Daily Market Newsletter

December 4, 2018

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Market Commentary

I had written yesterday: “ I would expect that today’s gap would be filled before long.” That did not take long; as you can see below, our trading plan is to “fade sentiment extremes.” When everything appears to be “coast is clear” that’s when we should expect to see the bottom drop out. Just when it looks like there is no hope left, we should expect to see a rally. Get used to this until the price finally breaks the large trading range in one direction or another. Trump’s “I am a Tariff Man” tweet added uncertainty to a very nervous market..

A lot of noise today about the yield curve inverting. This means that longer-term rares are lower than shorter-term rates, which has been known to precede recessions. Financials also got hammered as you can see the TNX/Ten Year note rate diving . 

Today you will see a tremendous amount of negative noise about the markets in the mainstream media. And it’s going to be hard to ignore. 

Here’s my thought: I’m going to give the longer-timeframe trends the benefit of the doubt in the near term. If they are truly rolling over, we’ll see a fairly strong rally leading to a monthly lower high, and the real fun begins then. 

In the meantime, I think we have the right approach for handling this market; in the middle of the range, set up long condors to anticipate the eventual next transition to a trend. Identify the range extremes, and fade those sentiment extremes with credit spreads to build huge iron condor wings. (distance-wise)

Due to President George HW Bush’s departure, Wednesday will be a national day of mourning here in the United States; equity markets will be closed tomorrow. There will be no newsletter produced Wednesday (tomorrow). 

Here is the current scorecard:

  • S&P is down ~337 points or 11.46%
  • Dow is down 2830 points or 10.5%
  • /NQ is down 1279 points or 16.55%
  • RUT is down 283 points or 16.3%

What is our approach to trading this market, which has once again moved into a “Sideways/Volatile” character?

  • Sell credit spreads/create iron condors on the SPX into relative extremes, beyond the current range of movement.
  • Establish long iron condors when the price shows potential of moving a great distance in the near future.
  • Exercise caution with long stocks/short puts as we see the 50/200 death cross hit each index
  • Look to establish debit spread-based swing trades against sentiment extremes, and/or EM boundaries

Markets are at a very important tipping point going forward; be mentally nimble enough to allow the price to go either way from here.

The scan for the “Cheap Stocks with Weeklys”  is available here.

The RSI(2) FE scan is available here.

The current MAIN “high liquidity” watchlist that I’m scanning against in thinkorswim is available here.

Please sign up for our free daily crypto report here.

An embedded flash video is available here.

Offensive Actions

Offensive Actions for the next trading day:

  • I will look to enter the SSO (stock) long on a wash-out low based on a single-digit number of advancing stocks in the S&P. (see “Swing” section below)

Defensive Actions

Defensive actions for the next trading day:

  • Any vertical, butterfly, or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
  • Closing orders have been entered for all new spreads.
  • I will look to exit the 7DEC SPY long put spreads on Thursday for any possible value they are showing. 
  • I am close to a 200% profit exit on the 28DEC SPY long put spreads, the second long iron we’ve set up recently. 

Strategy Summary Graphs

Each graph below represents a summary of the current performance of a strategy category. For an explanation of what the graphs mean, watch this video.

Non-Directional Strategies

Semi-Directional Strategies

Directional Strategies

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Technical Analysis Section

Market Internals:  Volume was well above-average today and breadth ended the day very negative with -442 advancers minus decliners.

SPX Market Timer : The Intermediate line continued higher below the Upper Reversal Zone, now showing a bullish bias. No leading signals at this time.

DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term downtrend. The Dow is in an intermediate downtrend and short-term downtrend.

VIX: The VIX rose to 20.74 after peaking at 50.3 ten months ago, inside the bollinger bands. The RVX rose to 24.24 and is inside the bollinger bands.

Fibonacci Retracements: The price is just bouncing up and down inside a triangle range, so Fibs have not been helpful lately. Watch the 61.8% fib retracement of the most recent rally higher. 

Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2816 and 2941. The RUT has support at RUT 1436 with overhead resistance at 1742. Three major index charts that we follow are now showing a Golden Cross with the 50 day moving average above the 200 day average (SPX/DJI). The Russell 2000 and Nasdaq 100 have printed a Death Cross with the 50ma crossing below the 200ma; this can be a leading signal for a true Bearish move. The SPX is next in line.

Fractal Energies: The major timeframe (Monthly) is super-charged again, with a reading of 65. The Weekly chart has an energy reading of 52. The Daily chart is showing a level of 51 which is just below fully charged again.  With the bounce back up, all SPX timeframes could be in position to support a massive move, regardless of direction. It’s very important that we get “on” the next trend when it shows, regardless which way that it goes. 

Other Technicals: The SPX Stochastics indicator rose to 47, mid-scale. The RUT Stochastics indicator rose to 50, mid-scale. SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2621 and resistance at the upper band at 2827 and price is above the lower band. The RUT is inside the Bollinger Bands  with its boundaries at 1460 to 1582 and price is above the lower band.

SPX chart

Position Management – NonDirectional Trades

I have the following positions in play:

  • SPY 21DEC 251/252*277/278 Long Iron Condor (11/26) entered for $.16 debit on the puts and $.18 debit on the call spreads. Per my advisory to close each side at 200%, my call spreads were sold off at $.54 credit (11/30)  and the put spreads are still in play. I am now at my profit target for the trade and will look to see if I can harvest any values on the put spreads if the price drops lower; they are showing about a $.07 exit, let’s see if there is more downside to come.  
  • SPY 28DEC 269/270*289/290 Long Iron Condor (12/3) entered for $.17 debit on the puts and $.17 debit on the call spreads. I will look for a 200% return from either side ($.51 exit) and will close that side only, leaving the distant side open. Right now the put spreads are showing a $.43 exit, getting close to my $.51 limit. I will keep the call spreads in play if the puts fire. 

 

I’ll wait until the price probes the edge of the current range before I set up the next credit spread. 

I have no positions at this time. We’ll park this strategy until the next high-probability condition shows. We’ll want to see daily exhaustion on the SPX or RUT after a strong move, at the very least. This strategy works best with a quiet/trending market, and not with a sideways/volatile one.

I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so we’ll want to wait for that type of price action to show again. The calendar spread tracking sheet is available for your download here. Yes, if you follow the math in the sheet, all of the numbers account for commissions in and out of the trade. Please note: If you trade these positions please keep the size small, to the point where you “do not care” about the success or failure of this position.

I am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of a crash we can almost define our total risk by the price of the underlying. While this is not how I intend to manage risk in these positions, I view this as fundamentally more solid than trying to actively manage risk on assets that are going for $$$hundreds which have also gone parabolic. I have the following positions in play:

  • SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 31DEC $15 SLV calls (10/3) for $.16.
  • SSO – I sold SSO 21DEC $95 puts (11/14) for $1.02 credit. I will look to close this position for $.10 on the next bounce up. If necessary I would consider closing/rolling to JAN to get more distance if this starts to transition to a Bear. 
  • HPE – I sold 21DEC $14 puts (11/12) for $.23 credit and looking to close for $.05.
  • BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05. 

 

The recent trades were relatively small positions that would create a discount entry should I be assigned. I have entered $.05 GTC exit debits to close out remaining inventory should we get the opportunity. If we see a death cross on the S&P, then I will cease selling puts on an ongoing basis until that signal clears. 

Position Management – Directional Trades

Thoughts on current swing strategies:

  • 8/21 EMA Crossover –  The 8/21EMA crossover has occurred to the upside, however today’s bearish engulfing candle blew past any entry point. This one might still be in play if we see a bounce higher from today’s close. 
  • RSI(2) CounterTrend –   Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
  • Daily S&P Advancersif I see the number of daily S&P500 advancers drop into single digits near the close of any trading day, I will go long shares of the SSO.
  • Swing – I faded the confluence of the gap fill and upper EM test (11/28), adding a 7DEC 269/270 Debit put spread for $.46. This trade got blown through by the FOMC minutes on that day yet today’s drop might put this one back into play again; I will look for a chance to exit this position on Thursday. 

The crypto market continues to get hit pretty hard recently as it finally broke below support. This could be part of the final capitulation that we’ve been waiting on.

Investors should currently be looking to find technical entries to warehouse BTC/ETH/LTC assets for eventual trades on Alt-coins. You should also be looking to devices like “trezor” or other cold-storage devices to keep your assets off of the network, or other secure wallet such as Navcoin. Relying on the security of your broker is no longer good enough; no one can log into your ETrade account and “steal” your stock assets, but the whole nature of Cryptocurrencies and their portability means that someone can grab your assets and transfer them elsewhere. I will continue to discuss the tradingview platform in daily videos as I think that it is currently the best way to chart the “big three.”

Viewing the SPY from the Friday closing price at 275.65, there is a +/-6.937 EM into this coming Friday.  This is slightly larger than last week’s 6.196 EM and reflects the risks expected out of the G20 meeting. The EM targets for this Friday’s close are 282.59 to the upside, and 268.71 to the downside

EM fades have not been a good setup lately due to the emotions raging in the markets; we’ll have to evaluate each test as it occurs. The price is getting close to the upper EM for the week now, with only a day gone in the week. Every Monday has featured a big move lately. 

We did get some recent experience with this style of trading and quite frankly it’s not as easy as it sounds. Strong bull trends do not give way easily. My conclusion is that this strategy is best reserved for stocks experiencing a snap-back rally in a primary bear trend. If the market starts to print a lower high on the weekly chart then I will become more serious about this strategy.

The scan that I discussed in the 8/4/2018 video is available to download for thinkorswim here: http://tos.mx/OvdVnz I will also be adding a second Larry Connors scan to this section as well; here is the Connors Crash scan: http://tos.mx/BhHuKL

I have no positions at this time.

No other entries at this point. I would prefer to see the market stabilize first before looking long again. We will see big volatility over the next two+ months. If we are able to secure a “higher low” off of the S&P in the short run, this might be a good environment for a couple of weeks. 

The “Hindenburg Strategy” is meant to capture “value” from successive corrections that lead up to the final “death spiral” with a Bear Market. The basic principle is to buy 3-month out long puts on the SPY, and to finance those puts by the sale of credit spreads. Frankly, selling the “financing” trades has been a huge challenge in this low-vol environment. I will only sell put spreads on decent pullbacks that allow me to secure put spreads 10% OTM. We have no positions at the current time. I have no positions at this time. I cleared out the current puts on the drop to the 200ma. I will “reload” again on the next bounce up.

I passed on the recent entry;  I’m going to hold off for a little longer to see if a more complex top is created off of a higher high. Recent entries were expensive due to elevated vol.