The November 11th Couch Potato stated "...All eyes are on the negotiation seeking a deal to avoid the fiscal cliff of tax hikes and spending cuts that will get underway at the White House next week...The major impediment to a quick deal will probably come from the President's own party as Senate Democrats have already expressed dismay at talk of cutting social security or Medicare...very few of the Democratic Senate winners will feel like they owe their victory to President Barack Obamaâ€™s coattails, and there is no indication the Senate feels obligated to follow his lead. If fiscal cliff talks turn cantankerous expect the market to react accordingly..."
While the house Republicans appeared to open the door to new taxes, a group of Senate Democrats presented a new set of fiscal cliff demands that would include significantly more taxes and exclude Medicaid, Medicare, and Social Security from any significant cuts as part of any budget deal. Despite news reports of a positive tone from budget negotiations on Friday, there is still a massive divide between liberal and conservative wings so that traders are very leery of making long term bets. The positive vibe emanated from Friday's meeting between congressional leaders and the White House halted stocks decline. But technically, Friday's price action is probably just a pause to allow the market to absorb extremely oversold conditions prior to continuing the current (downward) trend.
The November 11th article also mentioned "...Notice how the index has pulled back below its 200-day SMA line for the first time since the beginning of June...The obvious million dollar question is will prices recover from this point like they did in June, or are we headed down further to full correction?...The market is in the midst of the first serious price breakdown since this past May and now the question is where will prices bottom out. The May price pullback resulted in a full blown price correction and if stocks fall a little further the market will be in that mode again. The next week or so should tell the story, as discussed above, the equity indexes are in process of crashing through significant support levels. If the current trend continues it could get ugly as investors start selling out to lock in gains to keep from showing losses for the year..." The updated S&P 500 index chart below confirms the major equity indexes sinking through significant support levels down to four-month lows. Stocks are oversold, but keep in mind oversold conditions can continue indefinitely. Bearish price pressure is intense as trading volume has been relatively higher on down days. The next identifiable support level for the equity indexes are the intraday lows from July, and if prices fall that low we will be in correction territory.
The November 11th article also talked about "...The most recent weekly American Association of Individual Investors (AAII) survey below suggests there is still room for the market to pull back further before sellers are exhausted...The almost equal number of bullish and bearish percentage means that if stocks continue to crash there are plenty of individual investors who will probably sell shares and push prices even lower..." Last weeks article mentioned equal bullish and bearish sentiment percentages. The updated AAII survey results below show the biggest weekly drop in bullish sentiment since May (the historical average is around 40%). Also, note that the stock market bottomed out on the 2nd trading day in June. We discussed before how this survey is considered a reliable contra-indicator which suggests that stocks may be approaching a bottom.
SPY Position Update -------------------------------------------------------------
SPY closed at $136.37 on Friday â€“ the November position closed approx. $2,300 in the red
The October 17th Couch Potato published a November expiration SPY call spread
On October 23rd we suggested closing out the call spread for an approx. $900 gain (see tables below)
The October 11th Couch Potato published a November expiration SPY put spread
On November 15th we suggested closing out the put spread for an approx. $3,200 loss (see tables below)
SPY Risk Analysis
There is no money on the table for the SPY ETF as November options have been closed out and we have not yet published a December trade.
TLT Position Update -------------------------------------------------------------
TLT closed at $126.37 on Friday â€“ the November position closed approx. $2,300 in the black
The November 13th Couch Potato published a December expiration TLT call spread (see table below)
The October 11th Couch Potato published a November expiration TLT call spread
On November 15th we suggested letting the call spread expire worthless for an approx. $1,200 gain (see tables below)
The October 22nd Couch Potato published a November expiration TLT put spread
On November 8th we suggested closing out the put spread for an approx. $1,100 gain (see tables below)
TLT Risk Analysis
As mentioned above we closed out the November TLT ETF option contracts, therefore now the risk is treasury bonds trending higher and threatening our December $130 strike price TLT short call.
GLD Position Update -----------------------------------------------------------
GLD closed at $165.88 on Friday â€“ the November position closed approx. $300 in the red
The November 13th Couch Potato published a December expiration GLD call spread (see table below)
The November 13th Couch Potato published a December expiration GLD put spread (see table below)
The October 11th Couch Potato published a November expiration GLD put spread
On November 8th we suggested closing out the put spread for an approx. $300 loss (see tables below)
GLD Risk Analysis
Gold is in a downtrend and at this point the most probable risk is the price encroaching on our December GLD $161 strike price short put.
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 a 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.
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.