Daily Market Newsletter
November 24, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
December Expiration
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Market Commentary
How many times have we been in this same position through the last ten years, as price pushed off of the bottom in March 2009? More times than are worth mentioning here, but each time the Market has found a way to rise to the challenge and back away from the abyss. This recent correction does feel more “heavy,” because of the fact that this has come on the heel of what was considered to be excellent news regarding the economy. GDP is up, unemployment is down, energy prices are mild, there is (according to those that tabulate these things) nearly zero percent chance of recession. So what’s the problem?
Growth forecasts are falling, indicating that we might have already hit “peak” earnings, which would cause nearly everything else to peak as well. And this is in the face of a Federal Reserve hell-bent on normalizing rates – not a good look right now. But keep in mind that we actually had an earnings “recession” in 2015/2016 and we didn’t get a full vertical bear out of it.
There are two huge events on the horizon that will cause markets to re-price assets:
- G20 Summit – This meeting starts officially on Friday and will carry through the weekend. Expect lots of volatility due to posturing prior to the meeting. Can the US work out a trade deal without cratering the markets?
- FOMC – The next Fed meeting is 19 December. Chairman Powell wants to continue raising rates and there is a 74% chance of that happening next month.
Here is the current scorecard:
- S&P is down ~337 points or 11.46%
- Dow is down 2830 points or 10.5%
- /NQ is down 1279 points or 16.55%
- RUT is down 283 points or 16.3%
What is our approach to trading this market, which has once again moved into a “Sideways/Volatile” character?
- Sell credit spreads/create iron condors on the SPX into relative extremes, beyond the current range of movement.
- Establish long iron condors when the price shows potential of moving a great distance in the near future.
- Exercise caution with long stocks/short puts as we see the 50/200 death cross hit each index
- Look to establish debit spread-based swing trades against sentiment extremes, and/or EM boundaries
Markets are at a very important tipping point going forward; be mentally nimble enough to allow the price to go either way from here.
The scan for the “Cheap Stocks with Weeklys” is available here.
The RSI(2) FE scan is available here.
The current MAIN “high liquidity” watchlist that I’m scanning against in thinkorswim is available here.
Please sign up for our free daily crypto report here.
An embedded flash video is available here.
Offensive Actions
Offensive Actions for the next trading day:
- I will look to enter the SSO (stock) long on a wash-out low based on a single-digit number of advancing stocks in the S&P. (see “Swing” section below)
- I will set up a long iron condor on the SPY for 21DEC; see “HP Condor” 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.
- Closing orders have been entered for all new spreads.
- I will look to close the short puts that we sold for this cycle
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
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Technical Analysis Section
Market Internals: Volume was below-average on Friday (half-day) and breadth ended the day mixed with -92 advancers minus decliners.
SPX Market Timer : The Intermediate line dropped to just above the Lower Reversal Zone, still showing a bearish bias. This study is showing a Weak Bullish Cluster in the Lower Reversal Zone for the third day in a row, which is a leading indicator for a bounce. It’s almost in Full Bullish Cluster territory.
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 to 21.52 after peaking at 50.3 ten months ago, inside the bollinger bands. The RVX rose to 23.77 and is back inside the bollinger bands.
Fibonacci Retracements: The price broke the 61.8% fibs on the bounce back up showing that a re-test of the bottom is likely.
Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2816 and 2941. The RUT has support at RUT 1436 with overhead resistance at 1742. Three major index charts that we follow are now showing a Golden Cross with the 50 day moving average above the 200 day average (SPX/DJI/NQ). The Russell has printed a Death Cross with the 50ma crossing below the 200ma; this can be a leading signal for a true Bearish move.
Fractal Energies: The major timeframe (Monthly) is super-charged again, with a reading of 64. The Weekly chart has an energy reading of 47. The Daily chart is showing a level of 44 which is just below fully charged again. The RUT has the weekly chart showing massive exhaustion now; we normally see trends “pause” or reverse in this state. With the bounce back up, all SPX timeframes could be in position to support a massive move, regardless of direction. It’s very important that we get “on” the next trend when it shows, regardless which way that it goes.
Other Technicals: The SPX Stochastics indicator fell to 38, mid-scale. The RUT Stochastics indicator fell to 32, mid-scale. SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2611 and resistance at the upper band at 2817 and price is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 1457 to 1585 and price is above the lower band.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPX 7DEC 2490/2500 Short Put Spreads (10/22) entered for $.80 credit. I would close this position if the short put delta (2500) hits the .45 level. It is currently showing a .12 delta. I have also placed a $.10 debit limit order to close this one early if possible. The midpoint of this spread is currently $1.10 so it’s underwater and has about 130 points of downside room left.
- SPX 21DEC 2950/2960 Short Call Spreads (11/7) entered for $.80 credit. I would close this position if the short call delta hits the .35 level. It is currently at the .01 level.
- SPX 21DEC 2490/2500 Short Put Spreads (11/12) entered for $.80 credit. I would close this position if the short put delta (2500) hits the .45 level. It is showing a .20 delta.
No new entries at this time; we now have a full 21DEC SPX Iron Condor that is 450 points wide. I just hope that it’s wide enough. I will look to close the entire 21DEC Condor for $.80 debit; it is showing a midpoint of $1.60 so it’s at break-even at the present. The gamma on this trade will start to cause the value of this spread to move quickly going forward.
Let’s wait until the price probes the edge of the current range before I set up the next credit spread.
Because the S&P energy is relatively high across the board and we’re expecting the price to either release lower, or rally higher (or both) I will set up a long Iron Condor on Monday morning. There is a +/- 13 point expected move in the SPY between now and 21DEC expiration; on Monday morning I will set up $1-wide debit spreads at about a $.17-$.18 debit on each side, for a total condor spread investment of $36/contract. I will manage each side separately as the possibility exists of seeing a huge move in one direction, and then bouncing back the other way. Aftermarket I show those spreads as being at the SPY 249/250 (puts) and SPY 275/276 (calls) strike prices.
I have no positions at this time. We’ll park this strategy until the next high-probability condition shows. We’ll want to see daily exhaustion on the SPX or RUT after a strong move, at the very least. This strategy works best with a quiet/trending market, and not with a sideways/volatile one.
I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so we’ll want to wait for that type of price action to show 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 am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of a crash we can almost define our total risk by the price of the underlying. While this is not how I intend to manage risk in these positions, I view this as fundamentally more solid than trying to actively manage risk on assets that are going for $$$hundreds which have also gone parabolic. I have the following positions in play:
- SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 31DEC $15 SLV calls (10/3) for $.16.
- SSO – I sold SSO 21DEC $95 puts (11/14) for $1.02 credit. I will look to close this position for $.05 – $.10 on the next bounce up.
- CSCO – I sold CSCO 21DEC $40 puts (10/22) for $.40 credit. Looking to close this for $.05
- HPE – I sold 21DEC $14 puts (11/12) for $.23 credit
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit.
The recent trades were relatively small positions that would create a discount entry should I be assigned. I have entered $.05 GTC exit debits to close out CSCO early should we get the opportunity. If we see a death cross on the S&P, then I will cease selling puts on an ongoing basis until that signal clears.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – No setups at this point; the recent 8/21EMA cross failed, and has crossed to the downside again.
- RSI(2) CounterTrend – Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
- 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.
- Swing – I have no trades in play at this time.
The crypto market continues to get hit pretty hard recently as it finally broke below support. This could be part of the final capitulation that we’ve been waiting on.
Investors should currently be looking to find technical entries to warehouse BTC/ETH/LTC assets for eventual trades on Alt-coins. You should also be looking to devices like “trezor” or other cold-storage devices to keep your assets off of the network, or other secure wallet such as Navcoin. Relying on the security of your broker is no longer good enough; no one can log into your ETrade account and “steal” your stock assets, but the whole nature of Cryptocurrencies and their portability means that someone can grab your assets and transfer them elsewhere. I will continue to discuss the tradingview platform in daily videos as I think that it is currently the best way to chart the “big three.”
Viewing the SPY from the Friday closing price at 263.25, there is a +/-6.196 EM into this coming Friday. This is larger than last week’s 4.762 EM and reflects that this is a full week with jockeying expected into the G20 meeting. The EM targets for this Friday’s close are 269.45 to the upside, and 257.05 to the downside.
I will look to fade either EM this week; we could see one or both of them tagged this week as we approach the G20.
We did get some recent experience with this style of trading and quite frankly it’s not as easy as it sounds. Strong bull trends do not give way easily. My conclusion is that this strategy is best reserved for stocks experiencing a snap-back rally in a primary bear trend. If the market starts to print a lower high on the weekly chart then I will become more serious about this strategy.
The scan that I discussed in the 8/4/2018 video is available to download for thinkorswim here: http://tos.mx/OvdVnz I will also be adding a second Larry Connors scan to this section as well; here is the Connors Crash scan: http://tos.mx/BhHuKL
I have no positions at this time.
No other entries at this point. I would prefer to see the market stabilize first before looking long again. We will see big volatility over the next two+ months. If we are able to secure a “higher low” off of the S&P in the short run, this might be a good environment for a couple of weeks.
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. Frankly, 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 have no positions at the current time. I have no positions at this time. I cleared out the current puts on the drop to the 200ma. I will “reload” again on the next bounce up.
I passed on the recent entry; I’m going to hold off for a little longer to see if a more complex top is created off of a higher high. Recent entries were expensive due to elevated vol.