The charts below suggest that the recent mini-correction may have ended as prices and technical indicators are turning up. Last week traders were able to look past a long list of geopolitical economic worries including high oil prices, problems with Japan's nuclear reactors and fresh developments in Europe's debt crisis. Also, investors were buoyed decent earnings reports (especially in the technology sector) and a government report that said the economy grew at a faster pace than expected at the end of last year.
The March 20th Couch Potato Market Summary mentioned "... The question is whether the current price pullback has bottomed out at a near term support level which might signal range-bound trading..." At this point, the best near-term bet is that we get range-bound trading. Stocks were already in a trading range bound until Mideast turmoil and the crisis in Japan panicked the market, increasing volatility with the corresponding price drop. Traders may have already gotten past the recent international headline news as volatility has subsided and prices are headed back up. As earnings season picks up steam and if traders like what they hear, stocks could easily get back to recent highs. There are still a lot of land mines out there (e.g., the status of QE2, volatile energy prices, Mideast uncertainly). But usually a violent price pullback similar to a few weeks ago is set off by some unforeseen event. Obviously, what we want is the continued range-bound trading that we so love and cherish.
SPY Position Update
SPY closed $131.30 on Friday - the April position is approx. $200 in the black
SPY is 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 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 turning bullish (See SPY chart)
The March 22nd Couch Potato published an April expiration month bear call spread
This call spread is approx. $400 in the red (see tables below)
$134 strike price short call delta is .2773 (72% probability this position will be profitable)
The March 21st Couch Potato published an April expiration month bull put spread
This put spread is approx. $650 in the black (see tables below)
$125 strike price short put delta is -.1495 (85% probability this position will be profitable)
SPY Risk Analysis
Stock prices are turning up and the risk is that the bullish move continues and threatens our $134 strike price short call.
DIA Position Update ---------------------------------------------------------------
DIA closed at $121.96 on Friday - the March position is approx. at break-even
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 down below)
DIA is ABOVE 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 bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is turning bullish (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
This put spread is approx. $1,200 in the black (see tables below)
$114 strike price short put delta is -.001 (99% probability this position will be profitable)
DIA Risk Analysis
March quarterly options expire on Thursday and we expect the DIA put spread to expire worthless â€“ at this point the risk to the short put is not worth incurring commissions and fees to exit the position.
As with initiating the trade, the decision process for exiting our SPY iron condor will be simple:
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.
If one of our short strikes is penetrated (closing price above our short call or 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) 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.
It appears that the stock market has moved past the recent upheaval and is returning to normalcy. In the next day or so, if we can identify an opportunity that fits our ordering rules we may attempt to put on another trade(s). Stocks appear to be in a trading range with relatively low volume and low volatility. However, if we don't see a low-risk trade, then the best option is not to trade.
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.