Daily Market Newsletter

March 11, 2017

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Market Commentary

As anticipated, Friday’s Jobs report followed the Wednesday ADP report and clocked in a very strong number (at least strong relative to the last decade) and the markets shot up on Friday, although tempered somewhat by the end of the day. At the very least, they halted the current losing streak where markets were seeking the new range marker. Another good piece of news from the report is that the Labor Participation Rate also ticked up.

As a result of this, the Fed is all but guaranteed of hiking rates on Wednesday after the next FOMC policy meeting; the current probability stands near 89%. As always, the real risk during these times is what else that Janet Yellen could say, however she has learned to play the game quite well and will deliver the right mix of FedSpeak and Dovishness that the Market has come to expect from her. I would expect to see a bullish tone into mid-week on the “celebration of certainty.” Other risks remain, however, mostly coming from overseas. The US earnings season is all but over and traders are already starting to look forward to Q12017 earnings which will start in April, about a month from now.

What I still believe is that markets will need to pause for an extended period of time, perhaps another few months, before real progress can be made. Base-building will be appropriate and we’ll seek to take advantage of that with limited-risk options trades, mostly of the “seeking 1 to make 1” variety.

Customer Notice: I will be traveling for a family emergency through Tuesday AM March 14th. Newsletters might be more brief, will likely come out much later in the day, and there will be no trade entries until next week. Thanks for your patience during this time.

For the next few days, I will not be able to post the video in its own flash player. You must download flash to watch the video above.

Offensive Actions

Offensive Actions for the next trading day:

I have a couple of cash-secured put trades detailed in the “stocks” section below that can take advantage of the recent small pullback.
No other trades until after the FOMC reaction on Wednesday.

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.
I have a SPY Calendar Spread with action points defined below in the “Time Spreads” section.

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 about average Friday. Breadth was good with +205 advancers minus decliners.

SPX Market Timer : The Intermediate line turned turned down, below the Upper Reversal Zone, now showing a neutral bias. This chart is once again very close to showing a Full Bearish Cluster with all timeframes in the Upper Reversal Zone.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.

VIX: The VIX fell 5.20% to 11.66, inside the bollinger bands. The RVX dropped 5.94% to 16.47 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 32, due to the recent breakout. The Daily chart is showing a level of 54 which is recovering quickly. It’s rare when we have all three major timeframes in exhaustion as we had for two weeks.

Other Technicals: The SPX Stochastics indicator fell to 64, mid-scale. The RUT Stochastics indicator fell to 36. below mid-scale. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2325 and resistance at the upper band at 2398 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1362 to 1421 and price is at the lower 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:

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 Weekly timeframes. As long as this chart settles into a range it’ll be fine.

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 24MAR/21APR 237 Put Calendar (3/6) was entered for a $1.36 debit. My 10% profit exit is $1.54.

I describe the management of this trade in Tuesday’s video. The Upper adjustment point is 239.27, and the lower adjustment point is 234.44. I will be traveling this week and unable to email out adjustments if required, so please use alerts on your chart to notify yourself of required actions . 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 will look for the next daily exhaustion signal to sell further OTM calls against this position.
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. I will sell more 19MAY puts at the $25 strike price on Monday.
AMD – I sold the APR $11 puts (2/27) on AMD for $.19 credit.
NVDA – I think that this stock is a market leader in what they do and will continue to dominate for some time to come. The recent pullback to support near $100 is giving us an opportunity to sell puts below $100. On Monday I’ll sell puts against the $80 strike price with 19MAY options, seeking at least $1 credit. Note that this will require a lot more capital than other candidates that we’ve been pursuing, and therefore contains more risk….so keep your position size small.

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. The next earnings season will begin in April.

I have the following positions:

DIA 10MAR 199/201 Debit Put Spread (1/30) was entered for a $.94 debit and expired OTM on Friday.
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.

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.