. The situation is almost like catch-22, companies refuse to pick up the pace of hiring due to economic uncertainty, yet the lack of resource investments equates to reduced demand, but businesses won't hire until demand increases. After the elections this fall, depending on the result, there may be some semblance of clarity, however until we get to that point it is reasonable to expect the stock market to gyrate in spurts in both directions based on global economic events.
SPY Position Update
SPY closed at $134.14 on Friday â€“ the June position is 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 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 neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is turning up (See SPY chart)
The May 15th Couch Potato published a June expiration SPY bull put spread
On June 14th we suggested letting the put spread expire worthless for an approx. $1,200 gain (see tables below)
The June 6th Couch Potato published a June Quarterly end-of-month expiration SPY bear call spread
The call spread is approx. $1,100 in the red (see tables below)
$136 strike price short call delta is .3733 (63% probability this position will be profitable)
The June 6th Couch Potato published a June Quarterly end-of-month expiration SPY bull put spread
The put spread is approx. $700 in the black (see tables below)
$125 strike price short put delta is -.1060 (89% probability this position will be profitable)
SPY Risk Analysis
The S&P 500 Index is turning bullish and the risk is prices continuing higher and threatening the $136 strike price short call.
TLT Position Update ---------------------------------------------------------
TLT closed at $126.40 on Friday â€“ the June position closed approx $900 in the black
The May 22nd Couch Potato published a June expiration TLT bear call spread
On June 11th we suggested closing out the call spread for an approx. $900 gain (see tables below)
TLT Risk Analysis
As mentioned above we closed out the TLT position prior to expiration
GLD Position Update ---------------------------------------------------------
GLD closed at $157.87 on Friday â€“ the June position is approx. $750 in the black
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 ABOVE 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 neutral (See TLT chart)
The June 13th Couch Potato published a June Quarterly end-of-month expiration GLD bear call spread.
The June 6th Couch Potato published a June Quarterly end-of-month expiration GLD bull put spread.
The put spread is approx. $750 in the black (see tables below)
$148 strike price short put delta is -.1005 (90% probability this position will be profitable)
GLD Risk Analysis
The GLD chart above indicates that gold has trended higher the past week, however until prices penetrate near term resistance the most probable risk is downward price pressure threatening the $148 strike price short put.
As with initiating the trade, the decision process for exiting our SPY and GLD credit spreads 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 these positions 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 associated with closing out each side of the credit spreads is dependent on following our Exit Rules described above.
The June 10th Couch Potato Final Comment mentioned "... it appears the market may have bottomed during the recent correction and stocks are starting an uptrend...Technical signals support a trend change to a probable range-bound trading environment...Unless an unexpected negative event happens, we can expect that credit spreads should be easier to manage going forward..." The S&P 500 Index weekly Heikin-Ashi chart below indicates that stocks may in fact have turned up off the recent correction lows. The Market Summary section above discussed why one should expect a trend change to range-bound trading. Volatility levels are relatively subdued, therefore unless market sentiment changes, trading credit spreads should be more manageable in the near term.
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.