Daily Market Newsletter

Most of today’s big bullish move occurred in the premarket as Europe got the jump, and the US Cash market was left with about 15 minutes of upside before collapsing into a sideways heap for the rest of the day. Range expansion leads to range contraction. Clearly markets are in Euphoria phase but this is where “runaway” markets occur, when everyone figures out that this is THE rally and no one wants to miss out on it. It’s also somewhat scary in that all of the market “hate” is gone now; just a few months ago it would have been accurate to call this a “hated” bull market.

In today’s video I remind readers what a bubble looks like and how most of the gains will come at the end. I have no plans to try to catch the top of this market by shorting it and contributing to the rise. With that said, however, going long at this level goes against every rule that I have, so I’ll continue to look for creative ways to grab alpha without undue risk.

The market remains at extreme risk of an “exogenous event” which is news coming into the market that has not already been priced in. We could easily see a 3-5% single day event if the wrong news hit the wire. Make sure that your treatment of risk in your account can account for that potential move. We should continue to trade with the uptrend but in this Musical Chairs market, the music can stop very quickly. Any dip regardless of depth should create higher prices to follow.

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.

The latest crypto video (Bitcoin in a Bubble?) is available here

If you cannot view today’s video, please click here to view an embedded flash video.

Offensive Actions

Offensive Actions for the next trading day:

SPY Expected Move levels have been derived; see the “Weekly EM” section below for actions.
I will try to enter DUST puts tomorrow, but only at the levels/credits specified in the “stock” 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.

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

Technical Analysis Section

Market Internals: Volume was average today and breadth was modestly strong with +220 advancers minus decliners.

SPX Market Timer : The Intermediate line rose into the Upper Reversal Zone, now showing a bullish bias. This chart is now showing a strong bearish cluster with the two strongest timeframes in the upper reversal zone, which we’ve seen often this year with little effect.

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

VIX: The VIX fell to 9.53, back inside the bollinger bands. The /VX volatility futures hit a new all-time low on Friday. This is after a twenty-year low on the VIX. The RVX rose to 14.15 and is inside the bollinger bands.

Fibonacci Retracements: If we see an actual pullback then I’ll start to determine fib levels that might act as potential support.

Support/Resistance: For the SPX, support is at 2557 … with no overhead resistance. The RUT has support at RUT 1350 with no overhead resistance. All three major index charts that we follow are now showing a Golden Cross with the 50 day moving average crossing above the 200 day average.

Fractal Energies: The major timeframe (Monthly) is now down into exhaustion again with a reading of 23. The Weekly chart is now in exhaustion with an energy reading of 29, due to the recent trend. The Daily chart is showing a level of 50 which is now almost recharged again.

Other Technicals: The SPX Stochastics indicator flattened at 74, below overbought. The RUT Stochastics indicator fell to 37, mid-scale. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2580 and resistance at the upper band at 2692 and is at the upper band. The RUT is back outside the Bollinger Bands with its boundaries at 1499 to 1549 and price is above the upper band.

We are seeing the market reaching into a full “runaway” condition, where “fear of missing out” means abandoning any former patience and “wait for the dip” strategy. This usually occurs near the top of the intermediate move.

Position Management – NonDirectional Trades

I have no positions in play; I will wait on the first significant pullback to allow me to secure put spreads below support.I have not put this strategy into play since the 2016 Brexit reaction as the ultra-low risk premium in today’s market has not made this a wise strategy to pursue due to the inherent risk against the backdrop of super-low risk premium.

Offense: I still do not want to set up OTM credit spreads in this low-vol environment until we see real movement to the downside. If and when we get this movement we’ll need to identify levels that we want our credit spreads to be “below.” This is the same type of price action that was so perilous to HP condors back in 2013, so let’s not fight it.

I would need to see a SIGNIFICANT pullback to make me want to initiate this strategy again. Those selling call spreads are screaming in pain once again.

I have no positions at this time. Not the right type of market for non-directional trades.

I have no remaining positions. This is normally a perfect time to be selling calendar spreads against the RUT or SPX due to the exhaustion levels, however with my most recent experience with them in September, the effort was barely worth the hassle since we’re selling 6% vol and buying 7.5% vol against it. I might target higher IV underlyings to overcome this, at the risk of seeing greater movement.

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 personally believe that while markets are in “runaway” mode, easy gains may be had however there is always a huge amount of risk to “buying at the top.” To combat this risk, I am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of 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:

SDS Stock – I still own 100 shares of this stock from 2011 and will continue to write calls against this position with every correction/pullback.
VXX Stock – I own 12 shares of this stock and will hold until Armageddon occurs.
SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 19JAN $15 puts (12/4) for $.19 credit.
NUGT stock – We are out of NUGT for the time being as it’s in a primary downtrend. We’ll look for a reversal back to the upside to begin selling puts again.
DUST – Wait on the next dip! I am looking to sell the 22DEC DUST $25.5 puts for $.30, otherwise I will pass.
BAC 19JAN $25 puts (11/27) were sold for $.40 credit. I closed these (12/18) for a $.04 debit exit.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry. The last entry was at the end of August.
RSI(2) CounterTrend – Looking for the next setup.
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.

Bitcoin and Ethereum are still the ones to accumulate. Bitcoin is now fully on the consciousness of the investing public and has gone completely parabolic. I’m holding my current ETH and LTC. Litecoin and ETH just blew up this week after being dormant for some time. I also decided to get into Ripple last week after reading how it could be 1) listed on Coinbase, the holy grail of Fiat/coin conversion, and 2) that Amazon might consider payments on it. I would also look for entries into Monero as well.

The CME Bitcoin futures will be listed as /BTC on TDA Sunday evening. I don’t know when TDA will turn on the ability to trade the /XBT and /BTC futures, but I would be very cautious trading these due to the very light liquidity and gaps in the ladder.

Please refer to the left sidebar section if you’d like to get caught up on “FAQ” -style intro videos.

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.”

Here is the most recent video which is “Bitcoin in a bubble?”

Viewing the SPY from the current Friday closing price at 266.51, there is a +/- 2.426 EM into this coming Friday. This is close to a normal EM that we’ve seen this year.

The EM targets for this Friday’s close is 268.94 to the upside, and 264.08 to the downside.

I will fade either of these levels this week as long as I see some reaction to the level as it hits it. I will use front-week spreads into mid-week, and then long options on Thursday or Friday. The upper EM was almost hit today; I want to be very careful not to fade this unless there is a decent reaction.

I have no current positions:.

I have no new trades to add with this strategy. Markets are in a final euphoric parabolic run to the upside.

Entry criteria are:

Using calls
17 to 50 calendar days
center strike .25 to .40 delta
ratio is 1/3/2 quantity, from the bottom, calls are long/short/long

We will exit the spread at a 60-70% level of credit received. The max risk on the trade is defined on the graph if the price goes much higher. There are no early exits, only exiting the week of expiry to avoid assignment. Also avoid dividend periods.

I am currently trialing some trades and will discuss them in the newsletter; after a few cycles, I will start adding these trades to circulation.

TOS scan code: http://tos.mx/hvWmMl

I have no positions.

QQQ 29 DEC 156/157 call spread (12/12) was entered for a $.46 debit, and was closed (12/18) for a $.77 credit exit.

As expected the dividend was not a problem today with early assignment. This trade paid us a net profit of $27/contract, or a 59% return on capital.

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 currently have the following positions in play with this strategy:

SPY JAN18 229 long puts (10/11) – i entered this position for a $1.19 debit.

I might look to enter MAR18 puts this week. They couldn’t be cheaper.