Daily Market Newsletter

June 28, 2017

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Market Commentary

Today we saw the normal “window dressing” that typically comes with quarter-end, much like last quarter and certainly like last year, where a year ago we had the bounce up from the Brexit bottom. That marks one year since I’ve last sold a credit spread, and I miss using that strategy. When it works, there is not a better, more laid-back trading experience. When it goes awry, there is no place to hide. My trading has evolved over the years to be more sensitive to direction with better reward-to-risk, and less about the big OTM spreads that did so well in the quiet times, and so poorly in the bad times of 2008. Actually, 2013 was one of my worst years for credit spreads until I figured out that I had to change my approach!

I would be surprised if we didn’t see a return to credit spreads again soon as a new range is defined, albeit one slightly lower than today’s.

I am expecting pretty mellow price action over the next two days as traders anticipate a long weekend; they will do whatever they can to stretch out the next few days into an extended holiday.

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

Offensive Actions

Offensive Actions for the next trading day:

No neutral spread selling now….price is about to move.
Watch for a potential entry on the SPY Expected Move fade.
Watch for Whale entries on IWM and AIG.

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.
In today’s video I discussed the management of the ABBV spread which is underwater right now.

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 today. Breadth was strong with +317 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.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term sideways trend. 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 9.31% to 10.03, back inside the bollinger bands. The RVX fell to 14.31 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 33. The Weekly chart is now recharging quickly with an energy reading of 49, due to the recent chop. The Daily chart is showing a level of 67 which is massively charged up and we do not see markets pause for long in this state..

Other Technicals: The SPX Stochastics indicator fell to 58, mid-scale. The RUT Stochastics indicator fell to 49, mid-scale. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2422 and resistance at the upper band at 2448 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1390 to 1429 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.

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 the following positions:

ABBV 30JUN/7JUL 70/72 short call diagonal (6/20) was entered for a $1.10 credit; risk on the trade is $.90 total, so a 30% net return on risk would mean an exit at $.79. The price has broken above recent highs but Friday was weak and we’re starting to see this one rest; a quick pullback might give us a shot at a graceful exit. I must exit by Friday.

I will be on the lookout for more short call diagonals as this is the type of market that should support their use..

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 – We’ll keep looking for these setups.
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 243.13, there is a +/- 2.239 EM into this Friday.

The EM targets for this Friday’s close is 245.37 to the upside, and 240.89 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 either level is hit on the Friday, I will use ATM “front day” long options to fade that level.

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.

IWM is also showing up on the “whale” scan and is in a short-term flag. This could also be a good candidate for going long if the price breaks above 142. I would use a 142/143 debit call spread for about $.50 debit if that occurs. Got very close today and might be green light tomorrow..

I like AIG as a whale candidate if the price breaks above the $64.40 price level. I would trade the AIG 21JUL 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.