We appear to be in a new ball game where the Federal Reserve has blatantly signaled it will do whatever is necessary to prop up the stock market. In the past it was assumed by many pundits that the fed is implicitly supporting the market though their primary agenda is managing the economy. Now the fed's real primary agenda has to be called into question, but they have explicitly indicated they will dump enough cheap money in the market to push it higher. This weekend, OptionInvestor writer Jim Brown published several great articles detailing the Federal Reserve Q2 plan and the likely impact this might have the market and investors.
This new world order dictated by the Federal Reserve is complicating the life of technical analyst. Take a gander at the SPY and DIA charts below and notice how extremely overbought are the RSI's (Relative Strength Indicator), plus the prices are way above the upper level of the Bollinger Bands. Normally this would be considered a high probability sign of a price pullback. But what may be happening is that the technical indicators are being corrected by time, meaning that as prices continue to rise, the moving averages and other chart signals are being pulled along to catch up with the price, just like a magnet. Ultimately, RSI, MACD, Bollinger Bands, Stochastic, etc. are basically mathematical calculations technical analyst use to determine probabilities. But the actual price is the final arbiter of whether a trade is good or bad. At the most basic level the stock market is like any other market, supply and demand rules. There has been some discussion about the stock prices not going much higher without retail participation, but the market does not care where the money comes from. Whether it is retail investors, companies sitting on hordes of cash, the feds cheap money, it really does not matter, as long this demand (represented by the supply of funds) finds it way to the market prices will go higher. As always, eventually the bill will come due and we will have to pay the piper, but the fed has signaled that point is a ways off.
SPY Position Update
SPY closed $122.72 on Friday â€“ the current November position is approx. $1,200 in the red
SPY priced 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 also 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 October 21st Couch Potato recommended a November expiration month call spread
This spread is approx. $2,200 in the red (see tables below)
$122 strike price short call delta is .5834 (42% probability this position will be profitable)
SPY Bull Put Spread
The October 21st Couch Potato recommended a November expiration month put spread
This spread is approx. $1,000 in the black (see tables below)
$113 strike price short put delta is -.0351 (96% probability this position will be profitable)
SPY Risk Analysis
Thursday's Fed inspired price gap pushed the SPY price above the $122 strike short call. We should plan on doing a trade adjustment, but we don't want to move to soon. There is sufficient time to wait on the recent upward spurt to subside so that we can figure out the proper adjustment.
DIA Position Update
DIA closed at $111.31 on Friday â€“ the November position is approx. $100 in the red
DIA is priced 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 also 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 October 25th Couch Potato recommended a November expiration month call spread
This spread is approx. $600 in the red (see tables below)
$114 strike price short call delta is .5692 (43% probability this position will be profitable)
DIA Bull Put Spread
The October 28th Couch Potato recommended a November expiration month put spread (see tables below)
This spread is approx. $460 in the black (see tables below)
$107 strike price short put delta is -.0445 (96% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above the DIA price has gapped above the $114 strike price short call. Market behavior over the next few days will let us know how we should do a trade adjustment.
Thursday's stock price surge rocketed prices above our SPY and DIA short call strikes. Also, the exit rule is triggered for exiting our SPY and DIA put spreads. Over the next few days we should plan on closing out the put spreads AND will evaluate the optimum trade adjustment for the call spreads.
The October 31st Couch Potato Final Comment mentioned "...Fortunately we did a good job of letting the trades come to us and we weren't hurt much by not always being fully hedged. We don't want to press our luck and since the market is cooperating we need to take advantage of the opportunity to put on both sides of the trade. ..." Last week is exhibit A for the value hedging a trade. Obviously, if we had not put on the call and put spread side of our iron condor, last weeks price surge would have us in a deeper hole. At this point our position is manageable and unless something extraordinary happens and volatility accelerates we should 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.