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Planning Ahead for the Week of September 21, 2009

|Includes: SPDR S&P 500 Trust ETF (SPY)

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Next week will be very pivotal for both the October and November Long Iron Condors I’m holding in SPY.

In brief, we’ve seen the market push aggressively higher over the past few weeks, despite September’s reputation for stocks selling off.  In fact, SPY was up more than 2% in just the past five days.

With November – January a traditionally bullish period, I wouldn’t be surprised to see markets jump the gun and continue adding gains before then.  October is now the best S&P month over the last 15 years, so I have concerns about crossing our upper curb of 109 on both condors in the weeks ahead.

S&P 500 Technical Indicators, Early July 2009 - Present

S&P 500 Technical Indicators, Early July 2009 - Present

The good news is that there are a number of positive technical factors heading our way that could lead to some form of a sell-off.

First is the twelve-day MACD Histogram–the blue bar chart in the middle of the graphic.  We very well might have peaked and are heading towards a sell-off of some extent.  Other technicals are also “rolling over” to suggest a change in sentiment.

Further, September 24 is one of the most bearish market days–only 38% of them in recent years have yielded gains.  And prior to then, Monday-Wednesday are each positive only 43% of the time.  The week after September options expiry is just traditionally bad, plain and simple.

If I had to prioritize my moves, the October LIC is most important because its profit and loss  (P&L) slope is the steepest.  In other words, if the markets sell off, we’ll profit more quickly in this condor than November’s.  But since both condors hold the same targets, I’m most interested in dissolving both and re-establishing new positions.

For October’s LIC, peak profitability is currently at 102.5 for SPY and sliding towards 103.25 by next Friday.  In a perfect world, we’d see these targets hit, but I won’t get too cute in this trade due to the increased pressure of a steep profit/loss slope.  The call side of this condor breaks even at 105.5 next Friday, so if I can get near that, I’ll be content, and then I’ll see for how long I can hold the put side until the position turns disadvantageous–stay tuned, I’ll provide updates as the situation develops.

November’s LIC isn’t terribly different–peak profitability with SPY at 101.25 followed by a 101.5 level on Friday.  The P&L curve is still relatively modest, so I’m able to take a bit more risk here.  In fact, if the market does correct significantly–e.g. past 101.25 and down to as low as 98.5–I’d be willing to hold the condor ‘as-is’ and enjoy a (hopefully) modest recovery through October.  Note that peak profitability at the end of October lies at around 102.5, which could nicely match a market rebound through the upcoming month.  But here I go, into the theoreticals…

I feel comfortable with waiting for a mild sell-off through next week; it’s a fair argument to say that the odds are more on the bears’ side through next Friday than the bulls’.  In any case, even if we approach next Friday at around the same levels as today, we’ll see a nice profit.  Currently, both condors are up a total of 4%–despite the runaway market–and seven days from now, we’ll be looking at 8% gains.  If we manage to get out next week at peak profitability, we will have pocketed 14% profit for the past few weeks.