As confirmed in the weekly SPY chart below, the stock market has been incredibly resilient, methodically climbing higher off the low from last summer. Considering the recent rash of negative economic news there has every opportunity for prices to come crashing down. March U.S. single-family home prices fell below the 2009 low 'officially' double-dipping. The Chicago PMI dropped sharply and the Conference Board's consumer-confidence index fell in May. The manufacturing and service sector ISM reports were disappointing, new claims for unemployment remain high; the labor department jobs report was sad, and to top it all off, Moody's Investors Service issued a credit warning against U.S. government debt. Obviously, stocks are in a near term downtrend but prices are actually holding up pretty well.
Looking at the daily SPY chart down below, technically, what has to be major concern for the bulls is that we are at three consecutive bearish distribution days (down days on higher volume). Prices recovered a bit the prior week culminating into a bearish hanging man candlestick chart signal â€“ the SPY followed through on the bearish sign with the largest one-day drop in several years. The week ended with an inverted hammer candlestick â€“ considered a bullish reversal sign, plus stocks are nearing oversold levels. But most of the other technical chart signals are bearish (RSI, MACD, volume indicators, etc.) If prices break down any further look out below, as firm support will be breached and we will probably be looking at a 'death-cross' (shorter term moving averages dropping below the longer ones). Next week should tell the tale of whether we can expect stocks to vacillate in a trading range, or we are in the midst of a longer term downtrend.
SPY Position Update
SPY closed $130.42 on Friday - the June position is approx. $600 in the red
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 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 bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bearish (See SPY chart)
The May 16th Couch Potato published a June expiration month put spread
This put spread is approx. $600 in the red (see tables below)
$129 strike price short put delta is .3848 (61% probability this position will be profitable)
SPY Risk Analysis
We have not had the opportunity to initiate a bear call spread, therefore if the current downtrend continues the $129 short put will be at risk.
As with initiating the trade, the decision process for exiting the bull put spread position 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 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.
The most recent Couch Potato Final Comments mentioned setting up a SPY call spread position; this is still the goal if prices recover. The standard June options expire in a few weeks, therefore it is unlikely there will be an opportunity to open a call spread for that expiration date. However, June quarterly options expire at the end of the month and we may get a chance to do a spread for that expiration. Also, since the SPY is currently in a downtrend and approaching our short put, we need to start thinking about our next move in case a trade adjustment is necessary. So far the near-term SPY $130 support level is holding up and as displayed in the chart above, the price is approaching overbought levels with an inverted hammer candlestick chart pattern â€“ technically, this may signify a price reversal. In the next day or so we will know whether this reversal pattern is confirmed.
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.