Daily Market Newsletter

November 26, 2016

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Market Commentary

it was another melt-up Thanksgiving week. The Russell 2000 has seen a 16.5% rally off of the early November bottom, while the Dow Industrials and S&P500 have seen 7.1% and 6.2% gains, respectively. As always, very few were able to be positioned correctly at the beginning of these moves, and fewer still have been able to jump on board while markets melt up. The mark of any good rally is its ability to leave the most at the station, watching from the sidelines. When the pain gets too great, they will hop on board, and that will mark the end of the move. There is no greater pain in trading than watching a rally go much higher without you being on board.

.In today’s video I’ll go over the history of moves like this, and what it has meant to the market going forward after that point.

In the short run, I am not a believer that markets “did not earn this” or that they should be “punished” and driven lower. This is a supply/demand imbalance and unfortunately one of those times that every technical skill in the book that we use will not necessarily prevent losses. Here are some thoughts in bullet-form about the current market:

For the first time in the last two years, traders are buying new highs.
The SPX 2200 level is now support
Markets are very unlikely to “die” at this level….more likely to consolidate first and establish a new base of support
This is traditionally a bullish time of year and traders are going to put the hammer down to finish out the year strong.
The market is swept up in a wave of tremendous optimism of new growth policies and inflation and animal spirits being unleashed across the economy and world; there will be downdrafts as reality sets in and uncertainties come into play, however in the meantime the market is on “play” mode and will stay in that manner until some catalyst causes profit-taking.

How do we play this? We have to be generally long delta, although buying at today’s highs is suicidal. We can “fade” certain setups with the call diagonals if we keep the signals precise and the timeframes short. THe recent rally means that I want to be careful “chasing” stocks at these levels, but quite honestly….I’ve seen this movie before and typically prices go much higher before they normalize.

If the video above does not play or display, please use this link

Offensive Actions

Offensive Actions for the next trading day:

Please check the “stocks” section below for a short put position on GE.
Please check the Time Spreads section below for more weekly time spread candidates.

Defensive Actions

Defensive actions for the next trading day:

Any vertical or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
I will need to close out the UPS Diagonal position on Friday morning. It will be better to close this position early in the day while liquidity is still available.

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 very low on Friday. Breadth was modest and diverging with +229 advancers minus decliners.

SPX Market Timer : The Intermediate line turned further up into the Upper Reversal Zone, showing a bullish bias. Another strong bearish cluster was created today (third day in a row) with the two strongest timeframes in the Upper Reversal Zone; this can create 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 uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell .72% to 12.34, back inside the bollinger bands. The RVX rose 1.28% to 18.13 and is back inside the bollinger bands.

Fibonacci Retracements: The RUT 161.8% extension is up at the 1375 level; that might represent some token level of resistance.

Support/Resistance: For the SPX, support is at 2193 … with no overhead resistance . 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 60, due to the recent chop. The Daily chart is showing a level of 31 which is strongly reflecting the linearity of the move to the upside, and is showing exhaustion. This increases the probability that we’ll see a short-term consolidation in the near future.

Other Technicals: The SPX Stochastics indicator rose to 92, overbought. The RUT Stochastics indicator rose to 96, overbought. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2078 and resistance at the upper band at 2225 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1116 to 1375 and price is below the upper band.

We might be 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.

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.

I have no current positions. I have to wait for the next consolidation zone and the SPX 2200 level has been breached. This strategy will likely be “on the shelf” for some time until the SPX determines the next range.

I have the following positions:

UPS 25NOV/2DEC 111/113 call diagonal (11/17) was entered for a $.97 credit, and was closed for a $1.90 debit. This gave me a net $97/contract loss.
MS 2DEC/9DEC 39/41 Call Diagonal (11/21) was entered for a $1.10 credit. I will look to exit the position for about a 50% return on risk, and I will need to exit by this Friday.

I set the risk for these such that I have no “stop” other than closing the position on expiry. If we see a quick downdraft the profits will come quickly; shooting to exit at about half of the credit value.

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 would like to set up a couple of additional short call diagonal spreads on Monday morning:

M 9DEC/16DEC 43/45 short call diagonal – currently this one shows about a $.93 credit. Depending on the gap I might have to move the strikes.
AAL 9DEC/16DEC 45/47 short call diagonal – currently this one shows about a $.98 credit. I might have to move the strike prices to secure my entry on Monday AM.

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 – The SSO is “gone” and I don’t want it at these levels.
GE – This stock is a nice proxy for the US Industrial Economy and it’s inexpensive and pays a 3% dividend. On Monday I will sell the 20JAN $30 put option for a minimum of $.30 to ensure at least a 1% return on capital.

Nothing to do at this time with current positions. I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -We’ll look for the next crossover, which is happening now. If we see a rapid pullback that pulls the price down below the 8ema I might consider going long with a debit vertical spread. This one is very likely “gone” based on past experience with these types of rallies.
RSI(2) CounterTrend – Awaiting the next signal.
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.

No positions at this time.

I have no positions at the current time. Many stocks are already exhausted after moving very quickly.

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.

I will be adding the next series of FEB puts if we see a reason to. So far I don’t see a reason to add them. At this point I’d rather let the market play out another few days before adding a FEB position..

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. Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment.

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

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