Daily Market Newsletter

August 7, 2017

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Market Commentary

There is just enough skepticism to help drive this market higher through short interest being squeezed out as Hindenberg Omens fly and multiple warnings abound. Eventually this game of musical chairs will end and there will be no chairs to be found. This is really no different than multiple other instances that we’ve seen over the last ten years, with the price pressed at all-time highs and financial news editors warning, “it just can’t continue going higher” but it does. We’re seen this movie before, and it always ends the same way – instability begins to unwind to the downside. Until we see that instability, we should expect that every consolidation will break to the upside. Don’t try to predict the future nor “punish” the market for what you think it should not do….just play the setups and don’t think.

Based on feedback that I’ve heard from folks, I’ll be adding a section in the newsletter about Crypto Currencies. (Bitcoin, Ethereum, etc) I will be initially outsourcing this content to someone that knows the space better than I, and I hope you like the new voice. Look for that section to be added by the end of August in this newsletter.

Starting on August 1st , I am still in the middle of traveling for three weeks overseas; during this time I will be trading less-than-usual and my ability to produce the report and video in a timely manner in the evenings will be dependent on my ability to source connectivity. I’m hoping that this continues to be a quiet period but my experience with travel, as well as the time of year it is, says otherwise.

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Offensive Actions

Offensive Actions for the next trading day:

Weekly EM levels have been set; see “weekly EM” section below.
Keeping my powder dry for what could be an opportunistic pullback; no trades for next week yet.

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 below average today. Breadth was mixed with +36 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened in the Upper Reversal Zone, still showing a bullish bias. This study is now showing a Strong Bearish Cluster with the two strongest timeframes in the overbought zone; this can sometimes be a leading signal for a pause.

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

VIX: The VIX fell to 9.90, inside the bollinger bands. This is near a twenty-year low on the VIX. The RVX rose to 14.73.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2410 … with overhead resistance at 2484. The RUT has support at RUT 1400 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 44, due to the recent chop. The Daily chart is showing a level of 68 which is now fully (and insanely) charged again and is ready to bust a move.

Other Technicals: The SPX Stochastics indicator fell to 74, below overbought. The RUT Stochastics indicator fell to 37, mid-scale. 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 2440 and resistance at the upper band at 2495 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1405 to 1452 and price is above the lower band, squeezing again.

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.

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 no positions in play. At this point I’m expecting movement again so it makes no sense to pursue an order with this strategy. We got a nice week of consolidation.

I have no current positions; no current setups showing. I have looked at setting up some calendar spreads, but they are NARROW and not worth exploring right now. If we see a positive volatility differential then I’ll get more aggressive.

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 15SEP $16.5 calls (7/24) for $.17 credit.
X – I was assigned at the $25 price level. I added new AUG17 $25 calls for $1.12 credit (7/17). The price has faded somewhat from their earnings rally, and is now once again below my assignment point. As long as the price is underwater, I will continue hammering against the $25 level in hopes of being called out at some point. My hope is that the price will rise just into the money by AUG opex and it will call me away for full profit.
HPE – I sold the 18AUG $16 puts (6/12) for $.30 credit.
AMD – I sold the 15SEP $12 puts (7/31) for $.40 credit. I would sell the position if it closed below $10/share.

Not looking to add anything at these levels at this time.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry. I might have missed this one on the SPY with the recent big breakout; if the price pulls back into the space between the 8 and 21ema then I will go long a call spread.
RSI(2) CounterTrend – Looking for the next setup.
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 2Q2017 have already started.

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 the current Friday closing price at 247.41, there is a +/- 2.289 EM into this Friday.

The EM targets for this Friday’s close is 249.70 to the upside, and 245.12 to the downside.

Due to the Daily exhaustion, fading the upper leg looks to be a very good setup. Fading the lower leg has been the best setup over the last few months. I will not take a directional “target” position this week.

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

I have no positions at this time. I do not have any setups that look really great at this time, and markets likely to consolidate in the short run. Have a look at BIDU; this is a perfect example of a whale trade setup that we traded a couple of times in the spring but were not on board for the big one.

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. .

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 AUG17 214 long puts (5/2) – I entered this position for a $1.22 debit.
SPY OCT17 222 long puts (7/24) – I entered this position for an $.85 debit.