Daily Market Newsletter
February 16, 2019Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
March Expiration
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Market Commentary
I think we’re seeing a “perfect storm” of shorts covering, short-delta traders hedging with more positive delta, and those on the sidelines holding their nose and jumping in. It’s a proven fact that there a few things to rival the pain of being left on the sideline when your markets are rallying. This was yet another textbook case of a market climbing a wall of worry, because EVERYONE had assumed that the Bear would persist after a little bounce.
Well, that “little bounce” got bigger and bigger, and ultimately it’s led to a massive bounce. Jason Goepfert gave some historical context to it yesterday, as he does so well: 
In today’s video I’ll look back at that period, and show what it led to at that time, however we’ll have to understand that it showed at a different context than the December crash, thus we can’t play the “Jump to Conclusions” game with this data point. Yet.
Is the S&P bound to continue higher and set new highs in markets? With a neutral Fed and a declining Ten-Year Note, the Fed has backed away from their autopilot “hike” approach; I think that we can see that the main reason for the aggressive hike in December was to give themselves “room” down the road for policy adjustment, but not much. It could be likely that we’ll see negative rates some day because of this. Imagine what would happen to the stock market if banks charged you to store your money there! The CNN Fear and Greed index shows that we’re not nearly as “frothy” as one would expect, so there’s still some skepticism to wring out of the market:
I’m not much of a “tin foil hat” guy but everyone knows that this idea of printing our way out of trouble at every turn will not end well, and judging by the candidates about to throw their hat in the 2020 Presidential ring, more social platfom politicians are on the way. This will increase pressure to spend more and keep the punch bowl out. The USA used to be a very fiscally conservative republic, but more and more pressure is placed upon continuing social welfare programs and any politician considering tightening expenditures is painted as a “throw Granny from the cliff” heartless monster and voted out of office.My point here is that interest rates and saving cash will be slaughtered like a sacrificial lamb on the altar of pension funds and the stock market. I believe that it will be political suicide for anyone to allow another 2008-type event to happen on their watch.
Every sector is launching out of the December hole in a frenzied bid to accumulate value. We’re back to the “momentum” trades of 2017 where nothing but Momentum mattered. This makes objective “expansion/contraction” investing difficult, because those stocks that run attract more and more capital; BA is a poster child for this phenomenon and there’s no reason to think that we won’t see it continue, given the political climate. Remember, no matter how bad the mud-slinging gets, the market does not care.
Subscriber Note: Monday is a market holiday (President’s Day) so there will be no newsletter on Monday. See you back here Tuesday!
Here is the current scorecard – up and down – for the correction from the September 2018 highs:
- S&P was down ~594 points or 20.20%, now up 429 points or 18.28% from the bottom.
- Dow was down 5239 points or 19.44%, now up 4171 points or 19.21% from the bottom.
- /NQ is down 1908 points or 24.69%, now up 1274 points or 21.89% from the bottom.
- RUT is down 475 points or 27.27%, now up 303 points or 23.91% from the bottom.
The majority of the market-moving earnings heavyweights have already reported (FB, AAPL, AMZN, GOOGL). The FOMC meeting and most of the important economic numbers have been printed. The Market’s on its own from this point, perhaps with the help of a little FedSpeak. Anything can happen, but as long as the FOMC is operating with the “implied put” to backstop this market (even though there is LITTLE that they can do!) then I believe that the price is showing us higher in the near term. The Bear will not re-appear as long as the Fed is market-friendly.
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An embedded flash video is available here.
Offensive Actions
Offensive Actions for the next trading day:
- On Tuesday morning I’ll add the CAT call vertical as described in the “Whale” 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.
- Watch the upper delta limit on the SPX call spreads.
- The MSFT call spread must be closed by Tuesday.
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 above-average Friday and breadth ended the day very strong with +384 advancers minus decliners, with the high-water mark at +444 right near the opening bell.
SPX Market Timer : The Intermediate line flattened into the Upper Reversal Zone, still showing a bullish bias. All three timeframes are inside the Upper Reversal Zone, showing the relatively-rare Full Bearish Cluster with all three timeframes overbought. This can be a leading signal for a pause but usually not immediately..
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 14.91 after peaking at 50.3 a year ago, inside the bollinger bands. The RVX rose to 16.00 and is back inside the bollinger bands.
Fibonacci Retracements: The price has moved through several important Fib levels and is not caring about any confluence levels that these present.
Support/Resistance: For the SPX, support is at 2350 and 2600 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 1267 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. It can also signal “false” and create a massive swing higher.
Fractal Energies: The major timeframe (Monthly) is charged again, with a reading of 59. The Weekly chart has an energy reading of 46, starting to reflect the uptrend. The Daily chart is showing a level of 36 which is in exhaustion. This chart is just about ready for the next major swing as soon as the daily chart recharges.
Other Technicals: The SPX Stochastics indicator rose to 90, overbought. The RUT Stochastics indicator rose to 90, overbought. SPX MACD histogram rose above the signal line, showing a return of upside momentum but also showing negative divergence; this can be a leading signal for a pause. The SPX is inside the Bollinger Bands with Bollinger Band support at 2613 and resistance at the upper band at 2784 with price is at the upper band. The RUT is outside the Bollinger Bands with its boundaries at 1441 to 1564 and price is above the upper band.
I had the following results for the 15FEB 2019 Options Cycle:
High Probability Iron Condors
- SPY 27FEB 225/256*275276 Long Iron Condor entered for $.18 debit on the put spreads and $.20 debit on the call spreads for a total $.38 overall debit. I closed the call spreads for a $.51 credit; this gave me a net profit on the call spreads of $27/contract and I still hold the puts. Profit $35 assuming puts expire..
Low Probability Iron Condors
- SPX 15FEB 2590/2595*2710/2715 Iron Condor was entered for a $2.50 credit and closed for a $2.10 debit; this gave me a net profit of $32/contract after commissions, or a 12.8% return on risk.
- SPX 4FEB 2515/2520*2640/2645 Iron Condor was entered for a $2.50 credit and closed for a full loss of $256 after commissions.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- SLV 15FEB $15 SLV calls sold for $.23 and closed for $.03 With a ten contract position, this provided a net profit after commissions of $190.
- SSO 15FEB $65 puts sold for a $1.15 credit and closed for $.05. With a ten contract position, this provided a net profit after commissions of $545 or a 1.63% return on capital.
- HPE 15FEB $14 covered calls were sold for $.23 and bought back for $2.17, and the stock position closed out for $16.15. This gave me a net profit on the position of $190 after commissions.
“Whale” Trades
- MSFT 1FEB 106/107 debit call spread closed for break-even.
- GLD 1MAR 122.5/123.5 debit call spread entered for $.48 debit. and closed for a $.74 credit. This gave me a $22/contract profit or a net 46% return on capital after commissions, or $110 profit on five contracts.
- V 1MAR 140/141 debit call spread entered for $.52 debit; and closed for a $.80 debit. This gave me a net profit after commissions of $24/contract, or a 46.2% return on capital, or $120 profits on five contracts.
- MSFT 1MAR 106/107 debit call spread entered for $.52 debit, and closed for a $.70 credit. This gave me a net profit after commissions of $14/contract, or a 27% return on capital for $70 profit on five contracts.
Swing Trades
- SPY 30JAN 247/248 debit put spread bought for a $.42 debit. This trade expired worthless losing -$176 on four contracts.
- SPY 8FEB 260/261 debit put spread bought for $.40 debit. This trade expired worthless, losing -$168 on four contracts.
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
- 1FEB 270 puts for $.36 on Friday morning as the price faded back from the upper EM, closed for $.72 credit; this gave me a $34/contract profit or a 94% return on capital, or a net $170 profit on a five contract position.
Lessons Learned from this cycle:
I don’t think we’ve ever seen a rebound from a Bear Market that’s been this quick and violent, so for us to modestly profit from this cycle was a bit of a moral victory, but I am not surprised by what we’ve seen since early January, while most Bears are in shell-shock. Let’s see what we got right, and what we booted:.
What I think we did right this cycle: We did a few things right this cycle, because a lot of folks got killed on the rebound.
- We held off selling call credit spreads; even if it looks like I’ll get stepped on for the SPX call spreads, we did all the right things.
- We didn’t panic during the crash and sell off longs. We stayed the course and disposed of them normally.
- We flipped to long debit spreads when it made sense
- We did not load up on bearish trades on the bounce, even though it was tempting to anticipate the eventual “drop,” I think that went out the window with Powell’s flip.
- We stayed objective whilst others were losing it. I tried to evaluate the three possible scenarios and how we would identify/trade them going forward, which I think we did OK with, even though the eventual “winner” was the one that I assigned the lowest possible probability to. (Shows how much the consensus knows).
What I think we screwed up in this cycle: The assumption that the rebound off of the bottom would lead to either a re-test of the lows, or would lead to very little upside, was a valid theory based on our early January data. That assumption should have been thrown out once Jerome Powell flipped his stance. I also whiffed on the elusive 8/21 ema swing strategy that fired on the crossover and never looked back once..
What we have to do going forward: Be aware that this could be a cyclical move in the context of a much larger-term secular topping formation. This is a massive consolidation formation which has taken well over a year and still in the process of resolution. We should get movements that might last a few months but the rug will get pulled when we least expect it. .
Position Management – NonDirectional Trades
I have the following positions in play:
- SPX 15MAR 2820/2830 call credit spread (1/17) entered for $.80 credit. I will look for the next retracement to remove this position for a profit; my goal would be at least a $.40 debit or lower. If the price continues to advance higher, my exit point is at a .35 delta on the short call option. It’s currently at a delta of .32. Gamma makes delta move very quickly as the price gets near, so I don’t want to fall asleep on this one. I might only have 5-10 points of room left before I must close this trade. I will not roll this trade out; this is not a good market for selling credit spread premium until we see a sharp pullback. At this point I will not be sending out a Trade Update to inform customers of my exit; I will show how to add an alert to this option in today’s video.
- SPY 27FEB 225/256*275/276 Long Iron Condor (1/25) entered for $.18 debit on the put spreads and $.20 debit on the call spreads for a total $.38 overall debit. I closed the call spreads (2/12) for a $.51 credit; this gave me a net profit on the call spreads of $27/contract and I still hold the puts.
If we see a very sharp move lower in the near future, then we’ll start to scope out a downside put spread entry. There might be a “higher low” that shows up.
I have no positions in play.
Waiting for the next condition to sell options again; realized vol is out-pacing implied vol again. The rebound off of the bottom has been violent and traders are chasing after the move.
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 all of the four major indices in a death cross, I am suspending additional short put selling until those signals clear, unless a stock is clear of the death cross. I have the following positions in play:
- SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I currently have the SLV 18APR $15.5 calls (2/11) for a $.17 credit.
- AMD MAR19 $19 puts (2/11) were opened for a $.24 credit.
I am open to adding a little bit of inventory on stocks that are not in a death cross at this time. Seeing a pullback first would be a good thing.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – Looking for the next signal, which at this point would be the test of the 21ema.
- RSI(2) CounterTrend – Looking for the next setup.
- Daily S&P Advancers – Looking for the next signal to go long when we have single-digit advancers on the ADSPD.
- Swing – I have the following position:
- BAC 26.5/27.5 debit put spread (2/8) entered for $.24 debit per last Thursday’s advisory. I will look for 100% return.
Crypto markets have been strong when equities are weak; it appears like they might be negatively correlated and could create some important opportunities for us in 2019 if the equities market takes a dump. Right now we’re seeing crypto just holding steady in the face of the relentless equities rebound.
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 277.37, there is a +/-3.519 EM into this coming Friday. This is less than last week’s EM, some of that is due to a four-day week. The EM targets for this Friday’s close are 280.89 to the upside, and 273.85 to the downside.
Last week’s upper EM level was completely blown through as we once again have HV>IV. We did have a couple of mid-week opportunities to fade the upper EM for nice gains, although I was not able to take advantage of them. This week might offer a better opportunity for the price to do little, apart from Wednesday’s FOMC minutes and Thursday’s Home Sales.
I will start playing directional bear spreads once we see upside exhaustion on more than one timeframe.
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 had the following positions in play:
- NFLX 1MAR 347.5/350 debit call spread (2/4) entered for $1.28 debit. I will look for a 50% return.
- MSFT 1MAR 106/107 debit call spread (2/5) entered for $.52 debit, and per Thursday’s advisory I saw an opportunity to exit this trade on Friday for $.70, giving me a net $14/contract profit after commissions. MAKE SURE YOU EXIT BY TUESDAY to avoid Dividend risk!
I like the CAT 22MAR ATM debit call spreads, $1-wide, for around $.50 debit. Depending on the gap that we see Tuesday morning, we might have to pull our strike prices up or down to secure the right fill. If a reasonable debit is not see on the $1-wide, I’ll move out to $2-wide and spend about $1 debit.
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 most recent set of puts on the drop to the 200ma back in October. I will “reload” again soon, if/when the weekly chart goes into upside exhaustion. The three-month puts are still somewhat expensive. (3 months out/90% of current price).