Daily Market Newsletter

August 22, 2017

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Market Commentary

Today was a strong “trend day” which in my mind, was almost all short-covering due to the low volume. Now, we’ve learned not to discount low volume moves, but for the size of today’s move and the strong A/D value, there was just no volume to speak of. This could become another “lower high” or it could break out. Either way, we can take advantage of it, especially if we get a chance to fade the EM upper boundary before Friday.

I will be adding a new section on cryptocurrencies in this newsletter, and I’ll probably create its own area for it below to keep it separate from any options trades. In the meantime, I have a video that you can listen to here (or watch below) which gives you some basics on the Cryptocurrency markets which we’ll be spending more and more time on in the near future if the stock market continues to be painted into the corner with central bank policy.

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 am particularly enthused to fade the upper EM marker this week.
No other offense for tomorrow.

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 light today. Breadth was strong with +345 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 for the second day in a row; this was a leading signal for a bounce as we saw today.

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 11.35, back inside the bollinger bands. This is after a twenty-year low on the VIX. The RVX fell to 16.17.

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 59, due to the recent chop. The Daily chart is showing a level of 45 which is now showing some erosion of energy after this quick move lower.

Other Technicals: The SPX Stochastics indicator fell to 31, below mid-scale. The RUT Stochastics indicator flattened at 16, oversold. 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 2426 and resistance at the upper band at 2499 and is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1345 to 1451 and price is above 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.

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 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.
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 – Per weekend report I entered the 1SEP DE 117/119 call spread (8/21) for $.51 debit. I have a $.71 GTC limit order entered for my net 30% exit. 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.

Earnings for 2Q2017 have already started and I’m going to pass on entering trades with this strategy.

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 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. I think that fading the upper marker is a very high probability setup.

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 or pull back in the short run. Have a look at BIDU; we might look to re-enter this position should the weekly chart recharge again.

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% 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.