Daily Market Newsletter

May 8, 2017

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Market Commentary

Just a very odd market, with the “haves” being accumulated like crazy (AAPL today) and the rest of the market languishing. Trends like AAPL always end poorly when the bubble hits, even if it just creates a “higher low” on the weekly chart. The VIX is also at a ten-year low with realized vol on the floor. We’re playing “long vega” strategies to take advantage of any vol spike, but we’re actually seeing volatility contract.

With the price of the S&P at a resistance level, I’m going to enter a short-term bearish diagonal tomorrow morning; see the “time spreads” section below.

If the video above does not play, please try this version of the video with embedded player.

Offensive Actions

Offensive Actions for the next trading day:

Watch for the SPY levels on the EM fade listed below.
I will enter a Short Call Diagonal on the SPY tomorrow morning; see “time spreads” section 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.
I have my action points defined for my SPY Calendar spread in the “time spreads” section below.

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 below average today. Breadth was weak with -121 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, now showing a bullish bias. The two strongest timeframes are now in the Upper Reversal Zone, showing a strong bearish cluster after Friday’s Full Bearish Cluster with all timeframes overbought. This can be viewed as a leading signal for a pause.

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 sideways trend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term sideways trend.

VIX: The VIX fell 7.57% to 9.77, back inside the bollinger bands. The RVX flattened to 15.34 and is back inside the bollinger bands.

Fibonacci Retracements: The SPX has come down to the 23.6% Fib Retracement of the entire November-March rally.

Support/Resistance: For the SPX, support is at 2320 … with overhead resistance at about 2400. The RUT has support at RUT 1335 with overhead resistance at about 1426. 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 38. The Weekly chart is now recharging quickly with an energy reading of 52, due to the recent chop. The Daily chart is showing a level of 40 which is losing energy due to the recent uptrend. Charts are doing precisely what they need to do to work off the enormous move off of the election bottom.

Other Technicals: The SPX Stochastics indicator rose to 86, overbought. The RUT Stochastics indicator fell to 67, mid-scale. The SPX MACD histogram dropped above 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 2415 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1345 to 1427 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. Markets are still showing perfect “Quiet & Trending” behavior regardless of what we “think” that they should do.

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 2300 level, this might be our first opportunity to sell premium against that level.

I could not get the MSFT condor to fill so I’m going to abandon that trade setup. .

I have the following positions at this time:

SPY 19MAY/16JUN 237 Put Calendar (4/24) was entered for $1.69 debit.
SPY 19MAY/16JUN 241 Call Calendar (4/25) was entered for $1.10 debit.
My lower “action point” is 237, and my upper action point is 241. If one of those action points is hit, then I will exit the opposite side of the trade and double up on the remaining calendar spread .
My GTC credit limit for this position to secure an 8% return is a $3.10 credit. The aggregate trade is in the black right now but we still have to burn off more time premium and this week should be when I expect to close this position.If the price starts to rally above SPY 240 I’m closing this position.

I would like to set up a Weekly Short Call Diagonal tomorrow morning using the 17MAY/26MAY SPY options; I would like to receive about a $1 credit and I’ll have to see which secures me the best combination, whether it’s the 237/239 or the 238/240 strikes.

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 sold 19MAY $18 calls (3/27) against this position for a $.22 credit.
X – I added the 19MAY $25 puts (3/13) for $.37 credit. This stock is getting hammered. I would accept assignment if it comes to that, however my “get out of dodge” level is $16/share which is where I no longer want to be an owner of X
AMD – I sold 19MAY $10 puts (3/27) for a $.25 credit, and 16JUN $9 puts (5/8) for $.25 credit. Getting hammered but will hold on.
NVDA – I sold the 19MAY $80 puts (3/13) for $.90 credit.
XLF – I sold the 16JUN $22 puts (4/10) for $.25 credit and will accept assignment if the price pulls back.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – I entered the IWM 2JUN 140/142 (4/26) for a $1.01 debit, and will look for a 50% return from this position.
RSI(2) CounterTrend – I entered the CAT 12MAY 99/100 call spread (5/8) for $46; I will look for a 50% gain if the price bounces quickly.
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.

Earnings for 1Q2017 are just about done with; the next cycle will start in early July.

This is a new section that I’m going to start laying out trades for weekly “expected moves.” The S&P500 has done a nice job of moving pretty much to one end of the overall expected move every week. We can either speculate on that direction ahead of time using OTM spreads, or we can “fade” the price when it hits one of the EM levels.

Viewing the SPY from Friday’s close.at 239.70, the EM for this Friday’s close is 242.01 to the upside, and 237.39 to the downside.

We are going to have some type of reaction to this weekend’s French election; once I process this result, I’ll set up a trade for Tuesday morning to take an OTM directional trade to target one side or another.

We can also look to fade either level when touched with an ATM debit spread. At this point if the price rallies up to the 242 level then I will set up a 12MAY in/out put spread against it, otherwise if we see a move down to the 237.39 level we will set up a 12MAY in-out call spread

I have the following positions:

QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit. Still need more downside movement to light this position up.

I have the following positions:

TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.

Most of the candidates showing on the Whale scan watchlist are about to report earnings. We need to keep an eye on BIDU as the huge monthly pattern might be about to break.

I like the setup for BP very much right now, but it’s paying a dividend this week.

C looks like a good whale setup in the near term.

The major index charts look like they are about to break higher but not much daily energy left

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 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 AUG17 214 long puts (5/2) – I entered this position for a $1.22 debit.