The bulls staged a dramatic comeback late Friday, erasing large mid-day losses in most of the major indexes and squeezing the shorts. The late day reversal put the DOW and S&P slightly higher for the week and marginally up for the year. The bulls appear to have more energy at this point, but the question is what will be the motivation to drive prices higher? Most of the S&P 500 companies have already reported earnings, the mostly positive reports is what has juiced up stocks for the past few weeks. The recent tepid economic reports along with uncertainty in Washington appears to be keeping a lid on the near-tern upside. Typically, trading slows during the summer months, and the relatively low volume is helping to constrain a potential break-out.
The Federal Reserve meets next week and the market should be relatively quiet until big Ben makes his pronouncements. The major indexes are at their short term resistance levels, but until we get a confirmed break-out, we should expect that stocks will continue to trade range-bound. As we have been discussing, the ideal scenario for us is for stock prices to remain in a trading range.
SPY Position Update
SPY closed $112.39 on Friday â€“ the current August position is approx. $500 in the black
SPY is 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 ABOVE its 50-day simple moving average (see SPY chart)
SPY is priced ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
SPY Bear Call Spread
The July 14th Couch Potato recommended an August expiration month call spread
This spread is approx. $500 in the black (see tables below)
$115 strike price short call delta is .2442 (76% probability this position will be profitable)
SPY Risk Analysis
Since we have not had an opportunity to open a put spread, the only risk is prices continuing to rise and threatening our $115 strike price short call.
DIA Position Update
DIA closed at $106.69 on Friday â€“ the August position is approx. $500 in the red
DIA is ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is priced ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
DIA Bear Call Spread
The July 8th Couch Potato recommended an August expiration month call spread
This spread is approx. $1,700 in the red (see tables below)
$106 strike price short call delta is .5784 (42% probability this position will be profitable)
DIA Bull Put Spread
The July 19th Couch Potato recommended an August expiration month put spread
This spread is approx. $1,200 in the black (see tables below)
$96 strike price short put delta is -.0295 (97% probability this position will be profitable)
DIA Risk Analysis
The DIA broke-out above its two-month trading range and has settled above our $106 strike price short call (we expect to do a trade adjustment to minimize potential losses). We are trying to get a feel for if the current short-term upward momentum has stalled. After developing a certain level of confidence that the prices might be at a short-term top, this will let us know the optimum adjustment.
The rules for exiting the SPY and DIA credit spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 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 few days prior to the expiration date, we may be able to hold out for a .05 bid. The DIA put spread is currently at our exit price and we will probably close out this position within a few days.
If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, 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.
The market mood really has not changed much over the past few weeks as we still do not have a solid price break-out above the recent trading range. The bulls are doing their best to hold up stock prices, but now that earnings season is ending, the question is what will be the impetus to drive stocks higher?
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.