Daily Market Newsletter
December 12, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
December Expiration
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Market Commentary
No early rallies allowed. Today was about as strong as you could hope to see, rising about 45 handles above yesterday’s close, however an afternoon fade left most indices vulnerable again. I continue to believe the following:
- All of the known “bad news” is already priced in.
- Markets will not go lower unless a NEW negative catalyst comes along which has not already been factored in. (Ex: Lehman, Bear Stearns from 2008, etc)
- Markets *could* go higher in the short run if there is actual, tangible news of a trade deal. Rumors of a trade deal just serve as bait for the bears to short at higher levels.
- UNCERTAINTY is what is killing the market right now. This is common in corrective markets; everywhere you look there is bad news and more uncertainty.
- Financial media outlets get their highest ratings during these times because people tune in to see “where things will go.” They are encouraged to keep feeding the beast.
- Markets do NOT need to drop lower than current levels to eventually pull into a full Bear. A monthly “lower high” needs to be printed first before things get really interesting. Markets have to go higher first before they will go lower.
Next week’s Fed meeting has started to take on dramatically higher importance to the future state of markets. (This is SO 2007 all over again!) Right now there is a 78% chance that Powell will still hike rates, but as always it will come down to his statement, and more importantly the press conference afterwards.
I do not want to throw on any more “long” risk right now and in fact would prefer to clear what I have. This market carries the potential to drop another 10-15% on the next swing down (a 10% haircut targets SPX 2385) and it could get there quickly. We could also see SPX 2800 in a heartbeat. This is not an environment with any sort of “edge” to it unless you like gambling. Only those with a bias are truly directional right now. My stance is that if we see the price CLOSE under the 2600 level, especially under Monday’s lows….then we will quickly see 2500 or lower and the Bear is “on.”
Everyone’s talking that there is a zero chance of recession over the next year but the market doesn’t care about their carefully-constructed, logical argument. Humans are irrational and so are markets. We are looking at a potential 500-1000 point SPX swing over the next year and getting the first 50 points of it is irrelevant. Be patient.
Here is the current scorecard:
- S&P is down ~358 points or 12.17%
- Dow is down 3071 points or 11.4%
- /NQ is down 1279 points or 16.55%
- RUT is down 319 points or 18.3%
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)
- No additional trades for tomorrow morning; we are well-situated with Long Condors for the time being.
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 for a bounce over the next two weeks to see if our 28DEC Long Condor call spreads can throw off some value.
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 just above-average today and breadth ended the day strong with +222 advancers minus decliners, with the high on the day at about +475 advancers minus decliners.
SPX Market Timer : The Intermediate line turned down just above the Lower Reversal Zone, still showing a bearish bias. No leading signals at this time but this chart is close to showing a Weak Bullish Cluster with the two smaller timeframes oversold.
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 fell to 21.46 after peaking at 50.3 ten months ago, inside the bollinger bands. The RVX fell to 24.54 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.
Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 1436 with overhead resistance at 1553. Only one major index chart that we follow is still showing a Golden Cross with the 50 day moving average above the 200 day average (DJI). The S&P500, Russell 2000 and Nasdaq 100 have all printed a Death Cross with the 50ma crossing below the 200ma; this can be a leading signal for a true Bearish move. The SPX just printed this week.
Fractal Energies: The major timeframe (Monthly) is super-charged again, with a reading of 67. The Weekly chart has an energy reading of 54. The Daily chart is showing a level of 44 which is below fully charged again, and picking up on the recent swing down. 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 flattened at 56, mid-scale. The RUT Stochastics indicator fell to 51, mid-scale. SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2600 and resistance at the upper band at 2785 and price is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1432 to 1558 and price is above the lower band.
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 any side at 200%, my call spreads were sold off at $.54 credit (11/30) and I used recent weakness to clear off the put spreads (12/6) for a $.17 exit. The overall profit on this trade was $32/contract on the calls and -$3/contract on the puts, for a net profit of $29/contract, or an 85.3% return on capital for the entire trade.
- 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 sold off the put spreads (12/6) for $.56 credit, leaving the call spreads open and ensuring at least a 50% return on the overall trade. The overall profit on the puts was $35/contract so even if the calls expire worthless at the end of the month we will net a minimum $16/contract net profit after commissions, or a 47% return on capital. I will look for the price to bounce by the end of the month and possibly score a return on the call spreads.
- SPY 04JAN 257/258*281/282 Long Iron Condor (12/7) entered for $.18 debits on both the puts and calls, for a total trade debit of $.36. I will place a 200% return exit on both the puts and calls ($.54 credit) and look for one side to “fire” while keeping the opposite side in play to remove as the volatility allows it.
We are scoring big % returns on the long condors and our risk is very limited in this extreme volatility. I am very glad that we took the opportunity to close our short condors and spreads; absolutely horrible to hold short options in this type of price movement, especially in a short-vega trade. These trades are working out so well that I’m tempted to place another one on Monday, but I’m going to hold off until the price is near the center of the range again.
I’ll wait until the price probes the edge of the current range before I set up the next credit spread. We’ve got to have a massive sentiment extreme before I want to sell again in this volatility. Let’s continue to stay long theta/vega.
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 that we’re currently seeing.
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.
With three out of the four major indices in a death cross, I am suspending additional short put selling until those signals clear. 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. The bid keeps taunting me by dropping to $.05 but my order is still a penny too low.
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05. Starting to transition into a serious downtrend but still OTM. Will need to close these on the next bounce up.
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. Our priority at this point is to close our open positions and ride out the storm until conditions improve. With that said, if I see truly epic selling that allows me to secure puts at levels where I would be an enthusiastic buyer, I will take those trades. At the very least we would need to wait on Daily/Weekly exhaustion levels.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – The 8/21EMA crossover showed another false signal, which this study is famous for. We have to avoid these false breakouts and aggressively pursue the “real” one when it shows; not an easy task.
- RSI(2) CounterTrend – Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
- Daily S&P Advancers – if 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 – We will look for the next available swing soon.
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, before it sets up an extended “base” which will likely be frustrating.
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 263.57, there is a +/-8.261 EM into this coming Friday. This is larger than last week’s 6.937 EM and reflects the risks that the market is processing with rates, growth, and trade. The EM targets for this Friday’s close are 271.83 to the upside, and 255.31 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. Last week we saw the price get close to the upper EM on Monday, and eventually blew through the lower EM. This volatility will remain with us for months before it settles down.
Once again a huge Monday move; the price approached but did not violate the lower EM boundary.
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.