Daily Market Newsletter
December 27, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
January Expiration
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Market Commentary
Bear Trap version 2…after closing at +502 Advancers on the S&P500 yesterday, this morning flashed a -502 reading, the second time this week we’ve seen single-digit or zero advancers; either of these are a buy signal in my book. What we saw in the last 90 minutes of today’s market was staggering – a nearly 100 handle move. These are not the moves that we see in normal Bull markets.
The S&P ATR is now officially higher than that of 2008. Again, everything is relative but this is an intraday trader’s dream market.
The actual low in the SPX has been just under the 20% haircut level which is almost perfect for now. What happens next? I believe it will be anything BUT a v-bottom going forward. Remember that in 2008, prices took a torturous path to a 38.2% retracement before undercutting the January 2008 lows, at which point a 50% retrace rally kicked in. I believe that there is a good chance that a longer-term bear has kicked in, and we’ve just seen the first act.
I will consider completing the FEB SPX Iron Condor, but only if I can secure a call spread well above the recent swing highs at about 2814.
Here is the current scorecard:
- S&P is down ~594 points or 20.20%
- Dow is down 5239 points or 19.44%
- /NQ is down 1908 points or 24.69%
- RUT is down 475 points or 27.27%
What is our approach to trading this market, which has now moved into a “Volatile/Trending” 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
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An embedded flash video is available here.
Offensive Actions
Offensive Actions for the next trading day:
- I will roll my SLV calls to the FEB cycle; see “stocks” section below.
- I will add another Long Iron Condor on the SPY tomorrow morning; see “HP Condors” 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 for a bounce in the near future to clear the call spreads on our Long Condors.
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 is increasing to capitulation levels and breadth ended the day at +322 advancers minus decliners, which is fairly strong, and a net +824 advancer gain after hitting the -502 level early in the day. (And this was after hitting -502 Monday!)
SPX Market Timer : The Intermediate line rose inside the Lower Reversal Zone, still showing a bearish bias. The two shorter timeframes are now showing a Weak Bearish Cluster; this might be a leading signal for a short pause.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term uptrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate downtrend and short-term uptrend.
VIX: The VIX fell to 29.90 after peaking at 50.3 eleven months ago, back inside the bollinger bands. The RVX fell to 31.61 and is back inside the bollinger bands.
Fibonacci Retracements: Now we can start to track the bounce retracement of the SPX swing down from 2800; the 38.2% retracement is at the 2520 level.
Support/Resistance: For the SPX, support is at 2200 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 950 with overhead resistance at 1553. The S&P500, Russell 2000, Dow, 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.
Fractal Energies: The major timeframe (Monthly) is charged again, with a reading of 56. The Weekly chart has an energy reading of 40, almost at exhaustion. The Daily chart is showing a level of 38 which is at exhaustion on the swing down. I find it surprising that the monthly chart is even starting to pick up on the downtrend. We were seeing all three timeframes showing big levels of potential energy in early December and this is what happens when all that energy has to find a place to go.
Other Technicals: The SPX Stochastics indicator flattened at 14, oversold. The RUT Stochastics indicator rose to 8, oversold. SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2362 and resistance at the upper band at 2841 with price is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1254 to 1584 and price is above the lower band.
Position Management – NonDirectional Trades
I have the following positions in play:
- 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. The call spreads will expire tomorrow.
- 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 cleared the put spreads at target $.54 credit (12/17) and will the opposite side call spreads in play to remove as the volatility allows it.
- SPY 11JAN 247/248*270/271 Long Iron Condor (12/17) entered for $.17 debit on the call spreads and $.18 debit on the put spreads. I closed the put vertical spreads (12/20) for a $.54 credit. I will keep the call spreads in play to look for any kind of positive credit.
- SPY 19JAN 232/233*262/263 Long Iron Condor (12/21) entered for $.17 debits on the puts and calls. I will place $.51 GTC credit orders on each “side” of the trade so that if one side fires at a profit target, I will retain the other side for a bounce.
- SPX 15FEB 2150/2140 put credit spread (12/20) entered for $.80 credit. I will close this position if the delta of the short option hits .45; it is currently showing a delta of .10 on the short option.
We are scoring big % returns on the long condors and our risk is very limited in this extreme volatility.
I will add another Long Condor on Friday so that we can get ahead of the big Monday move that we’ve consistently seen for weeks. This one will be for the 25JAN cycle and I will cover the entry calculation for this in tonight’s video.
The big opportunity for us would be a relief rally where we could clear our call spreads from the long condor inventory that we hold.
We do have one short put spread on the SPX at what I believe would be an unattainable level for this first swing down, but we will manage it by the numbers. I would consider filling a FEB SPX 2820/2830 call spread as long as I could secure an $.80 credit. I am unlikely to fill that order unless we see a huge bounce higher.
This strategy works best with a quiet/trending market, and not with a sideways/volatile or trending/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. If this little bounce continues I might be selling $15 calls into FEB.
- SSO – I sold the SSO 15FEB $65 puts (12/21) for a $1.15 credit. I will look to close these positions on the next rally higher.
- HPE – I was assigned 500 shares in the DEC2018 cycle and my initial cost basis on this position is $13.78/share. I sold the 15FEB $14 calls (12/24) for a $.23 credit.
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05. Will need to close these on the next bounce up.
Let’s roll the SLV calls out to the FEB cycle tomorrow; I will close the 31DEC calls and open up the SLV 15FEB $15 calls.
The recent trades were relatively small positions that would create a discount entry should I be assigned. 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 – Looking for the next signal.
- RSI(2) CounterTrend – Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
- Daily S&P Advancers – Per Monday’s Trade Update I bought shares of the SSO at $84.35/share (12/24). I will sell this position at SSO 100, or when the RSI(14) hits the 70 level, whichever occurs first..
- Swing – We will look for the next available swing soon.
Crypto markets were soft today as Equity markets put in an important low; it appears like they might be negatively correlated.
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 240.70, there is a +/-8.935 EM into this coming Friday. This is larger than last week’s 6.897 EM. The EM targets for this Friday’s close are 249.64 to the upside, and 231.77 to the downside.
The realized volatility has been much larger than the implied forward volatility; Weekly EM levels are not being respected.
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.
We will look for the next bounce back up on the indices to start playing directional bear spreads
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.
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.