Daily Market Newsletter
February 10, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
February Expiration
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Market Commentary
I had written on Saturday: “...In my video I state that there might be more downside to come, so what we need to look for is a “washout” and look to take that signal long to the upside for at least a modest swing higher.” The action this week has been nothing less than magnificent…we are seeing huge ATR, the highest IV in years, and intraday swings that are just breath-taking. We are seeing the “range expansion moving to range contraction” phase of markets, and this should lead to titanic volatility and big price swings over the next few months. Where the price goes after that is not my concern right now, although from a larger-timeframe perspective, this should be just a well-deserved pause in the cyclical bull.
The month of January brought some truly incredible upside extremes, which went along with my theme of “the biggest gains in a bull rally come at the very end” and that was absolutely true; note the monthly candle for January. We don’t know where they will end which is why timing them is such folly.
OK, so now what? I believe that with Friday’s re-test comes a brief, strong rally that could be good for 300 points in the S&P’s. This will not be an easy journey over the mountain and the price will do its best to shuck everyone off at every opportunity, so only the strong hands will arrive at the top with profits intact. My preference is to get there via some risk-managed spreads. Once near the summit, we can look to sell call spreads again for the first time in years.
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 (How the CFTC will affect crypto) is available here
Please sign up for our free daily crypto report 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 but are not worth trying to fade.
- I’ll look for one more trip to the well for the SPY HP put spreads if the lows are re-tested Monday; see “HP Iron Condors” section below.
- See “Stocks” section below for short put sales that I’ll place on Monday.
- I will place two additional RSI(2) trades on HAL and SPY, see “swing trades” section below.
- I’ll add more NUGT calls above the weekly EM; see “stocks” 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
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Technical Analysis Section
Market Internals: Volume was big Friday and breadth was very weak with -380 advancers minus decliners, until the day-end rally which flipped the breadth to +323 advancers minus decliners. That’s an important reversal.
SPX Market Timer : The Intermediate line fell into the Lower Reversal Zone, still showing a bearish bias. No leading signals at this time however this study is almost at a Strong Bullish Cluster, just days after a strong bearish cluster. This could be a leading signal for a bounce.
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 29.06 after peaking at 50.3 this week, back inside the bollinger bands. The RVX flattened to 27.85 and is back inside the bollinger bands.
Fibonacci Retracements: The price has retraced 38.2% of the election rally.
Support/Resistance: For the SPX, support is at 200 … with overhead resistance at 2878. The RUT has support at RUT 1450 with overhead resistance at 1619. 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 30. The Weekly chart is now in exhaustion with an energy reading of 34, due to the recent trend. The Daily chart is showing a level of 30 which is now exhausted to the downside. Markets are doing PRECISELY what they must in order to restore energy that has been incredibly depleted. Extreme Range Expansion leads to extreme range contraction.
Other Technicals: The SPX Stochastics indicator fell to 38, mid-scale. The RUT Stochastics indicator flattened at 27, above oversold. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2612 and resistance at the upper band at 2939 and price is at the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1472 to 1656 and price is at the lower band.
We recently saw 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, and the price action over the last week looks to have signaled the end of that move. We should be in sideways/volatile behavior for the next several months.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPY 16MAR 218/220 put credit spread (2/6) was entered for $.19 credit, and was closed (2/8) for a $.03 debit. This gave me a net profit (after commissions) of $12/contract, or a net return on risk after commissions of 6.6%.
During Friday’s sell-off I tried to sell the SPY 16MAR 217/219 put credit spreads but I just whiffed as the price rallied immediately after testing the previous low. Even though we saw a huge move higher on Friday afternoon, I will keep this order possibility in place should the S&P re-test the low one more time. Unlikely, but possible.
The next goal might be to place call spreads above the January highs on the bounce back.
I have no positions at this time. Not the right type of market for these trades. If/when the price rallies higher to resistance, that might be an excellent time to place a LP Iron Condor.
I have no remaining positions. Calendar spreads are good for markets with some volatility but they are long vega so we can’t enter them during IV spikes.
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” as we saw at the end of last week. We’ll look to go shopping soon.
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:
- 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 FEB18 $17 calls (1/2) against my stock position for $.17 credit.
- NUGT stock – I entered the NUGT 2FEB $31.5 puts for $.31 credit (1/26) and I was assigned on these puts. I entered 09FEB $31.5 calls (2/5) for $.28 and those expired for a full profit. NUGT is getting drilled this week and I have to look for the next bounce to clear this. I will sell the 16FEB calls at one standard deviation above the price which aftermarket is the $27 strike, and might be higher or lower on Monday morning. This strike is below my cost basis so I will have to roll this position higher if assignment is likely
- DUST – We are out of DUST for the time being.
- BAC – I sold BAC 10MAR $28 puts (2/6) for a $.48 credit. I will look to close these down for $.05
I will look to take positions in the following short puts:
- GLW 20APR $25 puts for >1% return or $.25 credit
- HPE 16MAR $14 puts for >1% return.
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. The price is actually crossing to the downside right now but I have no entry, unless we take the backtest. I believe that this signal will be useless for the next several months as no swing will sustain.
- RSI(2) CounterTrend – Per Tuesday’s advisory I entered the USB 16FEB 54.5/55.5 call spreads for $.50 debit; I will look to close these for a $.69 credit. I will place another RSI(2) on the 23FEB SPY calls, and an additional one on the HAL 23FEB calls. Please see the video for details.
- 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. I went long shares of the SSO at a $107.32 cost basis (2/5) and sold this position (2/7) for a price of $111.29 as the RSI(2) oscillator approached 70. I want to be looking for this signal every day from this point forward, because a wash-out low will show this signal.
We might be seeing a small bounce but it’s not what I would want to see to signal the end of this Bear. We still need to see the final, eventual capitulation that is so necessary after December’s blow-off. One piece of bad news after another is a recipe for a wash-out that is overdue.Even great coins are being destroyed right now; this is like how a forest fire renews an area for new growth. Because there are not as many short-sellers in the crypto market, the bottom might not be as explosive as with stocks.
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 a recent video which is “Top Five Safest to Invest in 2018”
Viewing the SPY from the current Friday closing price at 261.50, there is a +/- 9.426 EM into this coming Friday. This is WAY above normal compared to the average EM that we’ve seen this past year, and actually larger than last week’s.
The EM targets for this Friday’s close is 270.93 to the upside, and 252.07 to the downside.
I don’t really have any interest in fading the EM this week, because the market is in transition.The price totally blew through the lower boundary last week and in January blew through the upside EM levels with impunity. The EM is going to be an effective level of support/resistance during times of relative calm.
I have no current positions. I will consider setting up another ratio fly as price approaches resistance:
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 the following positions:
- SPY 9FEB 271/272 Debit Put Spread (1/16) entered for a $.10 debit, and closed (2/5) for a $.43 credit. That produced a profit of $29/contract or a 290% return on risk.
- BIDU 23FEB 255/257.5 Debit Call Spread (1/29) entered for a $1.25 debit. Looking for a 50% return.
No other positions at this time.
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 MAR18 240 long puts (12/20) – I entered this position for a $.94 debit, and closed it (2/5) for a $3.75 credit. This produced a profit of $279/contract or a 297% return on capital.
I have no positions at this time and need to see the price rally to recent highs again to reload.