The major indexes returned to the loss column making last week the seventh down week out of the last eight. The question is when the current downdraft is coming to and end and prices begin some sort of sustained recovery. Notice in the stock charts below how the 20-day SMA (dotted purple line) recently became firm resistance and could actually be used as a quick and dirty downtrend line. With the SPY chart note how the 200-day SMA is on a collusion course with the current price. We always suggesting making trades on what we see, not what we want, but the best bet is probably range bound price action for a few weeks. As you can see in the charts below, prices have basically remained in a trading range for the past few weeks with a small gain last week and small loss this week. And of course in another week is the forth-of-July holiday which typically is a slow period for trading. Unless traders get antsy over some economic news over the next few days it may be slow going as they prepare for vacation. Most money managers probably have already done their 2nd quarter portfolio clean up, plus the expectation that QE2 is ending is already priced into the market.
Stock prices are holding up extremely well considering the continuing stream of less than stellar economic data that has been reported lately. On top of negative economic data is Fed Chairman's Ben Bernacke's admission that he could not explain why we are not experiencing more robust economic recovery. The market reacted negatively to Mr. Bernacke's comments, but a lot of folks expected a harsher price reaction. Maybe market watchers already suspected what the Fed Chairman admitted and it was not that much of a surprise? The most notable abstention from the economic debate on how to stimulate the economy is the President. President Barak Obama's lack of leadership concerning laying a future vision for economic growth really should not be that surprising considering he has does not have experience in business or finance. You can argue that the President has advisors that know business, economic, finance etc. as he constantly expounds on various task force he has set up. But the Presidents' lack of business training may be a major piece that is missing in getting the country back on solid fiscal footing. Similar to a fortune 100 CEO who doesn't need to be an expert in every area of the business, but they should have a basic understanding of what they need from each department and will ask the hard questions to get to a point of being able to articulate a vision and plan to get there.
If someone twisted my arm and insisted on a near-term price direction I would go with the relatively narrow trading range shown in the charts for the past few weeks. Then as earnings season begins to kick into high gear we should get a trend change, either a continuation of the current bearish direction or bullish break through the near-term resistance level. Of course one would need to hedge this bet by recognizing that investor's fixation with the Euro debt crisis or some other headline economic new could incite prices to move drastically sooner than later. At this point all bets are off as confusion and uncertainty reigns supreme.
SPY Position Update
SPY closed at $126.81 on Friday â€“ the overall June position is approx. $1,200 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 down below)
SPY is BELOW its 50-day simple moving average (see SPY chart)
SPY is still 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 bull put spread
On June 15th the Couch Potato suggested closing out the entire call spread for an approx. $2,300 loss (see tables below)
The June 15th Couch Potato published a June End-of-Month Quarterly expiration month SPY bull put spread
This put spread is approx. $1,100 in the black (see tables below)
$125 strike price short put delta is .3183 (68% probability this position will be profitable)
SPY Risk Analysis
The obvious issue is that the June quarterly options expire on Thursday and another weekly loss will probably encroach on the $125 short put.
DIA Position Update --------------------------------------------------------------
DIA closed at $119.20 on Friday - the July position is approx. $400 in the red
DIA is priced BELOW its current 14-day EMA (see DIA chart down below)
DIA is trading 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 still ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is bearish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)
The June 14th Couch Potato published a July expiration month bull put spread
This put spread is approx. $400 in the red (see tables below)
$117 strike price short put delta is .3850 (61% probability this position will be profitable)
DIA Risk Analysis
We have not yet initiated a DIA call spread; therefore the only risk is that a further price correction will threaten the $117 strike price short put.
The SPY quarterly options expire this upcoming Thursday and we will probably need to exit the bull put spread.
As mentioned above, our quarterly SPY bull put spread expires this week and we will need to maintain a tight leash on this position. We did a trade adjustment to mitigate a larger loss and a big price move up or down over the next few days will probably determine whether this plan works out.
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.