The September 16th Couch Potato mentioned "...From a trading perspective the trend is up and as has been the case all summer, whenever prices do pull back a bit, buyers step in to bid shares back up... The massive rally over the past week happened so fast that it pushed most of the major equity indexes into overbought territory. The best bet is probably for prices to stabilize and remain flat long enough for overbought conditions to subside, plus traders usually cash in some gains after such a big move. Until we get a bearish distribution day (lower prices on higher than average volume) it will be difficult to justify expecting a serious price pullback or downtrend. In the near term expect support levels to hold firm and prices to trend higher...
It has been noted that even when the market is overextended, overbought rallies can continuing indefinitely. Most of the technical indicators have been signaling a price pullback for several weeks. The volatility indexes (VIX), Relative Strength Indicator (RSI), Moving Average Convergence/Divergence (MACD), American Association of Individual Investors (AAII) investor survey, et al suggest at least a short term downtrend. Prior to the QE3 announcement stocks certainly appeared ready to turn over as September is normally a bad month for stocks, volume was light, the market was overbought on the daily charts, economic data was bad, etc. Then the Fed stepped in and opened the vault (catching everyone off guard). Bonds crashed, stocks surged, and gold exploded, shorts got squeezed and had to chase prices higher driving up volume. Prices should hold up for another week as the 3rd quarter ends and we can expect money managers to do some 'window dressing' to dump underperformers and add winners to their list of stock holdings. The S&P 500 index weekly chart directly below is sending a strong sign that stocks might finally be ready to turn over. The yellow vertical lines in the chart mark each point on the weekly chart over the past few years where the RSI displayed overbought conditions. As you can see, each and every time, prices pulled back after reaching this level.
Clearly, the current market rally is liquidity driven versus a move on strong economics. Most of the major indexes have hit multi year highs and in fact the DOW is up at a 30% annualized rate the past three months - this probably won't continue much longer. You don't want to fight the fed, but the excitement over the FMOC QE3 announcement is already beginning to dissipate and economic data will return to the forefront. Apparently, Ben Bernanke and the gang are willing to let the banks and financial institutions back the truck up to the Fed Vault to prevent a full blown market crash. But a near term top is a good bet with price consolidation and as mentioned above, over the past few years stocks have always pulled back at this overbought level on the weekly S&P 500 chart.
SPY Position Update -------------------------------------------------------------
SPY closed at $145.87 on Friday â€“ the September position closed approx. $2,700 in the red
The August 13th ouch Potato published a September expiration month SPY bear call spread
On September 19th we suggested closing out the call spread for an approx. $2,700 loss (see tables below)
SPY Risk Analysis
As indicated above we closed out the SPY call spread prior to September expiration and there is no more money on the table for this trade.
TLT Position Update -------------------------------------------------------------
TLT closed at $121.55 on Friday â€“ the September position closed approx $1,100 in the black
The August 9th Couch Potato published a September expiration TLT put spread
On September 20th we suggested letting the put spread expire worthless for an approx. $1,100 gain (see tables below)
The September 20th Couch Potato published an October expiration TLT put spread (see tables below)
TLT Risk Analysis
We have not had the opportunity to initiate a TLT call spread, therefore the only risk is Treasury note prices crashing further and threatening the October $117 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $171.96 on Friday â€“ the September position is approx. $3,300 in the red
The August 13th Couch Potato published a September expiration month GLD bear call spread
On September 12th we published a call spread trade adjustment rolling the $163 short call out to the September quarterly end-of-month expiration $171 strike price and increasing the number of contracts
The total call spread position is $5,500 in the red (see tables below)
$171 strike price short call delta is .6083 (39% probability this position will be profitable)
The September 12th Couch Potato published a September Quarterly end-of-month expiration month GLD bull put spread
The put spread is approx. $2,200 in the black (see tables below)
$120 strike price short put delta is -.0169 (98% probability this position will be profitable)
The September 20th Couch Potato published an October expiration GLD iron condor (see tables below)
GLD Risk Analysis
As confirmed in the GLD chart above, gold is extremely overbought and if prices don't pull back we will cash out of September end-of-month adjusted call spread.
As discussed above, over the next few days we will need to decide on an exit strategy for the GLD quarterly call spread prior to option expiration on Friday.
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.