The September 19th Couch Potato Market Summary mentioned "...Thus far the month of September has not lived up to its reputation as historically the worst month for trading stocks; but we still have a ways to go and may yet get the end-of-summer swoon. Most of the major stock indexes are near resistance levels but have not been able to confirm an upside break-out...Next week we should find if stocks have the juice to finally push above resistance. We have the Federal Reserve meeting, the housing market index, and existing home sales data. Prices are consolidated in a tight trading range, coiled like a tight spring and may be ready to bounce â€“ up or down. Depending on how traders interpret the weeks economic news may determine if we get the next price surge, north or south, that everyone seems to be predicting..."
So much for historical precedence. There are still a few days before the month ends but thus far, the bulls are riding hard in September.
We like to use the analogy of comparing the stock market to a great looking woman who is generally able to get away with whatever she wants, regardless of the circumstances or what people think. Recently the bears had plenty of opportunity to sink stock prices but couldn't, the bulls would squeeze them short every time. The general expectation appeared to be that prices could or would not rise much until after the fall elections. Now we already are hearing talk about the major indexes reaching 52-week highs by year-end. New highs may or may not happen anytime soon, there are still a lot of economic landmines that could negatively influence traders' perception about the market; and as proven over and over most folks are usually wrong about what stocks are getting ready to do. The market currently appears to be heading north, but without warning it can turn on a dime and head south â€“ this is why we trade what we see, not what we think stocks should do.
SPY Position Update
SPY closed $114.82 on Friday â€“ the current October position is approx. $1,700 in the red
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 extremely bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
SPY Bear Call Spread
The September 9th Couch Potato recommended an October expiration month call spread
This spread is approx. $1,700 in the red (see tables below)
$115 strike price short call delta is .4950 (50% probability this position will be profitable)
SPY Risk Analysis
With three weeks until October expiration SPY is already priced close to our $115 strike short call. We will probably need to do a trade adjustment, fortunately there should be plenty of time left before expiration to modify the risk to the October trade.
DIA Position Update
DIA closed at $108.57 on Friday â€“ the current October position is approx. $1,400 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 extremely bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bullish (See DIA chart)
DIA Bear Call Spread
The September 16th Couch Potato recommended an October expiration month DIA call spread
This spread is approx. $1,400 in the red (see tables below)
$115 strike price short call delta is .4646 (54% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above DIA is close to the $109 strike short call and we should expect to do a trade adjustment to minimize the risk to our October position.
The rules for exiting the SPY and DIA bear call credit spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 on the short strike, 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.
If the short strike is penetrated (closing price above the short call) AND after market close, if the delta associated with the short strike 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.
The September 19th Couch Potato Final Comment section mentioned "...The market mood has really not changed much over the past month; everyone is waiting to see if there will be a confirmed price break-out above the recent trading range. The bulls are doing an admirable job squeezing the shorts and pushing prices to near-term resistance..." We may finally have the breakout everyone seems to have been anxiously waiting on. For a long time we have been harping how convenient the summer long trading range has been to our trades. But, we also noted that inevitably this too shall pass and we anticipated that at some point, trade adjustments would be necessary. Almost on queue, the summer ended and stocks broke through the trading range. But we have been here before, and generally it easier to adjust to an upside breakout compared to a market plunge â€“ last summer and fall when stocks broke to the upside we were able to do okay.
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.