Traders are continuing to play a game of 'chicken', making bets based on speculation about possible central bank intervention. Market pundits are guessing on when, what form and if there will be another round of stimulus. Adding to the guessing game is the question of which bank will move first, will it be the U.S. Federal Reserve, European Central Bank, Chinese banking officials, etc. Some analysts are even wondering whether the banks will act in unison. Market fundamentals and technical analysis is taking a subordinate role in influencing the current price action.
The technical picture remains bullish for stocks intermediate term direction. It is typical for the major stock indexes to make multiple attempts before finally breaking clear to new highs. Large cap growth stocks and technology shares are leading the market higher which is considered a good omen for the bulls. In the near term there are definitely potential land mines out there. September is recognized as typically the worst performing month of the year for stocks. Trading volume has been relatively weak and market breath has been negative, this suggests it would not be that difficult for prices to drop. The VIX has been clocking in at extreme low levels not seen since 2007; this is a strong indication that a substantial price decline is due. Also, the American Association of Individual Investors (AAII) survey is flashing extreme bullish sentiment â€“ this reliable contra indicator is pointing to lower prices.
Stocks are signaling price consolidation but even a short term pull back would probably be healthy for a longer term bullish trend. Notice in the S&P 500 Index daily chart below how prices progressed from the May lows. The yellow vertical lines mark each time prices moved to the top of a trading range. As investors cashed in gains, prices consolidated and pulled back to relieve overbought conditions, then buyers stepped in to scoop up cheaper shares and 'squeeze' the shorts to the next higher price level. As confirmed in the chart, this pattern has repeated over and over during the summer and appears to be setting up to repeat again â€“ unless we get a full blow price correction.
SPY Position Update -------------------------------------------------------------
SPY closed at $141.51 on Friday â€“ the September position is approx. at breakeven
The August 13th ouch Potato published a September expiration month SPY bear call spread
The call spread is approx. at breakeven (see tables below)
$144 strike price short call delta is .2748 (73% probability this position will be profitable)
SPY Risk Analysis
We have not had the opportunity to open a put spread, therefore the only risk is prices continuing to creep up and threatening our September $144 strike price short call.
TLT Position Update -------------------------------------------------------------
TLT closed at $124.84 on Friday â€“ the September position is approx $300 in the black
The August 9th Couch Potato published a September expiration TLT put spread
The put spread is approx. $300 in the black (see tables below)
$120 strike price short put delta is -.1854 (81% probability this position will be profitable)
TLT Risk Analysis
We have not yet had the opportunity to open a September call spread and the risk is Treasury notes pulling back and threatening our September $120 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $161.97 on Friday â€“ the September position is approx. $1,800 in the red
The August 13th Couch Potato published a September expiration month GLD bear call spread
The call spread is approx. $1,800 in the red (see tables below)
$163 strike price short call delta is .4503 (55% probability this position will be profitable)
GLD Risk Analysis
We have not had the opportunity to open a September put spread, therefore the risk is gold prices continuing to surge and encroaching on our September $163 strike price short call.
Anytime the market maker is willing to accept a limit price of less than .10 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 week or so prior to the expiration date, we may be able to hold out for a .05 (or less) bid.
If one of our short strikes is penetrated (closing price above a 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.
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.