Daily Market Newsletter

Another profitable monthly cycle….while we didn’t hit this one very hard, it was a very low-maintenance cycle with another good “efficiency” rating as the majority of our trades earned profits. It’s no surprise that our most consistent strategy bar none since 2009 has been selling puts/covered calls. In fact, overall I’d have done much better if I’d have been less restrictive/conservative selling calls against my stocks, but I just find it easier to sell premium month after month and this is about the only way that we can effectively sell options in this market.

I don’t know when this market will “loosen up.” Perhaps we’ve seen a permanent change? I tend to think not, however….that “risk” will always find its way back into society. What central bankers have done to this stock market by driving down rates on everything else is unconscionable, yet it is the reality that we have to work with. When that paradigm no longer exists, you will see one of the most rapid and violent wealth transfers in history, which is (of course) not currently priced into the mix.

But that’s the problem that everyone is facing right now; EVERYONE is looking for the price to fall on its face, it’s “September so we’re supposed to have a pullback,” etc etc etc. Markets DO NOT CRASH when everyone is negative and skeptical….in fact, the opposite usually happens. One final tug to the upside to finally convince the shorts to give up might put a fork in this market as euphoria hits, and might lead to a corrective fourth quarter.

The Crypto Markets have been in an uproar over the past couple of weeks as the rumors of China prohibiting ICOs and removing BTC from exchanges is processed….but note that Bitcoin REGULARLY goes through 50% drawdowns after parabolic run-ups, and more than likely we’re seeing the next one. This is just too disruptive a technology for the existing dinosaurs to lay down quietly.

The latest crypto video (Wallets Part 3) is available here

If the above video does not play, try this version.

Offensive Actions

Offensive Actions for the next trading day:

Weekly EM levels have been set; see “weekly EM” section below.
I’m going to sell some puts against Ford (F) on Monday.
I’ll enter an SPX put calendar on Monday.

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.

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 mildly positive with +136 advancers minus decliners.

SPX Market Timer : The Intermediate line rose into the Upper Reversal Zone, now showing a bullish bias. This chart is showing a rare Full Bearish Cluster for the third cluster in a row, which is 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 uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell to 10.17, back inside the bollinger bands. This is after a twenty-year low on the VIX. The RVX fell to a new low of 11.83 and dropped BELOW the lower bollinger band to new all-time lows.

Fibonacci Retracements: If we see the pullback continue then I’ll start to determine fib levels that might act as potential support.

Support/Resistance: For the SPX, support is at 2430 … with overhead resistance at 2500. The RUT has support at RUT 1350 with overhead resistance at about 1452. 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 down into exhaustion again with a reading of 34. The Weekly chart is now recharging quickly with an energy reading of 64, due to the recent chop. The Daily chart is showing a level of 36 which is now bleeding energy with this strong micro-trend and is technically exhausted from the upside run. We are seeing the movement that we expected, however with an exhausted monthly chart, I don’t think any breakout will be able to reach its potential.

Other Technicals: The SPX Stochastics indicator rose to 84, overbought. The RUT Stochastics indicator rose to 86, overbought. The SPX MACD histogram fell slightly above the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2417 and resistance at the upper band at 2509 and is at the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1350 to 1440 and price is at the upper band.

We are seeing the market reacting to any fear catalyst right now, and we’ll be watching to see if the price is able to make new highs or not. The overall trend is still higher and short-term energy is building quickly on this non-linear chop.

I had the following results for the 15SEP 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

No trades this period

Time Spreads

No trades this period.

Cash-Secured Puts/Covered Calls

X $25 calls were entered for $.68 credit and closed for $.50 debit, and I sold the stock for $25.48. I also collected $40 of dividends for the last quarter. This gave me a net return for the month of $296 and I’m clear of USSteel stock. I made about $2000 over the past year selling against X either before or after assignment, so my total return was about 20% of invested capital.
AMD $12 Puts were sold for $.40 credit and expired, giving me a net $390 profit on 10 contracts. This was a net 3.25% return on capital.
SLV $16.5 Calls were rolled forward to the NOV cycle.

“Whale” Trades

SPY 15SEP 249/250 Call Spread was entered for an $.11 debit, and closed for a $.30 credit. That gave me a profit of $15/contract or net $150 on ten contracts, or a 136% return on invested capital.
AMAT 13OCT 45.5/46.5 Call Spread was entered for a $.50 debit and closed out for a $.71 credit. That gave me a profit of $17/contract or net $85 on five contracts, for a net 34% return on capital.

Swing Trades

1SEP DE 117/119 call spread (RSI(2)) entered for $.51 debit and expired OTM for a net $106 loss on two contracts.

Hindenburg Positions

None this period.

Earnings Trades

None this period.

SPY EM Fade/Target

No trades this period.

Lessons Learned from this cycle:

This cycle was yet another consolidation that broke higher after a negative news event dissapated; once more, the only way that this market goes higher is on the backs of the bears, one step back and two steps forward from short interest being squeezed out.

This was a very light cycle, even lighter than most due to my overseas travel and time of year. This cycle normally marks a very dull time of year and this was no exception, with light trading volumes and muted movement. Yet even as we move into Mid-September markets are still trapped by ranges and appear unwilling to dip or break. Something will break this logjam and when it does, we’ll be glad that we were not overly “weighted” in one direction or another.

This market is very difficult to find “alpha” in; you have to be an exceptionally good stock picker and understand the risks and rewards possible, and not overextend your positions beyond their ability to profit from them. In other words, don’t expect full extension of a breakout..

With the current price of stocks perched at all-time highs, we must be cognizant of risk to the downside, especially when we have seen no material correction since January of 2016. We are living through 2013 all over again (or the summer of 2015 or 2016) and we must remain patient and not “press” the market for opportunities that are there but unwise to pursue. I will stay with risk-defined spreads, selling premium on stocks that I would be happy to own at low prices, look for brief consolidations to sell against, and patiently wait for the price to seek a deeper range so that I can start to sell vertical put spreads on the SPY/IWM.

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. We can finally sell positions for SEP below SPY 230 but my sense is that still isn’t worth the risk just yet. A 10% correction would put the price at SPY 224 and we’d want to be well below that level with short puts.

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 no positions in play. It makes no sense to pursue an order with this strategy until we see (at the very least) a daily exhaustion signal.

I have no current positions.

I’m going to set up a calendar spread on the SPX on Monday morning. The price is up against an important resistance level and the daily energy is showing “exhaustion.” I will set up a 6OCT/3NOV 2500 Put Calendar, which is currently showing at around a $13.45 debit. In this weekend’s video I’ll discuss the defense of this trade. You can also use the SPY for this trade if you are trading a smaller account.

If I see more than a 5 point gap in the S&P’s which is not immediately closed, then I will not do this trade.

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 the NOV $18 calls for $.22
X – I was assigned at the $25 price level. I then rolled the position forward to SEP17 $25 calls for $.68 credit. I bought back the $25 calls today (after my update) for $.50, and subsequently sold the shares for $25.48. I’ll wrap up the details behind this position this weekend.
AMD – I sold the 15SEP $12 puts (7/31) for $.40 credit. I let these puts expire for a full profit.

There’s really not much that I’d like to buy at these levels. It looks like Ford (F) might be coming out of its funk, so I’d be willing to buy them at $11/share. I will sell the F 17NOV $11 puts on Monday for whatever I can get them for.

I would like one more shot at XLF at $22/share. Might be a while before I get that opportunity.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry.
RSI(2) CounterTrend – I will continue looking for additional setups as long as markets are trending higher
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.

This is a new section that I’m starting in the summer of 2017; all Cryptocurrency trades are by definition going to be “directional” trades due to the fact that there are no premium-selling strategies available.

Please refer to the left sidebar section if you’d like to get caught up on “FAQ” -style intro videos.

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.”

Here is the most recent video which is “Wallets Part III.”

Viewing the SPY from the current Friday closing price at 249.19, there is a +/- 2.119 EM into this Friday. Note that last week’s upper EM target was hit and due to it being at SPX 2500 as well, provided a rock wall of resistance. We have no such confluence this week.

The EM targets for this Friday’s close is 251.31 to the upside, and 247.07 to the downside.

Last week’s EM play was frustrating because we had the play perfectly set up, but the options skew between the ATM puts and the OTM puts blew up the spread and made it too expensive….we were paying too much for the long put and not enough for the short put which made the spread too expensive. I am not expecting any fireworks this week, even with a Fed meeting.

I have no positions at this time. Nothing else to enter at this time.

I have no positions at this time.

AMAT 13OCT 45.5/46.5 Call Spread (9/12) was entered for a $.50 debit, and I closed this trade on 9/15 for a $.71 credit as the price hit resistance and the daily energy was very close to exhaustion.

No other trades right now. I might look at VLO on Monday.

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

With a new all-time low VIX, the opportunity to buy inexpensive short deltas was too great, so I added some OCT puts recently.

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

SPY OCT17 222 long puts (7/24) – I entered this position for an $.85 debit. This position was up 50% at one point and the temptation to remove it for a profit was strong, however the point of these trades is to hedge the downside for existing longs, AND try for those home runs on corrections that come out of nowhere.