Daily Market Newsletter

August 12, 2017

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Market Commentary

So what’s next for this fragile market? With the price still inches away from all-time highs and investor sentiment very bullish up until recently, that is a troubled mix for the markets in what has historically become a very tenuous time of year. Most of us remember the late-August swoon of 2015, however not everyone remembers the August 2011 weekend crash, and fewer still remember the fun that we had in August of 2007. Expansion leads (eventually) to contraction, and these markets are somewhat overdue for at least a larger base being set up prior to year’s end. That’s what I think could happen in the next few months, based on historical patterns and signals that we track…..however I’ve also been humbled enough times to know that we trade the markets at their pleasure and they can do absolutely whatever they desire. I view it as simply a probability game – what is the highest probability to forward behavior? .

It’s also my contention based on watching markets over the last week is that investors sense that equity markets have been ridden pretty hard over the last year+, and that gains are starting to get very difficult to wring out of this market on the sisyphean push to the top. This is why we’re seeing just a massive influx of capital into what’s the “next” gold rush, or cryptocurrencies. Bitcoin, Ethereum, LiteCoin, Neo….start getting used to these names. We’re not necessarily going to be “first movers” but definitely on the “early adopter” side of the curve. Stay tuned.

My new section on cryptocurrencies will be added by the end of August in this newsletter.

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. I hope to be back at home base by this Saturday in one piece and of sound mind.

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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 this coming week.
I will roll my X calls to SEP this week; see “stock” 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.

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 average on Friday. Breadth was mixed with -5 advancers minus decliners.

SPX Market Timer : The Intermediate line fell out of the Upper Reversal Zone, now showing a bearish bias. The two weaker timeframes are showing a bullish cluster for the second day in a row, which can often lead to a short-term bounce.

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

VIX: The VIX fell to 15.51, outside the bollinger bands. This is after a twenty-year low on the VIX. The RVX rose to 19.59.

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 2410 … with overhead resistance at 2484. 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 35. The Weekly chart is now recharging quickly with an energy reading of 47, due to the recent chop. The Daily chart is showing a level of 48 which is now showing some erosion of energy after this quick move lower.

Other Technicals: The SPX Stochastics indicator fell to 57, mid-scale. The RUT Stochastics indicator fell to 15, oversold. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back outside the Bollinger Bands with Bollinger Band support at 2447 and resistance at the upper band at 2492 and is below the upper band. The RUT is back outside the Bollinger Bands with its boundaries at 1379 to 1463 and price is below the lower band.

We are seeing the market reacting to any fear catalyst right now.

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. At this point I’m expecting movement again (it’s here) so it makes no sense to pursue an order with this strategy.

I have no current positions; no current setups showing.

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, however I think that this is unlikely to happen this week so I will probably roll my AUG calls out to SEP this week and continue pounding at the $25 strike price. This chart is still showing a very well-defined bear flag so my hope is to get out of this position prior to it releasing lower.
HPE – I sold the 18AUG $16 puts (6/12) for $.30 credit. These look like they will expire OTM this week as long as we don’t see an overall crash.
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. I’d like to keep my powder dry and wait on a more severe correction.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry.
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 244.12, there is a +/- 4.165 EM into this Friday. That is about double that of previous week’s EM.

The EM targets for this Friday’s close is 248.29 to the upside, and 239.96 to the downside.

Last week’s lower EM level was eviscerated on Thursday; this is the first time that we’ve seen the lower EM level NOT being defended this year. The bias might be shifting to more aggressively fading upper EM level tests.

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. The OCT puts have gained a lot in value since entry…

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.