Daily Market Newsletter

May 20, 2017

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Market Commentary

Another profitable month! That’s nine in a row and 24 of the last 25 monthly cycle. (Please see the May 2017 Trade Performance Summary below) We’re not doing anything magic, just playing along with the trend and not trying to “outguess” the market. A lot of folks have gotten very bearish on the tape and are predicting Armageddon with every passing day, While I believe that there is some systemic risk and I’m not out there on the front line smoking Hopium, I also believe that markets transition to the next state with warning signs along the way.

Was this week’s drop our first warning sign? It’s hard to know for certain but at this point I’m saying “NO.” Usually the “shot over the bow” is more distinct, and Wednesday’s drop appeared more of the “one day wonder” variety.

At the same time it’s difficult to rationalize what the next positive catalyst is, but you have to understand one important thing about the market; it does not NEED your judgment nor permission for it to move. So many investors treat “fundamentals” as a forward-prediction and while they may be technically correct, they are usually years too early. We saw the whole 2008 bubble coming in slow motion, but those that got an early start in 2007 by getting bearish on the market found that the market went out of its way to punish them to new highs before the weight of the mess brought it down. This has been the way of the world for as long as I’ve read about markets, that the true “top” will never make sense. And I’ve had this drilled into my head for the past twenty years, over and over again.

So…I’m going to continue with the emphasis on small, short timeframe positions that reduce our time risk in the event that the “swan” does eventually appear.

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:

I will enter a whale position on XLU Monday.
Watch for a fade entry at the SPY EM targets listed for this week.

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 debit limit order entered for the SPX LP Iron Condor.

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 Friday. Breadth was strong with +341 advancers minus decliners.

SPX Market Timer : The Intermediate line turned down below the Upper Reversal Zone, still showing a neutral bias.. No other leading signals, but this chart bounced from the recent weak bullish cluster.

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

VIX: The VIX fell 17.87% to 12.04, back inside the bollinger bands. The RVX fell to 16.85 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 pulling out of exhaustion with a reading of 38. The Weekly chart is now recharging quickly with an energy reading of 67, due to the recent chop. The Daily chart is showing a level of 51 which is reflecting the move to the downside and now recent vol. Charts are doing precisely what they need to do to work off the enormous move off of the election bottom; it will take time.

Other Technicals: The SPX Stochastics indicator fell to 66, mid-scale. The RUT Stochastics indicator fell to 31, above oversold. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2366 and resistance at the upper band at 2411 and is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1361 to 1425 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. Markets are still showing perfect “Quiet & Trending” behavior regardless of what we “think” that they should do.

I had the following results for the 19MAY 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

No Trades this period.

Time Spreads

SPY 19MAY/16JUN 237/241 Double Calendar was closed for a net profit of $14/contract on 10 contracts, or a 5.02% return on capital and a $140 net profit.
SPY 19MAY/26MAY Short Call Diagonal was closed for a net profit of $35/contract or a 37.6% return on risk, for a net $175 profit on 5 contracts.
CTRP 26MAY/2JUN 53.5/55.5 Short Call Diagonal was closed for a net $30/contract profit or a 29.13% return on risk, for a net $150 profit on 5 contracts.

Cash-Secured Puts/Covered Calls

AMD MAY $10 puts sold for $.25 credit expired for $480 total profit on 20 contracts.
NVDA MAY $80 puts sold for $.90 credit expired for $267 profit on 3 contracts.
X MAY $25 puts sold for $.37 credit were assigned at the $25/share level. I kept the credit of the four contracts for a $144 profit and will now manage the position as a stock liability.
SLV MAY $18 Calls sold for $.22 credit expired for a net $210 profit.

Expected-Move or “Whale” Trades

QQQ 28APR 130/132 debit put spread expired for net $435 loss.
MSFT 5MAY 68.5/69.5 debit call spread was closed for a $11/contract profit on 10 contracts, giving me a net $110 profit and 52.4% return on capital.
SPY 5MAY 235.5/236.5 debit put spread expired for net $100 loss after commissions.
SPY 19MAY 237/238 EM fade call spread was closed for $25/contract profit after commissions, for a $250 profit on 10 contracts or a 47% return on capital

Swing Trades

RSI(2) CAT 12MAY 99/100 call debit spread gave me a $30/contract profit on five contracts, or a net $150 profit and 62.5% return on capital.

Hindenburg Positions

None this period.

Earnings Trades

None this period.

Lessons Learned from this cycle:

Another odd cycle that showed lots of range-bound tape with occasional big movement. The entire movement this cycle was limited to about four days out of the entire month; the rest of it was chop. We did play some “neutral” strategies but the risk of continued movement was far too high to really whack the market with condors and time spreads.

The short puts was our main profit weapon as usual but we saw a really bad breakdown in one of our target stocks (X) which could be a problem going forward in the future if it falls below my “get out” point. I have not had a problem in the past recovering after a deep assignment….remain patient and keep writing against it….but that was over the last eight years of this rally. How much longer can this market continue to lift all boats? We need to remain with our approach of only writing premium against stocks that have extended themselves.

It was nice to see a couple of short-call diagonals fire for us this cycle. I had imagined that to be a very effective weapon when this rally first began in November, but unfortunately the early rally was too strong and over-ran several positions. Now we’re in a good spot. The Lower EM was also defended nicely this week, so we’ll continue that.

No changes projected in our approach at this time.

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 have the following positions in play:

SPX 7JUN 2315/2320*2395/2400 Iron Condor was entered (5/18) for a $2.50 credit. I have entered a GTC $2.00 debit limit order as my closing order.

I have no positions at this time.

I will be on the lookout for more short call diagonals as this is the type of market that they should work well in. There is a LOT of short-term energy in the SPX chart so I’m going to back off of the longer term SPY spreads for now.

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 need to look for the next set of calls to sell against SLV; I can sell at the $17 level which feels low for JUL.
X – I added the 19MAY $25 puts (3/13) for $.37 credit and was assigned at the $25 price level (5/16). I sold 21JUL X $25 calls against this position for a $.40 credit. I will bail out of this position if the price closes below $16/share.
AMD – I sold 16JUN $9 puts (5/8) for $.25 credit. Bounced nicely at $10/share.
NVDA – positions expired and this one might be gone. We sold against it for several cycles and did fine. Not really interested in this one above $100/share.
XLF – I sold the 16JUN $22 puts (4/10) for $.25 credit and will accept assignment if the price pulls back.

I will start looking for new candidates, but really would prefer to see a larger-scale pullback first so I want to keep my powder dry for that event, when it comes. .

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 – .DIS fired last week but I was unable to get a good entry and I don’t like “chasing” these trades.
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 238.31, there is a +/- 2.898 EM into Friday.

The EM for this Friday’s close is 241.21 to the upside, and 235.41 to the downside.

Last week’s EM trade got “defended” on the downside and gave us a nice positive return. I will watch for either level to be tested this week and will fade that level if breached.

I have the following positions:

SPY 21JUL 229/230 Debit Put Spread (5/15) was entered for a $.14 debit.

Nothing else to enter at this time.

I have the following positions:

TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
C 23JUN 63.5/64.5 debit call spread (5/15) was entered for $.27 debit. Let’s look for a 100% return from this trade.
BIDU 23JUN 202.5/205 call debit spread (5/17) entered for $.39 debit.

I like the XLU long right now. I will enter the XLU 23JUN 52/53 call spread on Monday morning, with the goal of spending less than $.50 for that spread. If there is a large gap in either direction I will adjust the strikes to keep the price in the middle and below $.50 cost.

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.