Daily Market Newsletter
March 25, 2017Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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OK, now what? A very interesting week in the markets (finally) as corrective price action replaced the “groundhog day” price action of the previous period that we’ve seen, especially since the November election. A straight-up, relentless 15% rally has been the mode since mid-November, with all of my studies screaming for a break in the price. Perhaps the news from last week was the catalyst for that break.
Frankly, I’m a little surprised that we didn’t see a bigger haircut right off the back of Tuesday’s modest decline of 29 handles, however corrective price action is never that simple to predict and trade. It typically converts everyone to the “bull” camp again before pulling the rug out. This happens again and again until a new floor of support has been printed.
I am not looking for an outright crash; as I’ve been saying for some time, a new floor down at SPX 2300 (roughly 4% drop) might do the trick, with a stretch target at about 2200 should the market need to find a deeper floor of support. What I’m really hoping for out of this move is for some additional implied volatility so that we might become effective option sellers again. .
Offensive Actions for the next trading day:
- I will look to enter a LP Iron Condor on the SPX on Monday; see “LP Condors” section below..
- I will enter a QQQ debit put spread on Monday; see “bearish/fade” section below.
- I have some options being sold against fixed assets on SLV and AMD; see the “stock” section below.
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 will close the ABBV position if the price drops to support again; please see “time spreads” section below.
Non-Directional Strategies
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Market Internals: Volume was slightly above average Friday. Breadth was mixed with -49 advancers minus decliners.
SPX Market Timer : The Intermediate line turned down, below the Upper Reversal Zone, now showing a bearish bias. The two weaker lines have bounced slightly above another Weak Bullish Cluster in the lower 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 downtrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term downtrend.
VIX: The VIX fell 1.22% to 12.96, back inside the bollinger bands. The RVX gained .88% to 18.38 and is back 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 30. The Weekly chart is now technically exhausted with an energy reading of 38, due to the recent breakout. The Daily chart is showing a level of 53 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 41, mid-scale. The RUT Stochastics indicator rose to 39. above oversold. The SPX MACD histogram fell below the signal line, showing a lack of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2341 and resistance at the upper band at 2397 and is at the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1338 to 1414 and price is above 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.
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 2300 level, this might be our first opportunity to sell premium against that level.
I have no positions at the current time.
I don’t have any “signals” at this time but the SPX is close to the center of what I expect the short-term range to be.
I will enter the following position on Monday morning: SPX 24APR 2295/2300*2395/2400 Iron Condor for $2.50 minimum credit. This position will require you to incur $250/risk per contract. You might also consider selling the same equivalent position on the SPY.
Due to a morning commitment, I will not be entering this position until the early afternoon ET so there’s a good chance that the strike prices that I enter will be considerably different than those. I will discuss how I will be setting up the initial strike prices to “walk into” the eventual entry. .
I have the following positions:
- ABBV 31MAR/7APR 64.5/66.5 Call Diagonal (3/20) was entered for a $.97 credit. I will look for a 40-50% return from this trade and that decision is usually made intraday in this market. I have added an alert to close the position if the price revisits the $65.04 level again
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 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 to sell 19MAY $18 calls against this position for a limit of $.18 credit.
- RIG I’m going to add more puts once we determine that the ” range” is printed on US markets. .
- X – I added the 19MAY $25 puts (3/13) for $.37 credit.
- AMD – I sold the APR $11 puts (2/27) on AMD for $.19 credit. I will sell 19MAY $10 puts on Monday.
- NVDA – I sold the 19MAY $80 puts (3/13) for $.90 credit. We need to look for the next pullback before selling again.
If we get more of a pullback then I can be a little more aggressive with this strategy. I have a feeling that a lot of things will be on sale before long.
Thoughts on current swing strategies:
- 8/21 EMA Crossover – The 8/21 ema is starting to cross over to the downside now. I am taking the QQQ put spread on this signal .
- RSI(2) CounterTrend – I’ll look for more of these in the near future as a new range approaches. I’ll talk more about the RSI(2) in today’s video.
- 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 the following positions:
- QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit. Still need more downside movement to light these up.
- CRM 21APR 79/80 Put Spread (3/21) was added for $.20 debit. I will enter a $.46 credit closing order GTC for a 100% return.
On Monday I will add a QQQ 28APR 130/132 debit put spread, currently priced at $.86 debit. I will be entering this trade in the early afternoon ET so I may have to adjust the strike prices to reflect movement by that point.
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. This one looks like it’s rolled back down the hill..
There are several Whale longs that are setting up nicely and might allow a counter-trend entry in this corrective period. Be aware that any counter-trend longs could fail immediately if the larger market starts to erode again. Here are some of the candidates:
- .BBY Long above $45.85
- MSFT above $66
- T above $42.72
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
Per Thursday’s report I added the JUN17 long puts. I can’t think of a better market condition to be adding long puts.
I will likely clear all put options if the price drops 5% from the recent highs at SPX 2400. Not sure that I can expect much more than that given the current climate.
We currently have the following positions in play with this strategy:
- SPY JUN17 215 long puts – I entered this position (3/17) for a $1.19 debit.
- SPY APR17 206 long puts – I entered this position (1/27) for a $.92 debit.