Daily Market Newsletter

January 24, 2017

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Market Commentary

The long-awaited Keystone Pipeline got “executive order’ed” today and the XLB Building Materials sector got a big lift, as did Energy, Financials, and most other sectors with the exception of Healthcare. In one day nearly all of the losses over the last two weeks have been erased. This is the character of this market; rallies are stronger than sell-offs. Until that changes, we have to simply tune out the noise and trade along with the trend.

Look at IBM over the last few days; if you want to copy down a textbook breakout from a consolidation pattern, this is what it looks like.

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

Offensive Actions

Offensive Actions for the next trading day:

Nothing for tomorrow, I’ll take a MSFT earnings trade on Thursday afternoon prior to the close.

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 above average today. Breadth was relatively strong with +309 advancers minus decliners.

SPX Market Timer : The Intermediate line rose in the Upper Reversal Zone, showing a bullish bias. No leading signals at this time, but once again close to a full bearish cluster.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term sideways trend. 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 sideways trend.

VIX: The VIX fell 5.95% to 11.07, inside the bollinger bands. The RVX fell 3.29% to 17.06 and is inside the bollinger bands.

Fibonacci Retracements: The SPX has recently 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 now technically exhausted with an energy reading of 37, due to the recent breakout. The Daily chart is showing a level of 64 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.

Other Technicals: The SPX Stochastics indicator fell to 68, below overbought. The RUT Stochastics indicator rose to 34. above oversold. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2246 and resistance at the upper band at 2286 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1343 to 1385 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, 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 no current positions:

I expect movement very soon so I’ll put this strategy on the shelf until I see the next signal.

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. I looked through my scans this weekend and none were quite set up. EFA appears to be the chart showing the best near-term potential for a Weekly Short Call Diagonal. TSLA is also in a very nice position but I don’t like trading the wider spreads from a risk-management perspective, and earnings are skewing the volatilities.

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. No action required.
GE I will look to sell FEB17 $29 puts if the pullback continues.
TWTR I added another ten contracts (1/3) of $13 FEB puts for $.20. I don’t care about the recent bad press.
RIG I would like to sell against the $12 or $13 level again. .

I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. Pullbacks across the board would help.

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..
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 will look to take MSFT aftermarket on Thursday this week.

I have the following position:

SPY 10FEB 225.5/227.5 debit put spread (1/10) was entered for a $.79 debit. I will look for about a 50% return on capital with this position.

I have the following positions.

IBM 24FEB 170/172.5 call spread (1/23) entered for $1.20 debit. I sold this position (1/24) for a $2.00 credit. This gave me a net profit of $76/contract after commissions, which was a 63% return on capital. .

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

I would like to see if the price ramps up slightly this week, and I will buy APR puts into that strength.

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.