Market Summary
Traders may be beginning to lose their appetite for risk. The Dow Jones Industrial Average led the market last week with a 52-week high on Friday. Conversely, the other major indexes including the S&P 500, S&P MidCap 400, Russell 2000 and Nasdaq 100 hit their new highs at the beginning of the week and ended on a down note. Most notably the Russell 2000 suffered its biggest weekly loss since early August. Until this week the small cap indexes had led the recent charge with higher percentage gains compared to the large caps. Also, volatility as measured by the volatility index (VIX) has been bouncing off established support levels. As displayed in the chart below the VIX and stock prices normally move in opposite directions. The VIX is trying to climb while most of the major stock indexes are in overbought territory. If in fact traders are beginning to get nervous about a correction, then you would expect funds to rotate out of small cap stocks into larger, more conservative shares. We should find out pretty quick whether the past week was an aberration or a true change in sentiment.

DIA Position Update
DIA closed $118.46 on Friday
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 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 neutral (See DIA chart)

The January 20th Couch Potato published a February expiration month iron condor trade. The put spread side of the trade was not available, but we did execute the call spread (see table below). Our ordering rules dictate a minimum premium credit on both sides of the iron condor (call spread and put spread). Sometimes it is easier to comply with this rule by entering separates order for each side (versus one order for all four legs). You can get the total credit amount with a singe order, but the allocation between the call and put spreads might not provide the hedge that you expect (e.g. you may get .77 credit on the call spread, but only .45 on the put spread). This actually might be acceptable if you believe prices are not pulling back and you probably won't get a better deal. But if there are indications that prices might drop then by waiting you not only should get a better credit amount on the put spread, but you have avoided a big loss in the event of a full blown correction.

DIA Risk Analysis
Stocks are overbought and upward momentum is slowing, but the trend is still bullish until we get a change. We need a price pullback so that we can do the put spread to hedge our position. Until prices correct a little bit the risk is that prices will continue to advance toward our $120 short call.

Exit Plan
The rules for exiting the DIA call spread are:

Anytime the market maker is willing to accept a limit price of less than .11 on our 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 our short strike is penetrated (closing price above our 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 higher short strike price.

Final Comment
Generally we publish an opening trade based on closing prices that day. When attempting to execute the trade the following day we usually never, ever trade within first hour of trading. Overnight futures transactions, plus activity in the Asian and European markets usually influence traders' sentiment when Wall Street opens each day. Yesterday's closing price might not be a good deal depending on what happened overnight. Most of the time after the first hour you can get a pretty good idea which direction prices will flow. On Friday after the initial hour, traders indicated bullishness for large caps. The intraday bullish move eliminated the opportunity to do a put spread that fit our trading rules. Note in the 30 minute chart below how the price gapped at the open and established a resistance level after the first hour or so – we then executed the call spread. If the DIA would have continued to climb, we would have waited for a top to develop before doing the trade. Obviously, we got a better price versus using the prior day's closing price. If the market had sunk at the open, then we would have waited on a bottom to form and did the put spread instead.

An alternative to the fun of watching stock charts and monitoring prices all day is to wait until the last hour of trading to execute the trade. The final 60 to 90 minutes is good time because usually the market has done what it is going to do that day and you can avoid end of day reversals that have been happening lately. No strategy is foolproof and ensures getting the best price of the day, but unless you are daytrading, executing trades within the first hour of trading is usually the least desirable alternative.

Gregory Clay

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.