The word on the street is that most traders expect that the so-called 'fiscal cliff' budget impasse will be resolved and that current market pricing reflects this expectation. But, also the rumor is that investors will allow a few weeks grace period for the White House and congressional leaders to show substantial progress towards negotiating a budget agreement. Expect increased nervous anxiety if the grace period ends on a down-note with traders becoming anxious to cash in gains as upside risk starts to diminish. That upside risk is the potential for some sort of 'grand bargain' (something more than pushing the can down the road), plus, remember the Fed could make a surprise announcement at their meeting in a few weeks. A grand bargain on the fiscal cliff negotiations and a Christmas present from Big Ben Bernanke could send the market roaring at years end. Over the next few weeks expect the market to continuing reacting with erratic swings up and down. The 2-hour Volatility Index (VIX) chart below confirms that the risk barometer is vacillating between the relative highs that coincide with price pullbacks to low points where the market bounces â€“ note the current VIX low price as stocks have recovered.
The November 11th Couch Potato mentioned "...The column of 'O's on the far right of the updated chart below confirms stocks current short term downtrend...for the first time since the current P&F long-term uptrend started over a year ago, the S&P 500 index dropped below the (blue) uptrend line...The current downtrend is considered a serious breach and observe how the chart now has a red line to denote the beginning of a long term downtrend..." The updated S&P 500 index P&F chart below signals that after crashing to four-month lows, the major equity indexes recovered to a short term uptrend (column of X's on the far right). Also, note the current short term uptrend is contained within a longer term downtrend (red diagonal line at the top). The S&P 500 index bounced higher from oversold conditions at around the $1,345 level which also conveniently happens to be the 61.8% Fibonacci retracement of the entire June-to- September rally. Over the next few days when traders return to their desk from the holiday we should find out if there will be follow through to the current rally. Remember, unless prices push back to recent highs stocks are still in a longer term downtrend.
The November 18th article also talked about "... 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..." Right on queue stock prices recovered, albeit on light volume and during a holiday shortened week (but the score still counts). The updated American Association of Individual Investor survey below shows that bullish sentiment has recovered a bit as the market surged higher last week. But bullish sentiment is still lower than the historical average which suggests prices would need to push higher to get back to a normal level.
TLT Position Update -------------------------------------------------------------
TLT closed at $124.21 on Friday â€“ the December position is approx. $1,000 in the black
The November 13th Couch Potato published a December expiration TLT call spread
The call spread is approx. $1,000 in the black (see tables below)
$130 strike price short call delta is .0889 (91% probability this position will be profitable)
TLT Risk Analysis
We have not had the opportunity to execute a put spread, therefore the only risk is treasury bonds trending higher and threatening our December $130 strike price TLT short call.
GLD Position Update -----------------------------------------------------------
GLD closed at $169.61 on Friday â€“ the December position is approx. $700 in the black
The November 13th Couch Potato published a December expiration GLD call spread
The call spread is approx. $100 in the red (see tables below)
$174 strike price short call delta is .2447 (75% probability this position will be profitable)
The November 13th Couch Potato published a December expiration GLD put spread
The put spread is approx. $800 in the black (see tables below)
$161 strike price short put delta is -.0841 (92% probability this position will be profitable)
GLD Risk Analysis
This past Friday Gold catapulted higher along with stocks and the current risk is the trend continuing and encroaching on our December GLD $174 strike price short call.
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.