Daily Market Newsletter

This is PRECISELY what the market should be doing to generate an intermediate top; in a few months we will look back at these signals and say, “well, all the SIGNS were there, why couldn’t we pull the trigger?” And every time it’s due to all the complexities that come with trading the market, especially the emotions that come from a huge freight train of a move blowing by everyone with few passengers on board.

Melt-up moves like this NEVER feel comfortable, in fact they always come with a strong sense of FOMO, or “fear of missing out.” You sit on the sidelines and the pain comes too much to bear, and you finally pile on….right at the high water mark.

The S&P500 has piled on 112.6 points since the beginning of the year, for a 4.2% gain. The Dow has gained 1084 points for 4.4%. Markets have gained as much in two holiday-shortened weeks as they have in some years. We are clearly in the “euphoria” phase of this cyclical bull run that began on the breakout from the Brexit in late June 2016. As I’ve mentioned several times by now, I no longer reference this bull market to the 2009 bottom….that was a secular bull bottom that will likely last for decades.

As the Sentimentrader tweet above references, we are into some very rarefied air but it can continue to go higher. Our approach has been to try occasional short-delta entries (more to come on Tuesday) but these have been small and generally have not worked. Our approach has been to stay long and look for money rotation into stocks breaking out from consolidations, like last week’s KRE trade that was closed at our target on Friday. Eventually this will end poorly but it is NOT our goal to try to catch the top….at best we might get a weak pullback from this area. In today’s video I’ll highlight other past runs that were similar to this one….however none of them truly compare to what we’re seeing.

As a human interest story, it’s worth pointing out that exactly ten years ago this happened to the young trader in the video. I remember that day like yesterday, as I went to routinely check on the futures on a market holiday and was shocked to find them limit-down. (no, this is not me in that video!) This is the sort of thing that can occur right after a euphoric top as everyone is on the wrong side of the boat when the boom swings over. I will caution you that the video is unedited and not fit for sensitive ears.

Monday is Market Luther King day in the USA which is a market holiday; there will be no newsletter that day. Have a good long weekend, folks….

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 (New to 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; see the “Weekly EM” section below for actions.
I will enter another SPY EM put spread, see “whale” section below.
I will consider entries in COST, XLP, and MCD in the “whale” section below, and will be discussed in today’s video.

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 average Friday and breadth was relatively strong with +209 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened in the Upper Reversal Zone, still showing a bullish bias. Another strong bearish cluster Friday which has become meaningless in the face of this advance.

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 to 10.16, inside the bollinger bands. The RVX rose to 13.87 and is inside the bollinger bands.

Fibonacci Retracements: If we see an actual pullback then I’ll start to determine fib levels that might act as potential support.

Support/Resistance: For the SPX, support is at 2672 … with no overhead resistance. The RUT has support at RUT 1505 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 down into exhaustion again with a reading of 23. The Weekly chart is now in exhaustion with an energy reading of 25, due to the recent trend. The Daily chart is showing a level of 21 which is now in massive technical exhaustion and well below where we normally see it during the finale of a rally. These are the lowest readings that I have ever seen in the past twenty years.

Other Technicals: The SPX Stochastics indicator rose to 88, overbought. The RUT Stochastics indicator flattened at 86, overbought. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back outside the Bollinger Bands for the second day in a row and six out of the last seven days with Bollinger Band support at 2634 and resistance at the upper band at 2780 and price is above the upper band. The RUT is outside the Bollinger Bands for the second day in a row with its boundaries at 1514 to 1586 and price is well above the upper band.

We are seeing 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.

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.I have not put this strategy into play since the 2016 Brexit reaction as the ultra-low risk premium in today’s market has not made this a wise strategy to pursue due to the inherent risk against the backdrop of super-low risk premium.

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.

I would need to see a SIGNIFICANT pullback to make me want to initiate this strategy again. Those selling call spreads are screaming in pain once again.

I have no positions at this time. Not the right type of market for non-directional trades. I might consider a LP Condor if the SPX hits a daily energy level of 25.

I have no remaining positions. This is normally a perfect time to be selling calendar spreads against the RUT or SPX due to the exhaustion levels, however with my most recent experience with them in September, the effort was barely worth the hassle since we’re selling 6% vol and buying 7.5% vol against it. I might target higher IV underlyings to overcome this, at the risk of seeing greater movement.

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.” 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:

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. I sold the 19JAN $15 puts (12/4) for $.19 credit. I also sold FEB18 $17 calls (1/2) against my stock position for $.17 credit.
NUGT stock – We are once again green light on NUGT but the price has run away from my desired entry point..
DUST – We are out of DUST for the time being.

Just about everything that I would consider buying is running far away from my desired buy points. Gold is on a run so NUGT is running with it and the pullbacks will be shallow. I want to ensure that I am fully capitalized when we do see a “real” dip occur. I will not chase prices higher.

I would like to pursue the next pullback in BAC to sell puts. Earnings are coming soon. .

OIH looks like a good candidate now, as it pulls back after this breakout.

If we see a pullback in January, I want to be very aggressive to be selling puts against stocks that I would be OK owning.

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.
RSI(2) CounterTrend – Looking for the next setup.
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.

Perhaps it’s time to go “alt-coins.” The latest video shows “New to Crypto?” and should be viewed by anyone regardless of how long you’ve traded it.

The crypto market has strengthened after the FUD related to south korea banning crypto was found to be false. Even CNBC was spreading this junk, quite surprising.

Please refer to the left sidebar section if you’d like to get caught up on “FAQ” -style intro videos.

I will be part of the creation of a new advisory site “readysetcrypto.com” which will actually start creating a daily advisory service in mid-January. Crypto is such a different world that it shares very little with the equities and options world and I cannot give it proper due in this newsletter. You’re welcome to sign up for our free daily report to start getting plugged into this exciting new world.

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 Ten Sleeper Crypto picks”

Viewing the SPY from the current Friday closing price at 277.92, there is a +/- 2.697 EM into this coming Friday. This is about normal compared to the average EM that we’ve seen this past year, however consider that this is only pricing in four days of movement.

The EM targets for this Friday’s close is 280.62 to the upside, and 275.22 to the downside.

Well OK I entered the SPY 12JAN $276 puts Thursday on last week’s upper EM test, for $.68; these expired worthless. Once more I will fade any test of the EM this week with debit spreads to begin the week, and long options ATM by Thursday/Friday.

I have the following current positions:

SPY 31JAN 274/276/278 Ratio Butterfly (1/11) was entered for a $.30 credit. I will hold this trade to expiry if necessary.

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 31JAN 261/262 Debit Put Spread (12/29) entered for a $.12 debit. I will look for a minimum 100% return from this trade after commissions.
KRE 2FEB 59.5/60.5 debit call spread (1/5) entered for a $.50 debit. I removed half of this position for a $.76 credit on Thursday, and closed the rest above my target on Friday for an $.81 credit.
WMT 9FEB 100/101 debit call spread (1/8) entered for $.53 debit; I will look for a 50% return.
JPM 12JAN 110/111 debit call spread (1/11) entered for a $.50 debit, I closed this trade near the opening bell on Friday for an $.85 credit.

I would like to create another set of SPY put spreads into the 9FEB series; on Tuesday I will enter the SPY 9FEB 271/272 debit put spreads, currently showing about a $.12 to $.14 entry price.

I will also talk about entries in COST, XLP, and MCD in today’s video. I would consider going long on these for the 9FEB series if we can get them for the right price. (16FEB for XLP due to liquidity issues with 9FEB)

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 JAN18 229 long puts (10/11) – i entered this position for a $1.19 debit.
SPY MAR18 240 long puts (12/20) – I entered this position for a $.94 debit