Daily Market Newsletter
August 19, 2017Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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September Expiration
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Market Commentary
Another profitable month….very light trading due to my travel this month, but we stuck with strategies that work well without having to over-manage them. In this month’s “Performance Summary” (see tab below) I discuss how finding “alpha” has been really difficult lately. Stocks are not moving, prices of those that are moving are near all-time highs, and implied volatility values show little sense of perceived forward risk. What I’ve had to do lately to “fill in the gaps” on my end is to do much more intraday trading. I focus on the Nasdaq futures as well as QQQ options directionally. While this newsletter is a poor vehicle for communicating those trades, if there is any interest I can devote a portion of the daily video towards covering some of those techniques.
I’m a big believer in using one “framework” to trade from, regardless of what you’re trading. Directional trading (or for that matter, non-directional trading…) is simply a matter of determining trends (or lack of) on a fractal basis with different timeframes. Yes, I will occasionally use separate, discrete strategies (i.e. RSI2, etc) but when you use a backbone analysis system that fundamentally is based on price action, then you have a system that can be leveraged across markets and different strategies, and you won’t have a re-learn something new when markets change again….which they will. I spend most of my time trying to adapt this one system to the volatility and price movement that is presented.
For example, right now we’re seeing very tame volatility with fairly predictable intraday price movement. At the lowest point, the nasdaq futures are still showing a range of about 40 points/day. This is plenty of movement to take advantage of with directional QQQ options or NQ futures. When markets start to REALLY move (and they will soon) then we’ll see intraday ranges of 80 to 100 points on average. While at first this might seem perfect for intraday directional trading, what becomes more difficult is the RISK. You have to loosen up stops and take much more risk to deal with all of the potential reward. Not everyone’s cup of tea, so in cases like that I’ll move towards more premium-selling strategies to take advantage of the fear. We have seen many, many transitions between quiet and noisy markets over the past 10+ years and we’ll see more transition shortly. My point here is that having one system allows you to adjust more quickly since you’re just moving a variable or two and not re-inventing the wheel.
My new section on cryptocurrencies will be added by the end of August in this newsletter.This new space shows incredible potential in the near term but man, is it RAW right now. You will not be able to leverage the same tools and brokers that you’re used to. You will have to think differently to take advantage of this space. It will be a good exercise for everyone to see if they can be adaptive and embrace disruptive technologies and tools, or simply wait for time to run out. Thanks for your patience as I line up the right resources.
If the above video does not play, please try this version.
Offensive Actions
Offensive Actions for the next trading day:
- Weekly EM levels have been set; see “weekly EM” section below.
- I’ll enter an RSI(2) long call spread on DE on Monday; see “swing trades” 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
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Technical Analysis Section
Market Internals: Volume was fairly high on Friday. Breadth was mixed-to-poor with -108 advancers minus decliners.
SPX Market Timer : The Intermediate line continued declining below the Upper Reversal Zone, now showing a bearish bias. This chart is showing a Weak Bullish Cluster; this is a leading signal for a 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 14.26, back inside the bollinger bands. This is after a twenty-year low on the VIX. The RVX fell to 17.76.
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 36. The Weekly chart is now recharging quickly with an energy reading of 50, due to the recent chop. The Daily chart is showing a level of 46 which is now showing some erosion of energy after this quick move lower.
Other Technicals: The SPX Stochastics indicator fell to 42, mid-scale. The RUT Stochastics indicator flattened at 17, 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 2432 and resistance at the upper band at 2499 and is below the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1352 to 1460 and price is at the lower 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.
I had the following results for the 18UAG 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 $1.12 credit and closed for $.06 debit, rolling to the SEP cycle. This generated a net profit of $104/contract profit after commissions, or a net profit of $416 on four contracts.
- HPE AUG $16 puts were sold for $.30 and expired OTM for full profit. This generated a net $290 profit on ten contracts.
“Whale” Trades
No Trades this period.
Swing Trades
No trades this period.
Hindenburg Positions
- SPY AUG 214 Long puts were purchased for $1.22 debit and expired OTM for a net $123 loss after commissions.
Earnings Trades
None this period.
SPY EM Fade/Target
No trades this period.
Lessons Learned from this cycle:
This cycle began by seeing the price rally from another flag breakout, and consolidation after the subsequent exhaustion, however the eventual breakout from this chop came to the downside and we’re seeing that continue lower today. I traded very little during this cycle, and it was intentional due to my overseas travel. I consciously went into the travel knowing that I did not want to sit around trading intraday or even swing positions, so the bulk of the trading was confined to short puts/covered calls which are excellent “travel” positions!
Nonetheless, this was actually quite an efficient cycle with most positions producing good profits without stress. The one misgiving that I had was the inability to fill the SPX LP Condor in late July, which was an excellent signal and turned out to have been a very good trade had I been more aggressive in filling it. I try to be patient to fill at the midpoint and in this case it created an opportunity cost.
Up to this point this summer, as I mentioned in the July report, this market has gotten very difficult to find any “alpha” in. The normal premium-selling trades (iron condors, calendar spreads, etc) are devoid of any implied volatility, meaning that there is no risk being priced into the options. We have been turned into option buyers, and directional traders. We have had to adapt, although this might be loosening up based on the price action and risk premium rising.
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.
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.
- 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) and closed those down (8/15) for $.06. I then rolled the position forward to SEP17 $25 calls for $.68 credit. This continues to lower my cost basis and gives me a little bit more downside protection if the trap door opens.
- 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
- 8/21 EMA Crossover – Looking for the next 8/21 ema entry.
- RSI(2) CounterTrend – DE is showing the next RSI(2) trade setup. I will use the 1SEP options cycle and attempt to set up a call debit spread on Monday morning for about unity cost. That would be a 1SEP DE 117/118 debit call spread for about $.50, or perhaps I will have to move to a 1SEP DE 117/119 call spread for $1. It all depends on how much of a gap that we have to start the day. I will look for a 30% return from this trade on any bounce. There is no “stop” for this trade.
- 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.
Viewing the SPY from the current Friday closing price at 242.71, there is a +/- 3.455 EM into this Friday. This is smaller than last week’s EM, but still somewhat larger than previous week’s EM values of about 2 points during most of the summer.
The EM targets for this Friday’s close is 246.17 to the upside, and 239.26 to the downside.
If I see either EM level being tested, I will fade it with a debit spread earlier in the week, and a long option on Thursday or Friday.
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 is up 50% and the temptation to remove it for a profit is 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.