Daily Market Newsletter

June 17, 2017

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Market Commentary

Another profitable monthly cycle for us, that’s ten in a row and 122 out of the last 141 monthly cycles. This is a very, very different market that we’re trading today vs. the one that I started with in October 2005. It seems like a lifetime ago that the S&P was trading around the 1200 level. Back then, a 10% haircut was worth 120 points and something to fear….now, a 120 point move is only 5% of today’s price…but we’re hardly moving a fraction of that. There is no fear due to the amount of fiat currency floating around the system, looking for a home….not so in 2005, when any number of alternative investments were available to the savvy investor.

We have been through these interminable rallies before, many times. They all feature the same emotions of FOMO (fear of missing out) as well as “fear of the big drop.” Normally two things are seen during these rallies: 1) more opportunity is lost by being scared to participate (due to the inevitable pullback) than is ever truly lost, and 2) Retail and Institutional traders alike finally tire of being patient and hold their nose, diving in at the top. Never fails.

So ask yourself, “where is the pain?” Which way would the market have to move to generate the most “pain?” It’s not the old “max pain” theory which has been proven not to be correlated to movement, but rather the overall sentiment….which admittedly has been very difficult to interpret lately. I have to say that the pain appears to still be to the upside, as there is still far too much skepticism in this rally for the price to start to fall appreciably..

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

Offensive Actions

Offensive Actions for the next trading day:

AIG is setting up as a potential Whale entry; see “whale” section below.
I will target the upper EM SPY target with an inexpensive call spread; 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 average Friday. Breadth was mixed with +45 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened inside the Upper Reversal Zone, still showing a bullish bias. No leading signals at this time, however this chart is very close to a full bearish cluster once again.

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 downtrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell 4.77% to 10.38, back inside the bollinger bands. The RVX fell to 14.06 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 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 34. 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 55 which has recovered from exhaustion again and is just about ready to support movement.

Other Technicals: The SPX Stochastics indicator fell to 78, below overbought. The RUT Stochastics indicator fell to 77, below overbought. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2389 and resistance at the upper band at 2455 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1360 to 1432 and price is below the upper band. The SPX Bollingers are starting to squeeze again.

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 16JUN 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

SPX 7JUN 2315/2320*2395/2400 Iron Condor showed a loss of $506 on two contracts..

Time Spreads

BBY 9JUN/16JUN 57.5/59.5 short call diagonal was closed for a break-even exit.
SPY 16JUN/21JUL 244 Put Calendar was closed for a net profit of $13/contract or a 10% return on capital. This gave me a net $260 profit on 20 contracts.

Cash-Secured Puts/Covered Calls

AMD JUN $9 puts sold for $.25 credit expired for $480 total profit on 20 contracts.
XLF 16JUN $22 puts sold for $.25 credit expired for $240 total profit on 10 contracts.

“Whale” Trades

XLU 23JUN 52/53 call debit spread produced a net profit of $17/contract, or a 42.5% return on capital. This gave me a net profit of $85 on 5 contracts.
C 23JUN 63.5/64.5 debit call spread produced a net profit of $29/contract, or a 100% return on capital for a $145 profit on 5 contracts.
AAL 23JUN 48/49 call debit spread produced a net profit of $20/contract, or 43.5% return on capital, for a $100 profit on 5 contracts..
ABBV 30JUN 65.5/67.5 debit call spread produced a net $42/contract profit or a 44% return on capital, for a $210 profit on 5 contracts.
AXP 7JUL 78/80 debit call spread produced a $35/contract profit or a 35.3% return on capital, for a $175 profit on 5 contracts..
AAPL 16JUN 160/162.5 debit call spread expired for a $108 loss on 3 contracts.

Swing Trades

RSI(2) CELG 2JUN 117/118 call spread produced a net profit of $22/contract which is a 42.3% return on capital, for a $110 profit on 5 contracts.
8/21EMA IWM 2JUN 140/142 produced a net $103 loss/contract on 3 contracts for a $309 debit.
RSI(2) CAT 16JUN 104/106 call spread produced a net $31/contract profit, or a 31.3% return on capital, for a net $155 profit on five contracts.

Hindenburg Positions

SPY JUN17 215 long Hindenburg puts entered for a $1.19 debit which expired for $120 loss.

Earnings Trades

None this period.

SPY EM Fade

SPY Weekly EM – SPY 26MAY 240.5/241.5 debit put spread incurred a $46 loss/contract on 5 contracts, for a net $230 debit..
SPY Weekly EM: SPY 9JUN 242.5 call options produced a $32 net profit/contract, or a 110% return, for a net $320 profit on ten contracts..

Lessons Learned from this cycle:

This cycle began by following through on the mid-May pullback and subsequent “slingshot” rally higher. The “range contraction” of mid-May first broke falsely to the downside, then rocketed higher until exhaustion, creating the next “range contraction” zone where the price currently sits. .

One of the neutral trades (SPX Condor) was run over badly which was a misjudgment on my part and should not have been entered, mostly due to the available daily energy at that time. Going back over time, I can see that I have “fallen” for that trap several times only to be run over to the upside. Never again, I think. Sticking to the “energy” rules is really the best way to trade these. I stuck to those rules with the JUN time spread and that worked out perfectly.

We were able to get several directional swing trades to work out for us this cycle, which always helps accelerate the profits. In the past, I have had a much better “base” of premium selling to help smooth out the directional trades. Not so with a VIX of 10..

No changes projected in our approach at this time.

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 to sell LP Condors again.

I have no current positions:

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

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.
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.
HPE – I sold the 18AUG $16 puts (6/12) for $.30 credit.

I will look for future entries for AMD and XLF going forward.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry.
RSI(2) CounterTrend – SBUX is currently showing an RSI(2) signal; per the weekend advisory I entered a 23JUN 61.5/62.5 call spread for a $.44 debit. I will look for a 30% return from this trade but we only have until Friday.

COST is showing an RSI(2) entry today but the options to play this have wide spreads and too much skew. .

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.

Viewing the SPY from the current price at 243.09, there is a +/- 2.122 EM into this Friday.

The EM targets for this Friday’s close is 245.21 to the upside, and 240.97 to the downside.I will watch for either of those levels to be tagged, and will fade that level with an ATM debit spread.I might also consider targeting one of the EM levels with an OTM long option or debit spread. If either level is hit on the Friday, I will use ATM “front day” long options to fade that level.

I would like to target this Friday’s upper EM target with an OTM call spread. I will add the 23JUN 245/246 debit call spread position on Monday morning for the lowest debit possible.

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:

BIDU 23JUN 202.5/205 call debit spread (5/17) entered for $.39 debit.

I like AIG as a whale candidate if the price breaks above the $64.40 price level. I would trade the AIG 14JUL 64/65 call spread for about a $.50 debit, or the equivalent strike pair if that is not available.

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.