Market Summary
Expect trading volatility to increase during July option expiration next week. Earning reporting begins in earnest and Fed Chairman Ben Bernanke is scheduled to deliver his semiannual monetary report to Congressional committees on Tuesday and Wednesday. Market watchers will be sitting on the edge of their seats sniffing for a hint of another round of stimulus. In fact, a CNNMoney survey reports that two-thirds of experts polled believe the Fed will consider a third round of quantitative easing (QE3).

The Fed's zero interest rate policy and constant liquidity injections has become a 'drug' to investors as they psychologically are hooked on the need for stimulation. And the Fed has become adept at playing the role of a 'dealer' as indicated by a recent report published by the Federal Reserve Bank of New York. The study was intended to explain why equity investments generate a premium compared to less risky assets such as bonds. What they found out is that the bulk of equity returns for more than a decade are due to actions by the U.S. central bank. The report concluded that theoretically, the S&P 500 Index would be more than 50% lower at the 600 level if the bullish price action resulting from Fed announcements was excluded. It seems that every time investors get desperate and start scratching for a fix, the Fed pulls up to the curb to provide what they want.

Right now the bulls and bears are struggling for control of the market trend with the edge going to the bulls. The major equity indexes dropped back into their trading ranges that began in early June as last week's attempt at an upside breakout failed. But the bulls are resisting the negative news that pushed prices down at the start of the week and are keeping the bears from taking control. When the stocks want to go higher they will, regardless of the market fundamentals or technical analysis. The market appears to be looking for a reason to go higher and any positive news (from the Fed, Europe, etc.) will send stocks upward. How else do you explain J.P. Morgan Chase and the financial sector leading the market to a huge surge on Friday after Chase announced the losses from the so-called 'London Whale' trade was a lot larger than previously announced? Most folks would have expected this news to crash stock prices.

The updated S&P 500 Index P&F chart below confirms that last week's upside price breakout failed and started a new downtrend (column of O's on the far right). But don't be surprised if we get a trend reversal next week.

SPY Position Update
SPY closed at $135.75 on Friday – the July position is approx. $2,000 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 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) turned neutral (dee SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (see SPY chart)

The June 27th Couch Potato published a July expiration SPY bear call spread
The call spread is approx. $1,000 in the black (see tables below)
$138 strike price short call delta is .1643 (84% probability this position will be profitable)

The June 25th Couch Potato published a July expiration SPY bull put spread
On July 5th we suggested closing out the put spread for an approx. $900 gain (see tables below)

SPY Risk Analysis
July options expire this Friday and the risk is the SPY price moving higher and threatening the $138 strike price short call prior to expiration.

TLT Position Update ---------------------------------------------------------
TLT closed at $129.17 on Friday – the July position is approx $1,600 in the black
TLT is priced ABOVE 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 bullish (see TLT chart)
Moving Average Convergence/Divergence (MACD) is neutral (see TLT chart)

The June 21st Couch Potato published a July expiration month TLT bear call spread
The call spread is approx. $500 in the black (see tables below)
$131 strike price short call delta is .2287 (78% probability this position will be profitable)

The June 21st Couch Potato published a July expiration month TLT bull put spread
The put spread is approx. $1,000 in the black (see tables below)
$122 strike price short put delta is -.0190 (98% probability this position will be profitable)

TLT Risk Analysis
Traders moved funds into treasury bonds and drove the TLT price higher as equities pulled back last week. This trend threatens the $131 strike price short call prior to expiration on Friday.

GLD Position Update ---------------------------------------------------------
GLD closed at $154.14 on Friday – the July position is approx. $900 in the black
GLD is priced ABOVE its current 14-day EMA (see GLD chart down below)
GLD is trading at its 20-day Bollinger Band SMA (see GLD chart)
GLD is priced close to its 50-day simple moving average (see GLD chart)
GLD is well BELOW its 200-day simple moving average (see GLD chart)
Relative Strength Indicator (RSI) is neutral (see GLD chart)
Moving Average Convergence/Divergence (MACD) is neutral (see GLD chart)

The June 27th Couch Potato published a July expiration GLD put spread
The put spread is approx. $900 in the black (see tables below)
$145 strike price short put delta is -.0387(96% probability this position will be profitable)

GLD Risk Analysis
We didn't execute a GLD call spread, the only risk is gold prices crashing prior to Friday option expiration and threatening the $145 strike price short put.

Exit Plan
As mentioned above July options expire on Friday and we will be doing trade alerts to exit the July positions. In particular, we should keep a tight reign on the SPY and TLT short calls positions as they are the most likely to be threatened.

Final Comment
The July 8th Couch Potato Final Comment mentioned "... the index finally poked through the top of the recent trading range and trended higher...will we get upside follow through or will the recent high prices prove to be just a false breakout?..." The updated S&P 500 Index Heikin-Ashi chart below confirms the false breakout and recent downtrend. Remember that Heikin-Ashi charts are designed to smooth out market fluctuations and better identify trends.

Note that the S&P has pulled back to the yellow uptrend line on the chart below. Based on recent action the price is already starting to bounce back up to recent highs. If prices don't follow through on Friday's surge and drop below the uptrend line that would suggest the bears are starting to exert control.

Happy Trading

Gregory Clay

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.