The mood on Wall Street turned sour this week after Federal Reserve Bank of Philadelphia President Charles Plosser suggested that the central bank's latest round of monetary easing was unlikely to help growth. "We are unlikely to see much benefit to growth or to employment from further asset purchases," Plosser said in a prepared speech. Economic data scheduled to be announced this week could set the stage for stocks to advance to the next level, or confirm a price pullback. Spain is expected to announce a budget proposal that may be the preamble to a government bailout request. The bulls are hoping this will be the first step toward getting the financial house of the Euro zone's fourth largest economy in order and clear some of the uncertainty around the European debt crisis. Federal Reserve Chairman Ben Bernanke is scheduled to speak on Monday and the minutes of the latest FOMC meeting are set for release later in the week. Also on Monday the Institute for Supply Management (ISM) is scheduled to release the September index of manufacturing activity and its service-sector Purchasing Managers Index (PMI) on Wednesday. The September non-farm payroll report due on Friday will get increased scrutiny because is will come right after Wednesday's presidential debate.
The September 16th Couch Potato mentioned "... 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... In the S&P 500 index daily chart below look at the blue circle at the bottom right. You can see that stocks posted the first bearish distribution day in months and was followed up in subsequent days by higher volume on lower prices. The major indexes have avoided a sustained price downturn all summer but stocks have pulled back a bit in response to extended overbought conditions. The best bet is to expect prices to settle into a trading range with resistance at the recent 52-week highs.
The September 23rd Couch Potato mentioned "...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...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..." In the updated weekly chart below it appears the weekly overbought indicator is holding true to form as the S&P 500 index suffered its worst weekly percentage decline since June.
Finally the S&P500 index P&F chart below confirms a new downtrend (column of 'O's on the far right). Even gold prices, which have been the hottest asset class over the past month, turned down this week. Chinese stimulus reports awakened the inflation hawks who bid up gold prices on Thursday, but there was no follow through as gold trended lower the next day. Until the P&F chart post an 'X' to signify a new uptrend, the near term trend is down.
TLT Position Update -------------------------------------------------------------
TLT closed at $124.22 on Friday â€“ the October position is approx $800 in the black
The September 20th Couch Potato published an October expiration TLT put spread
The put spread is approx. $800 in the black (see tables below)
$120 strike price short put delta is -.0714 (93% probability this position will be profitable)
TLT Risk Analysis
We have not had the opportunity to initiate a TLT call spread; therefore the only risk is crashing Treasury note prices threatening the October $117 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $171.96 on Friday â€“ the September position closed approx. $1,000 in the black
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
A September 27th trade alert suggested closing out the short call contracts prior to expiration the next day (see tables below)
As confirmed in the GLD hourly chart above, gold prices dropped during expiration week which decreased the assignment risk on our short strike. Chinese stimulus rumors fueled a price recovery the day before expiration. But GLD price pulled back on expiration day and in the afternoon we basically were able to exit the trade for intrinsic value as time value evaporated.
The September 12th Couch Potato published a September Quarterly end-of-month expiration month GLD bull put spread as gold opened lower the next morning
On September 27th we suggested letting the put spread expire worthless for an approx. $2,200 gain (see tables below)
The September 20th Couch Potato published an October expiration GLD bear call spread
The call spread is approx. $300 in the black (see tables below)
$179 strike price short call delta is .1544 (85% probability this position will be profitable)
The September 20th Couch Potato published an October expiration GLD put spread
The put spread is approx. $500 in the black (see tables below)
$165 strike price short put delta is -.1388 (86% probability this position will be profitable)
GLD Risk Analysis
Gold has been overbought most of the month of September, but until we get a confirmed downtrend the risk is GLD setting 52-week highs and threatening our $179 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.