The March 11th Couch Potato Market Summary mentioned "... For the first time since the beginning of December the major indexes breached their 50-day SMAs, but prices recovered a bit at the end of the week. Typically, a long-term penetration of resistance or support does not occur the first time prices reach that level. We need to see if subsequent price pullbacks will generate a confirmed penetration of near-term support â€“ until that happens the long term trend is still bullish...Eventually prices will break out from the trading range, the obvious question is when and will it be an up or down move...At this point, all bets are off concerning what the market will do as you can make a solid case either way..."
The end of week recovery notwithstanding, the short term trend is down. As indicated in the charts below, trading volume is considerably higher on down days (bearish distribution). And the shorter term moving averages are trying to cross below the longer averages (death cross). The question is whether the current price pullback has bottomed out at a near term support level which might signal range-bound trading. We have to trade what we see and right now the short term signs suggest more downside potential.
SPY Position Update
SPY closed $127.76 on Friday - the March position ended approx. $2,600 in the black
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is just BELOW its 50-day simple moving average (see SPY chart)
SPY is well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The February 7th Couch Potato published a March expiration month SPY bear call spread
On March 11th the Couch Potato suggested closing out the entire call spread for an approx. $1,600 gain (see tables below)
The February 7th Couch Potato published a March expiration month SPY bull put spread
On March 17th the Couch Potato suggested closing out the entire put spread for an approx. $1,000 gain (see tables below)
DIA Position Update ---------------------------------------------------------------
DIA closed at $118.27 on Friday - the March position is approx. at break-even
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading just BELOW its 20-day Bollinger Band SMA (see DIA chart down below)
DIA is BELOW its 50-day simple moving average (see DIA chart)
DIA is well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is neutral (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The February 22nd Couch Potato published a March expiration month DIA bull put spread
On March 16th the Couch Potato suggested closing out the entire put spread for an approx. $1,100 loss (see tables below)
The March 16th Couch Potato published a March Quarterly expiration month DIA bull put spread (see tables below)
DIA Risk Analysis
As mentioned above we rolled down the put spread down to the March end-of-month quarterly expiration; therefore the risk is that the downtrend resumes and the price threatens our $114 strike price short put.
Anytime the market maker is willing to accept a limit price of less than .05 on one of our DIA short strikes, buy back all the short contracts and sell the long positions on the same spread.
If one of our short strikes is penetrated (closing price 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).
Sometimes timing impacts trade results as much as anything and last week was a good example. The SPY and DIA credit spreads in last weeks Couch Potato displayed a relatively high probability of ending option expiration week with gains. Stocks were trading range-bound and we appeared set up to end the March expiration month on a high note. But the earthquake and tsunami in Japan along with continued Libyan unrest threw traders for a loop and the market reacted violently. Stock prices plunged and our bullish positions converted to large unrealized losses. But, when the March option contracts expired on Friday all of our original trades had max gains. Unfortunately the mini-crash on Wednesday triggered our DIA put spread exit rule and with only a few days left we had to do a trade adjustment to minimize the potential loss. Obviously if we had a couple of more days we could have let it play out a little longer as prices recovered in subsequent days. Another way of looking at it is that we were very lucky â€“ the mini-crash could have happened on expiration day which would have generated large realized losses. Fortunately, we did have enough time to for the SPY price to recover and provide a decent gain.
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.