Daily Market Newsletter

July 19, 2017
Non-Directional Strategies
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Semi-Directional Strategies
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Directional Strategies
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Market Commentary

A big rally in Energy and Materials is helping squeeze markets higher; the S&P has rallied about 45 points higher from last week’s breakout, and might support a move up to the 2500 level before we see any exhaustion signals. What was really important today was that the rally was broad-based, unlike yesterday’s single-dimensional move that was only based on FB/AAPL/AMZN/MSFT/GOOGL. The other thing about today was the all-time highs were being bought, which has not been the case for a while.

This, to me, means that we might be entering the “runaway” portion of this rally on the weekly timeframe where price movement goes almost vertical.

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Offensive Actions

Offensive Actions for the next trading day:

  • No neutral spread selling now….price is about to move.
  • Weekly EM levels have been set; see “weekly EM” section below.
  • Summer doldrums means low volatility, and quiet movement. Best to keep your powder dry for now.

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 average today. Breadth was good with +307 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up below the Upper Reversal Zone, now showing a bullsih bias. This study is showing a FULL BEARISH CLUSTER in the Upper Reversal Zone, which can precede a pause. Sometimes..

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 sideways trend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell .61% to 9.83, inside the bollinger bands. The RVX flattened to 13.24 and is near the lower bollinger band.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2355 … with overhead resistance at 2463. The RUT has support at RUT 1335 with overhead resistance at about 1434. 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 32. The Weekly chart is now recharging quickly with an energy reading of 46, due to the recent chop. The Daily chart is showing a level of 44 which is starting to drop energy after this latest breakout.

Other Technicals: The SPX Stochastics indicator rose to 68, mid-scale. The RUT Stochastics indicator rose to 64, mid-scale. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back outside the Bollinger Bands with Bollinger Band support at 2405 and resistance at the upper band at 2469 and is above the upper band. The RUT is back outside the Bollinger Bands with its boundaries at 1396 to 1440 and price is above the upper band, squeezing again. The SPX Bollingers are starting to squeeze again as well and appear to be breaking the squeeze.

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. 

SPX chart

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.

 

I will look for the next daily/weekly consolidation signal on the SPX to sell LP Condors again. With the recent breakout, this might occur soon.

I have no current positions; no current setups showing. This might change quickly with the recent breakout to the upside by the SPY; perhaps by next week we’ll see the SPY exhaustion signal which will signal my entry into a calendar spread.

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 21JUL $17.5 calls (6/6) for $.19 credit; these will expire this week and I’ll look for new calls above the $16.5 level to sell soon. I might have to move to the SEP17 cycle.
  • X – I was assigned at the $25 price level. I added new AUG17 $25 calls for $1.12 credit (7/17). The price continues to rally higher almost to my assignment point, however the price is in a bear flag pattern so I will have no problem just closing the position or being called out.
  • HPE – I sold the 18AUG $16 puts (6/12) for $.30 credit.

 

I will look for a deeper pullback in stocks before selling more puts.

 

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 last week’s 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. Not thrilled by the prospects of these but will look for some tech earnings to play perhaps next week.

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 245.56, there is a +/- 1.966 EM into this Friday.

The EM targets for this Friday’s close is 247.53 to the upside, and 243.59 to the downside.

I will continue to look for lower level fades and upper EM targets in the near future.

I added the 21JUL 247/248 call spread (7/17) for $.15 and I sold this position off today for a $.40 credit.

I have the following positions:

 

 

  • SPY 21JUL 229/230 Debit Put Spread (5/15) was entered for a $.14 debit.

Nothing else to enter at this time.

I have the following positions:

  • SPY 21JUL248/249 debit call spread (6/26) was entered for $.16. This is an inexpensive, high reward-to-risk trade that’s looking for the SPY to head up to the expected move by the JUL expiry. I want to see if I can profit from this trade yet.
  • UPS 28JUL 111/112 debit call spread (7/3) was entered for a $.52 debit. I will look for a 50% return and currently have an $.80 credit limit defined GTC. We have until next week to close this one.

I discussed additional whale candidates in Saturday’s report:

  • AIG – If the price breaks above $64.44 then I want to go long a 25AUG ATM call spread. Earnings early August.
  • BIDU – I would like to set up a longer-term 1SEP 200/202.5 call spread as I believe that this one is finally releasing. I have to wait until the July 27 earnings date.
  • TIF – if the price breaks above $95 then I want to be long a vertical spread but I cannot choose a spread pair now due to liquidity issues. Earnings late August.
  • UNP looks great but earnings are around the corner.
  • VLO looks very good as well but earnings next week.

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

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.