The December 18th Couch Potato mentioned "... note in SPY daily chart... how it is currently priced close to its 200-day SMA which is acting like a magnet... The S&P 500 index is down approx. 3% for the year and would need to rise to around 1,257 to finish higher for the year. With two weeks left in the trading year we might see a Santa Claus rally to the upside as some money managers might attempt to push the prices up so that the market at least ends the year flat. Trading volume is typically lighter this time of year as traders start checking out for year vacation. Since there will be fewer participants and less trading volume, it becomes easier for traders to push to push stocks higher..."
As expected we got our Santa Clause rally as stocks finished with the best weekly gain in several months and the S&P 500 turned positive for the year - though Friday's final bullish push was the lowest volume for a full day of trading this year. The major indexes have all moved above their 200- SMA's even though the big money is sitting on the sidelines. Stocks would need to make a confirmed break above the October highs to establish a break out of the recent trading range.
Technically, the so called Santa Claus rally 'officially' began on Friday and ends on Wednesday January 4th. The weak trading hands have probably washed out of the market at this point leaving the stronger investors to bid up prices. Unless we get some unforeseen negative macroeconomic headline news, we should expect stock prices to hold up through the year end. The fund managers who are currently underinvested in stocks and in danger of underperforming the market will be motivated to jump back into the market in a last-ditch effort to dress up their returns. Institutional investors do not want to under perform and be in the red when the benchmark indexes are in the black for the year. Note in the VIX chart down below how the fear indicator is at the lowest level since July. Also, take a look at the SPY chart and notice how the Bollinger bands beginning to contract. This suggests that the combination of relatively positive recent U.S. economic data and the European version of a backdoor QE program may have calmed traders' nerves, at least temporarily.
SPY Position Update
SPY closed at $126.39 on Friday â€“ the December positions closed out at approx. $4,500 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 priced ABOVE its 50-day simple moving average (see SPY chart)
SPY moved ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)
The November 30th Couch Potato published a December expiration SPY bear call spread
On December 12th we suggested closing out the call spread for an approx. $1,200 gain (see tables below)
The November 14th Couch Potato published a December expiration SPY bull put spread
On December 16th this put spread expired with an approx. $1,400 gain (see tables below)
The December 5th Couch Potato published a December Quarterly expiration SPY bear call spread
On December 13th we suggested closing out the quarterly call spread for an approx. $900 gain (see tables below)
The December 5th Couch Potato published a December Quarterly expiration SPY bull put spread
On December 22nd we suggested closing out the quarterly put spread for an approx. $900 gain (see tables below)
The December 15th Couch Potato published a January expiration SPY bull put spread
This put spread is approx. is approx. $900 in the black (see tables below)
$114 strike price short put delta is -.0761 (92% probability this position will be profitable)
SPY Risk Analysis
All of the December SPY contracts have been closed out and we have not yet setup a January call spread; therefore the only risk is a price crash threatening our January short puts.
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 our 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 December 18th Couch Potato Final Comment said "...As mentioned above, money managers might be tempted to push the market higher over the next few weeks so that stocks can end the year higher. At this point our Couch Potato portfolio is holding bullish put spreads; therefore a price move to the upside would help ensure these positions remain profitable. And of course, if we get a bullish price move into resistance there might be an opportunity to execute call spreads to hedge our current positions..." Stocks have moved up toward resistance levels which enabled us to generate gains and close out all December positions. As mentioned above the recent upside move should set up an opportunity to do January call spreads.
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.