Daily Market Newsletter

January 4, 2017

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Market Commentary

Stong auto sales and no drama from the FOMC minutes created yet more gains today, as markets have shaken off last week’s dip of apparent tax-selling. I keep waiting for the first “shot over the bow” that leads to some REAL distribution (but not a trend change) but we might have to wait until mid-January to see it. The uptrend continues..

On that note, we are seeing some extreme bollinger squeezes on the RUT and SPX. Big movement is coming soon.

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

Offensive Actions

Offensive Actions for the next trading day:

I’m going to add a 20JAN SPY Butterfly as described below in the “Whale” section.

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.
The new SPX and RUT LP Condors are risk-managed from day one and there is no defense other than early exit

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 above average today. Breadth was good with +336 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened below the Upper Reversal Zone, showing a neutral bias. The Near Term Line went into the Upper Reversal Zone, so this chart is very close to a strong bearish cluster with in the upper reversal zone.

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 7.78% to 11.85, inside the bollinger bands. The RVX fell 5.04% to 18.10 and is inside the bollinger bands.

Fibonacci Retracements: The SPX has retraced about 23.6% of its election rally. The more important 38.2% fib retracement sits at the 2203 level.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2277. The RUT has support at RUT 1300 with overhead resistance at 1393. 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 still charged with a reading of 43. The Weekly chart is declining with an energy reading of 40, due to the recent breakout. The Daily chart is showing a level of 59 which is completely recharged again; we are seeing the expected short consolidation at this level but it’s not going to last much longer as the daily energy must go somewhere. It appears to be pulling to the downside for now.

Other Technicals: The SPX Stochastics indicator fell to 51, mid-scale. The RUT Stochastics indicator fell to 47. mid-scale. The SPX MACD histogram rose slightly below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2229 and resistance at the upper band at 2283 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1349 to 1391 and price is below the upper band. The Bollinger Bands are starting to squeeze, especially on the RUT.

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.

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 position:

20JAN SPX 2215/2220*2285/2290 LP Iron Condor (12/29) was entered for a $2.50 credit. I have already set my GTC debit exit at $2.00. I will set my risk from day one on this trade and there is no adjustment. The price moving to the downside is actually great news for this position and puts me in a stronger position to succeed with it. .
20JAN RUT 1335/1340*1395/1400 LP Iron Condor (1/3) was entered for a $2.75 credit. Per this weekend’s advisory, I entered this position in the first few minutes of the cash market. My preference would have been to secure the 1400/1405 strike prices for the calls, but the 1405 was not available so I made the compromise of securing a larger credit and will look for an earlier exit of $2.45 to secure the 20% return minus commissions.

Nothing to do at this point but to keep my limit orders in play and look for an exit. Not what I wanted to see from the RUT today.

I have no current positions. If I see this current move continue to the upside, I’ll start to look for exhaustion signals that line up with resistance, and then sell Weekly Diagonals again.

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 will continue to write time against these shares on every rally. I will look to sell more calls in the next bounce higher in SLV. If the price continues pulling back, I will likely sell more puts against the $13 level if I can secure them for at least $.15 credit.
GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit. I will look to sell FEB17 $29 puts if the pullback continues.
TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit, and added another ten contracts (1/3) of $13 FEB puts for $.20. I don’t care about the recent bad press.
RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 credit. I will see if the pullback gets a little stronger.

I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. Last week’s dip didn’t give me much of an opportunity to secure new positions.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover. .
RSI(2) CounterTrend – Awaiting the next signal.
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.

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge.

No positions at this time. Once the S&P hits an exhaustion level on the weekly chart, I will consider a vertical debit put spread to catch any volatility to the downside.

I have no current positions.

I am going to add a 20JAN SPY 228/230/232 call butterfly tomorrow to help hedge the SPX Iron Condor. It’s currently showing about a $.36 debit afterhours. If the price ends up gapping down significantly tomorrow morning then I will just match the strikes to the expected move, as I’ll show in tonight’s video.

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 JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.
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.