Daily Market Newsletter

February 15, 2017

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Market Commentary

I said in December that the “Fed is out of the way” and I still stand by that assertion for now. The market has taken the baton from the central banks and is running with it. The market already knows that rate hikes are coming and does not care. I think the days are over – again, for now – where the FOMC and IMF are the main drivers of the markets based on fake stimuli.

Now, eventually it will be of interest to us as rates start to become noticeable again – remember 10% home mortgages? They are coming. And the market will eventually become very sensitive to these higher rates, much in the same way that every FOMC event in 2007 became a nightmare. But that is not now. I think that the number one market driver/risk will now be Donald J. Trump. So far he has been very market-friendly with only an occasional devastating Tweet aimed at a company or sector. It won’t be long, at this rate however. Vol is right around the corner.

It’s really rare when we have ALL S&P500 timeframes in exhaustion; this is typically when we see one final push higher to pull everyone in off the sidelines, and then a new range sets in. Odd today that the VIX rose 11% as well. Perhaps someone knows something?

If the above video does not work, please try this link.

Offensive Actions

Offensive Actions for the next trading day:

I will enter a simple bearish play on the QQQ tomorrow morning; see the “bearish/fade” 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 higher than average today. Breadth was good with +221 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, showing a bullish bias. This chart is now showing a “Strong Bearish Cluster” for the fourth day in a row with the two strongest timeframes in the Upper Reversal Zone; this sometimes foreshadows a pause in the trend..

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 rose 11.45% to 11.97, inside the bollinger bands. The RVX fell .30% to 16.63 and is inside the bollinger bands.

Fibonacci Retracements: Fibs are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with no overhead resistance. The RUT has support at RUT 1300 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 into exhaustion with a reading of 37. The Weekly chart is now technically exhausted with an energy reading of 34, due to the recent breakout. The Daily chart is showing a level of 32 which is exhausted now. It’s rare when we have all three major timeframes in exhaustion.

Other Technicals: The SPX Stochastics indicator rose to 81, overbought. The RUT Stochastics indicator rose to 69. above mid-scale. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is outside the Bollinger Bands with Bollinger Band support at 2251 and resistance at the upper band at 2340 and is above the upper band. The RUT is outside the Bollinger Bands with its boundaries at 1338 to 1403 and price is above the upper band.

We are seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. I think this will bring about a big shift in how the market behaves, but a pullback to stoke up the negativity would be a good thing to see first.

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.

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.

If I see price drop to the SPX 2200 level, this might be our first opportunity to sell premium against that level.

I have the following positions:

AAPL 3MAR 129/131*135/137 Iron Condor (2/13) was entered for a $.91 credit. We will look for about a 20% return on this trade, and is risk-managed from day one.

I have the following positions:

AAPL 24FEB/3MAR 131/133 Short Call Diagonal (2/14) was entered for $.98 credit. I will look for the first red candle down over the next week to look for at least a 20% return on risk. .

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 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, and I sold SLV FEB $17 calls (1/17) for $.19 credit. I will roll these if necessary this week into MAR or APR calls so as not to be called out.
GE I am going to start to focus on the APR put cycle for GE and I’d like to secure the $27 or $28 puts for at least 1%.
TWTR I added another ten contracts (1/3) of $13 FEB puts for $.20. I don’t care about the recent bad press. I will either accept assignment or let these expire this week, I would also be interested in securing APR puts near $10/share this week if the sell-off continues.
RIG I added the $12 MAR17 puts (1/30) for $.19 credit. .So far the $13 support is holding and I’d like to see if I can secure lower, deeper puts this week for late March or APR when printed.
X – I added the MAR17 $25 puts (1/30) for $.47 credit. .We’ll look for the next dip in price to sell again.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover, however it will be to the downside, and the first downside crossover is usually a poor signal. .
RSI(2) CounterTrend – I’ll look for more of these in the near future; I need to tighten up the rule set first..
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 have no positions at this time.

I have the following position:

DIA 10MAR 199/201 Debit Put Spread (1/30) was entered for a $.94 debit. I will look for a 50% return from this position. I show this as a $1.46 credit limit.

I’m going to set up a simple bearish play on the QQQ’s by buying a 3-month put 10% OTM since risk premium is so cheap right now….that’s the QQQ 19MAY 116 puts. I will simply look for a 50% return on these trades, and not a full retracement to that level.

I have the following positions:

BIDU APR17 190/195 Debit Call Spread (1/30) entered for a $.98 debit.Understand that I do not have a “stop” in this trade. Right now I’m showing about a 70% return on this trade and if the expected weekly breakout occurs we could see much higher yields from this position.
TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
XLU 10MAR 48.5/50.5 Call Vertical (2/13) was entered for $.99 debit.
TIF 31MAR 81/83 Call Vertical (2/13) was entered for $.97 debit.

There are many, many charts currently showing a very large amount of energy on the daily chart, but are still in exhaustion on the weekly or even monthly charts. We might be on borrowed time with directional upside plays.

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.

Quite honestly, 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 FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.
SPY MAR17 203 long puts – I entered this position (12/28) for a $1.07 debit.
SPY APR17 206 long puts – I entered this position (1/27) for a $.92 debit.