Daily Market Newsletter

November 5, 2016

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Market Commentary

A month ago I mentioned how stocks are “wound up” and sitting with the highest energy level at all major timeframes that we had seen for some time, implying a big move was coming. Well, I can’t exactly call a 3% move to the downside a “big” move, but it’s been persistently leaking for the past several days, and the S&P is now a full 5% or 109 points off of the August high water mark.

And the majority of this is due to the upcoming election. Who will win the White House? The Senate? The House? It seems that we’ve been talking about this election risk forever, and just when it seemed as though we’d see a bounce on Friday, no one wanted to be long over the weekend. It seems that there’s enough of a chance of a completely random combination of results – or worse, NO result like 2000 – that risk premiums are skyrocketing.

And yet, for all of this fear in the air, I very much doubt that we’ll tip the markets into a Bear no matter what occurs; that would be a greater-than-20% haircut accompanied by spiking risk premium and a monthly downtrend. Imagine a price level of S&P 1755, which is a 20% drop from August levels…that’s not far below the January lows. It seems as though we have already “corrected through time” over the past 2 years and today’s rampant skepticism seems to be a better environment for higher prices than lower ones.But then again, the recent Brexit rally could be the most epic “throw-over” and fake-out of all time if we did “correct” from these prices.

I think that we need to do the following:

Look to sell premium at or below the January lows if possible (credit spreads)
Look to sell assets at prices not seen since January (cash-secured puts)
If the price actually comes down to “whack” those positions, then we know that we have a “new” market to trade and there will be no lack of opportunity. Otherwise we can use the fear against the market to establish some good positions in the short term.

Usually the “fear” is overdone and rewards those traders willing to see through the fog. With that said, let’s take really wise risks and not try to be a hero before the result is known.

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Offensive Actions

Offensive Actions for the next trading day:

Nothing planned for Monday at this time. I would like to sell positions that are below the January lows if we see that much “fear” in the Market on Monday or Tuesday..

Defensive Actions

Defensive actions for the next trading day:

Any vertical debit spreads that we set up are risk-managed from day one, and no defense is really required.

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 flat with -23 advancers minus decliners.

SPX Market Timer : The Intermediate line turned down into the Lower Reversal Zone, showing a bearish bias. This chart is now showing a Full Bull Cluster for the second day in a row with all three timeframes oversold in the Lower Reversal Zone; this is often a leading signal for a bounce..

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

VIX: The VIX rose 1.95% to 22.51, outside the bollinger bands. The RVX gained 1.64% to 25.38 and is outside the bollinger bands.

Fibonacci Retracements: The SPX has retraced more than 50% of the Brexit rally, but not quite 61.8% at SPX 20161. It has also retraced more than 38.2% of the full Feb-August rally.

Support/Resistance: For the SPX, support is at 2080 … with overhead resistance near 2200. The RUT has support at RUT 1090 with overhead resistance at about 1300. 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 still highly-charged with a reading of 53. The Weekly chart is now fully-charged showing an energy reading of 58, due to the recent chop. The Daily chart is showing a level of 43 which is starting to reflect the move to the downside.

Other Technicals: The SPX Stochastics indicator fell to 36, mid-scale. The RUT Stochastics indicator fell to 16, oversold. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is outside the Bollinger Bands with Bollinger Band support at 2091 and resistance at the upper band at 2169 and is below the lower band. The RUT is inside the Bollinger Bands with its boundaries at 1156 to 1254 and price is below the lower band.

If Central Banks go “all-in” to save each sovereign economy, this will not be sustainable in the long run. We will continue to monitor price action that will show us if the character of the market is moving towards a change in character to a Quiet/Trending Bull again. For now, we’re seeing necessary corrective action come in to “shock-start” markets and volatility again. Markets have become complacent to all of the central bank monetary policy and that’s not a good thing..

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: If this dip in price hits the 2050-2100 level on the S&P, we are game on for back month put spreads. I’m a little concerned about how deep this move could go depending on the results of Tuesday’s election. Might be best to wait on a big VIX spike first. Right now I show a potential 16DEC credit spread available at the 187/189 strike prices, which appears good but at this point my preference would be to locate something below the January lows at SPY 180 or lower. That will probably prove to be overly cautious but my number one goal is always risk management.

I have no positions right now:

No setups at the current time as we allow election risk to pass.

I have no time spreads at the current time. My preference is to take these on DAILY exhaustion and not WEEKLY exhaustion signals, since the weekly exhaustion creates unwanted price volatility. Similar to the LP Condors above, I will likely have to expand my view to include equity candidates that are showing a likely short-term consolidation. This is never my first choice due to the additional variables that we encounter.

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, and will continue to write time against these shares on every rally. I will look to sell more calls in the next bounce higher in SLV.
SSO – Waiting for the next pullback to sell puts against the SSO, preferably at the 50 level or lower. .

Nothing to do at this time with current positions.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -We’ll look for the next crossover.
RSI(2) CounterTrend – The next signal is showing. I bought the SPY NOV11 209/211 call spread for a $1.14 debit. This is more expensive than I wanted to pay but it should move quickly if we see a mean reversion. I will look for a 50% return from this position.
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.

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge.

I have the following positions in play:

QQQ 11NOV 116/118 debit put spread (10/17) – I entered this trade by buying the 118 put and simultaneously selling the 116 put, for an .84 debit, and I removed this position (11/3) for a $1.34 credit. This gave me a net $46 profit per contract or a 53% return on capital.

I have no positions at the current time. We’ll wait until after the election to look for new candidates.

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.

To remove the current series of puts, I will look for a move down to and below the SPX 2100 level. We are there now but the NOV position is not profitable. If we see a real “waterfall” decline with the price coming down to about the SPX 2000 level I will at least close the NOV position and hold the JAN to exit as those positions get ATM.

I never got the upside “burst” to allow me to sell call spreads above SPY 230 that I wanted; now I can concentrate on selling put spreads at some level below SPY 190.

We currently have the following positions in play with this strategy:

SPY NOV 197 Long Puts – I entered this position (8/22) for a $1.56 debit.
SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.