Daily Market Newsletter

March 4, 2017

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Market Commentary

The Market continues walking a tightrope through a mine field, continually betting on the new administration stumbling, some piece of bad news appearing…..however those skeptics have been slowly, patiently, inexorably squeezed out to the upside. A little bit of normalcy hit the market at the end of this past week as charts took a pause. This is long overdue, and I’m actually looking for a deeper, longer pause to kick in, but past experience offers that this “rest” will not occur until everyone stops looking for it.

It’s always amazing to me how these patterns play out near intermediate market tops; they are so obvious to see in the rear-view mirror, but we are mostly blind to them in the short run due to Recency Bias, which gives more weight to recent events than all available information.

My approach in the near term is to continue to go a little “overweight” on non-directional strategies like LP Iron Condors and Calendar Spreads. I will also start to leg into short-term bearish opportunities. There are some “long” opportunities setting up right now and I will still pursue those, albeit with smaller positions.

Customer Notice: I will be traveling for a family emergency from Wednesday March 8th through Tuesday March 14th. Newsletters might be more brief, and there will be fewer trade entries. Thanks for your patience during this time.

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

Offensive Actions

Offensive Actions for the next trading day:

I will add a SPY Time Spread as discussed in the “Time Spreads” section and this weekend’s video.
Watch for Whale Trades on UAL, AAL, and DAL described in the video and 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.
In this weekend’s video I discussed the need to close the RUT LP Iron Condor soon.
We will also need to close the SPX Iron Condor this week on any pullback.

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. Breadth was mixed with -24 advancers minus decliners.

SPX Market Timer : The Intermediate line turned turned down inside the Upper Reversal Zone, still showing a bullish bias. After several rare Full Bearish Clusters lately, no leading signals.

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 7.20% to 10.96, inside the bollinger bands. The RVX fell 3.86% to 16.69 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 29. The Weekly chart is now technically exhausted with an energy reading of 30, due to the recent breakout. The Daily chart is showing a level of 36 which is exhausted now. It’s rare when we have all three major timeframes in exhaustion.

Other Technicals: The SPX Stochastics indicator fell to 92, overbought. The RUT Stochastics indicator fell to 73. below overbought. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2279 and resistance at the upper band at 2408 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1361 to 1422 and price is below 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 and move into a larger trading range 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. This one’s not going to work out. I closed down my call spreads (3/2) for a $1.00 debit.
SPX 10MAR 2315/2320*2370/2375 (2/17) entered for $2.50 credit. I have already entered my $2.00 GTC debit order. The price is above the call spreads right now so we need to be in place to take advantage of any pullback that we see this coming week to close down the entire position.
AMGN 24MAR 167.5/170*180/182.5 Iron Condor (2/24) was entered for a $1.27 credit. I’m going to shoot for a $1 debit exit GTC. The price is near the top of the range but is showing exhaustion on Daily and Weekly timeframes.
RUT 24MAR 1360/1365*1425/1430 Iron Condor (2/27) entered for $2.50 credit. I have in place a $2.00 GTC debit closing order and this one might fire soon. I am a little concerned with this one because it’s currently profitable but we’re seeing the RUT daily and weekly charts coiled up and ready to move again.

With all index charts at maximum exhaustion, now is the highest-probability window of opportunity for range-bound trades….however it feels positively suicidal doing so. This is usually the measure of a good setup. .

I have the following positions:

SPY 17MAR/21APR 235 Put Calendar (2/21) was entered for $1.44 debit. Per my action plan the gap yesterday caused me to add the SPY 17MAR/21APR 241 Call Calendar (3/1) for $1.07 debit. I closed this entire position (3/2) for a $2.76 credit. This brought in a credit of $276/contract minus $4 of commissions for a net $272 credit per contract. My cost basis was $248 plus $4 for net $252. This gave me a net profit of $20/contract or an 8% return on capital.

I will add another SPY time spread for Monday entry, using the SPY 24MAR/21APR 239 Puts, or adjust for Monday morning’s gap. I describe the management of this trade in this weekend’s video. .

The 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 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 had to close out my SLV FEB calls on Friday as they slipped ITM by a few pennies. I will look for the next daily exhaustion signal to sell further OTM calls against this position.
GE Did not give us much of a pullback to sell puts against.
TWTR I will look for the next cycle of puts to sell against TWTR. .
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.
X – I added the MAR17 $25 puts (1/30) for $.47 credit. .We’ll look for the next dip in price to sell again.
AMD – I sold the APR $11 puts (2/27) on AMD for $.19 credit. .

If we get more of a pullback then I can be a little more aggressive with this strategy.

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 as a new range approaches.
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.
QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit.

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. I closed down half of the contracts (2/17)for a $1.82 credit, or a net profit of $80/contract. I will hold the rest of the contracts longer-term and wait on the breakout.
TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
VLO 31MAR 67.5/69.5 Debit Call Spread (2/28) was entered for a $1.00 debit. I will look for a 50% gain from this position.

What was threatening to break out, has broken out. We might be on borrowed time with directional upside plays.In this weekend’s video I discussed potential setups on UAL, AAL, and DAL which are in nice potential breakout patterns.

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 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.