Daily Market Newsletter

July 22, 2017

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Market Commentary

Another profitable month but quite honestly, one that felt like we actually lost. Opportunity is scarce yet risk is high in markets right now, regardless of what the risk premium is being sold at. According to my charting program, the VIX is at the lowest level in the twenty years that I can chart it. Does this mean that we should just “buy the dip” and continue on? Well, yes and no.

Markets like this skate along on a thin veil of ice that can suddenly break, and that’s not all…..many times we’ll see a final “buying panic” that sends markets immediately higher before falling. At all times you have to ask yourself, “who is the sucker in this game?” If you don’t know the answer to that, then you’re about to get found out. It happened to me a couple of times earlier in my career before I realized the game, and it never changes.

In today’s video I’ll talk about the hunt for “Alpha” in today’s market and what we can do to combat this dried-up environment.

In August I will be 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 says otherwise.

If the above video does not play, please use this link.

Offensive Actions

Offensive Actions for the next trading day:

I will sell 15SEP calls against my core SLV position; see “stocks” section below.
I will buy 20OCT SPY Hindenburg puts on Monday; see “hindenburg” section below.
Weekly EM levels have been set; see “weekly EM” 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 higher on Friday. Breadth was mixed with +51 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up below the Upper Reversal Zone, now showing a bullsih bias. This study has faded lower after showing a STRONG BEARISH CLUSTER in the Upper Reversal Zone earlier in the week, with the two strongest timeframes in the upper reversal zone; this can precede a pause as we saw.

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 2.30% to 9.36, inside the bollinger bands. This is a twenty-year low on the VIX. The RVX rose to 13.85.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2355 … with overhead resistance at 2478. The RUT has support at RUT 1335 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 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 38 which is technically exhausted and should lead to a short consolidation.

Other Technicals: The SPX Stochastics indicator rose to 80, overbought. The RUT Stochastics indicator rose to 73, below overbought. The SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2403 and resistance at the upper band at 2479 and is at the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1400 to 1444 and price is at 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.

I had the following results for the 21JUL 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

No trades this period

Time Spreads

ABBV 30JUN/7JUL 70/72 short call diagonal was closed for a net $63/contract loss, or a $126 loss on 2 contracts.

Cash-Secured Puts/Covered Calls

SLV $17.5 calls expired for full profit of $180 on 10 contracts.
X $25 calls were rolled to SEP cycle and secured a net $92 profit on 4 contracts.

“Whale” Trades

UPS 28JUL 111/112 debit call spread produced a net profit of $7/contract, or a 13.5% return on capital. This gave me a net profit of $35 on 5 contracts.
BIDU 23JUN 202.5/205 call debit spread expired OTM for a net loss of $41/contract, or $123 on three contracts.
SPY SPY 21JUL 229/230 Debit Put Spread expired OTM for a net loss of $16/contract on 3 contracts for a net $48 loss.

Swing Trades

RSI(2) SBUX 23JUN 61.5/62.5 call spread produced a net loss of $46/contract or $138 on 3 contracts.
RSI(2) MGM 14JUL 30.5/31.5 call spread produced a net profit of $12/contract, or $48 on four contracts.

Hindenburg Positions

None this period.

Earnings Trades

None this period.

SPY EM Fade/Target

SPY Weekly EM Target – SPY 21JUL 247/248 call spread produced a net $23/contract profit on ten contracts, for a net $230 gain.
SPY Weekly EM Target: SPY 30JUN 242 call produced a net $17/contract profit, for a net $170 profit on ten contracts.
SPY Weekly EM Target: 23JUN 245/246 Debit Call Spread expired for a net $16/contract loss, or $160 on ten contracts.

Lessons Learned from this cycle:

This cycle began by fading softly lower through the last two weeks in June and the first week in July, then exploding higher from that flag. Even though this was a marginally-positive month, it was a difficult cycle to trade and did not help to be away on vacation during the only breakout that we’ve seen since mid-April.

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 must adapt or stop trading.

In addition, 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 .

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 want to sell an SPX LP Condor due to the daily chart exhaustion….but common sense tells me to wait out this week as we could see one final upside ramp.

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 21JUL $17.5 calls (6/6) for $.19 credit; these expired on Friday for full profit. On Monday I will sell new SLV 15SEP $16.5 calls and will seek to collect at least a $.16 credit from these. If the price rallies hard on Monday I’ll see if I can secure at least a $.17 credit from $17 calls, but this is unlikely to occur.
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 this 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 246.88, there is a +/- 1.921 EM into this Friday.

The EM targets for this Friday’s close is 248.80 to the upside, and 244.96 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 due to the daily exhaustion.

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.

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 is too great. I will buy the SPY 20OCT 222 puts on Monday, currently showing about a $.90 cost.

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.