The December 30th Couch Potato opined "... the market still appears to be desperately looking for a reason to head higher. The best bet is probably range-bound trading. There is not going to be a 'grand bargain' on the fiscal cliff negotiation. Whatever budget settlement the White and Congress decide will probably provide a quick boost to the market..."
The Couch Potato commentary also mentioned "...S&P index P&F chart signaling the index remains below its near-term downtrend (red) line...technically, until there is confirmed break above the downtrend (red) line, the index remains in a near-term downtrend..."
The update chart below confirms that last week's price action generated a confirmed breakout through the downtrend line and now equities are in a new uptrend (see blue line on far right). The article also suggested "... this may turn to be a 'sell the news' event in the longer term..."
Now the question is whether the current bullish move continues higher or will the current level act as resistance for a range-bound trading environment?
The December 30th Couch Potato stated "... the VIX is still soaring higher as it is not been at this level since the beginning of last summer..." As seen in the updated chart below, over a matter of a few days the Volatility Index went from a high of 23.23 to 14.38 â€“ this type of action is unprecedented. Certainly the VIX was overbought and a pullback was due, but the bottom falling out like it did may suggest that investors have become overly complacent. Last week's move in the VIX would tend to support the analysis that range-bound trading is a high probability.
The Couch Potato also said "...over the past week or so investors have been playing it safe by dumping stocks they don't want in their year-end inventory and parking the money in treasury bonds..." As discussed above, the drop in the VIX indicates that traders developed an appetite for risk. The updated chart below shows that traders rapidly dumped bonds and precious metals as they bid up equity prices. Contributing to bonds demise were comments in Fed meeting minutes that were released last week. Minutes released from the Federal Reserveâ€™s December meeting had several central bankers seeing either a slowdown or outright halt to Fed bond purchases before the end of 2013. This would probably lead to a rise in interest and corresponding drop in bond prices.
SPY Position Update ---------------------------------------------------------------
SPY closed at $146.37 on Friday â€“ the January position is approx. $1,000 in the black
The January 2nd Couch Potato published a January expiration SPY call spread (see table below)
The December 27th Couch Potato published a January expiration SPY bull put spread
The put spread is approx. $1,000 in the black (see tables below)
$135 strike price short put delta is -.0206 (98% probability this position will be profitable)
SPY Risk Analysis
The S&P500 index started the year by reversing the downtrend and surging back up towards recent highs. If the upside move continues the $148 strike price short call with be at risk.
TLT Position Update ---------------------------------------------------------------
TLT closed at $118.40 on Friday â€“ the January position is approx. $2,800 in the red
The December 16th Couch Potato published a January expiration TLT put spread
The put spread is approx. $2,800 in the red (see tables below)
$120 strike price short put delta is -.6906 (31% probability this position will be profitable)
TLT Risk Analysis
Treasury bonds started the year with a price crash down to the long term support level established in the middle of September. The $120 strike price short put exit rule is triggered and unless treasury bonds bounce back similar to September, we will look for an opportunity to adjust the trade.
GLD Position Update --------------------------------------------------------------
GLD closed at $160.44 on Friday â€“ the January position is approx. at breakeven
The December 17th Couch Potato set up a January expiration GLD bull put spread
The put spread is approx. at breakeven (see tables below)
$158 strike price short put delta is -.2714 (73% probability this position will be profitable)
GLD Risk Analysis
We did not have the opportunity to setup a January GLD call spread, therefore the risk is gold prices continuing to crash and encroaching on our $158 strike price short put.
As mentioned above, the GLD put spread exit rule is triggered and very soon we will probably need to make a decision about adjusting the trade.
Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, we can 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 bid or lower.
If one of our short strikes is penetrated (closing price above 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.