Daily Market Newsletter

June 3, 2017

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June Expiration

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Market Commentary

Investors are still struggling to make sense of this market after a weak jobs report on Friday (138k vs. consensus 185k) actually caused markets to rally strongly on the day, led by pretty much every sector BUT Financials. My take is that it’s because they believe that this month’s June FOMC (expected) rate hike will be the last for the year, and the cheap-money-party continues unabated. The probability of hiking another quarter-point is now 94.6% on the 14th, but it drops to about 28% in September, the next “major” FOMC release point. We also have statistical arbitrage driving markets, only looking at the 2″ in front of their face, and not at the long-term picture. These firms really don’t care that AMZN is at $1000/share, all that they understand is that it’s a positive long-delta instrument heading higher.

This has all of the hallmarks of a traditional “runaway” market to the upside. The last Weekly swing on the S&P 500 carried the chart about 300 points higher, with a similar energy backdrop on the Weekly and Daily charts. The difference this time is that the Monthly chart is still reflective a >600 point move off of the 2016 bottom/correction, and it’s heavily into exhaustion now as opposed to being fully charged in early November. This tells me that we might not see this move unfurl to the tune of 300 points….so far it’s been good for about 90 points off of the “one day wonder” bottom, and might need a pause this week,

If you cannot get the above video to play, try this link.

Offensive Actions

Offensive Actions for the next trading day:

I will enter two Whale entries, defined in the “whale” section below.
I’m also entering a 16JUN SPY calendar, defined in the “time spreads” 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.
At this point I would welcome a break-even exit for the SPX LP Iron Condor.

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 above-average Friday. Breadth was (oddly) mixed with +46 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, now showing a bullish bias. This chart is showing a Strong Bearish Cluster with the two stronger timeframes in the Upper Reversal Zone, and is also very close to a full bearish cluster again with all three timeframes in the URZ. This can be a leading signal for a pause.

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 1.42% to 9.42, back inside the bollinger bands. The RVX fell to 15.07 and is back inside the bollinger bands.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2355 … with no overhead resistance. The RUT has support at RUT 1335 with overhead resistance at about 1426. 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 53, due to the recent chop. The Daily chart is showing a level of 33 which is in exhaustion again.

Other Technicals: The SPX Stochastics indicator rose to 80, overbought. The RUT Stochastics indicator rose to 54, 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 2364 and resistance at the upper band at 2437 and is above the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1358 to 1410 and price is below the upper band.

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.

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 the following positions in play:

SPX 7JUN 2315/2320*2395/2400 Iron Condor was entered (5/18) for a $2.50 credit. I have entered a GTC $2.00 debit limit order as my closing order. At this point with days remaining I will just look to break even on this position but that’s looking less likely by the day. Quick “one day wonder” days have a pattern of roping me into thinking that the price will remain volatile yet range-bound in that area, however most of these have v-bottomed to the upside as this one has. Note to self…..

I have the following positions:

BBY 9JUN/16JUN 57.5/59.5 short call diagonal (5/30) was entered for $.94 credit. I will look for a 30% return on this position.

LVS looks to be setting up as a good short call diagonal candidate.

I will be on the lookout for more short call diagonals as this is the type of market that they should work well in.

This might be an aggressive trade in many ways, but I like the SPY 16JUN/21JUL 245 put calendar as a short-term calendar spread seeking a 10% return into JUN expiry. There are some headwinds that I’ll discuss in today’s video, so just understand that this is a more aggressive time spread trade that might require me to hold into JUN expiration.

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 need to look for the next set of calls to sell against SLV; I would like to sell at the $17.5 level for JUL but need to get at least an $.18 credit.
X – I was assigned at the $25 price level.. I sold 21JUL X $25 calls against this position for a $.40 credit. I will bail out of this position if the price closes below $16/share. Ultimately I would like to bail on this position as there has been so much technical damage that it might be difficult to get this stock bid up again.In the short term, we have weekly exhaustion and a high level of energy on the daily chart, so this might encourage a quick bounce to at least set up a “lower high” which we could use.
AMD – I sold 16JUN $9 puts (5/8) for $.25 credit. Bounced nicely at $10/share.
NVDA – Not really interested in this one above $100/share.
XLF – I sold the 16JUN $22 puts (4/10) for $.25 credit and will accept assignment if the price pulls back.

I will put in a GTC $.18 credit limit order for SLV JUL17 calls.

Still not thrilled by available candidates. I will look more in-depth this week to see what I can target, even if it’s damaged goods. .

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – I entered the IWM 2JUN 140/142 (4/26) for a $1.01 debit, and closed it on Friday for a $.40 credit on the rally for a partial loss.
RSI(2) CounterTrend – .I entered the CELG 2JUN 117/118 call spread (5/23) for $.52 debit and closed it for a $.78 credit on Friday. This gave me a net profit of $22/contract which is a 42.3% return on capital.
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 1Q2017 are just about done with; the next cycle will start in early July.

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.

This past Friday’s upper EM limit was hit at the cash open, and “fade-able” for the first thirty minutes through a simple ATM put option. Past that, it was run through for the second week as the daily chart is in a trend off of a weekly consolidation pattern.

Viewing the SPY from Friday’s close.at 244.17, there is a +/- 2.132 EM into Friday.

The EM targets for next Friday’s close is 246.30 to the upside, and 242.04 to the downside.I will watch for either of those levels to be tagged, and will fade that level with an ATM debit spread. If we see a short-term consolidation show up this week, then I will target the next available upside EM target with an EM debit spread.

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:

TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.
C 23JUN 63.5/64.5 debit call spread (5/15) was entered for $.27 debit. Let’s look for a 100% return from this trade.
BIDU 23JUN 202.5/205 call debit spread (5/17) entered for $.39 debit.
AAL 23JUN 48/49 call debit spread (5/26) was entered for a $.46 debit, and was closed Friday for a $.69 credit. This gave me a net profit of $20/contract, or 43.5% return on capital.
ABBV 30JUN 65.5/57.5 debit call spread (5/30) was entered for $.95 debit. Looking for 50% return which is a $1.48 credit.

Most of these are in good shape for now as long as markets are pressing higher.

On Monday I will enter an AXP 7JUL 78/80 debit call spread (or equivalent) for $1.00 credit or less.

I will also enter an AAPL 16JUN 160/162.5 call spread (or equivalent depending on the gap) for $.28 or whatever the midpoint is.

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 JUN17 215 long puts – I entered this position (3/17) for a $1.19 debit.
SPY AUG17 214 long puts (5/2) – I entered this position for a $1.22 debit.