Daily Market Newsletter
April 21, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
May Expiration
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Market Commentary
Another profitable month! Not the most efficient one, as several of our swing trades struck out, but the short put trade was great off of the recent “fear” lows, and we had one killer swing trade off the recent bottom that compensated nicely.
Corrective behavior reigns once again as no swing is able to sustain a move, either to the upside nor the downside. You would think that premium sellers would be cleaning up in this environment, and you might be right…..but at what risk? Realized volatility is 32% higher than Implied volatility in the S&P! This means that the price is moving further/faster than the options are pricing in, and we’ve seen this constantly over the last two months. This is somewhat similar to what we saw after the first bounce in the summer of 2015, but not this late in the pattern. QE and an accomodative Fed has taught traders over the last few years to be complacent and trust that the system will be protected. Perhaps these are old habits that need to be revisited for their worth, but I find it difficult if not impossible NOT to heed this warning. I believe that most options are not pricing in enough risk thus difficult to sell.
But if one edge disappears, another one pops up in its place. Because vol is low, that puts us back into “long-gamma” debit trades again.
The scan for the “Cheap Stocks with Weeklys” is available here.
The RSI(2) FE scan is available here.
The current MAIN “high liquidity” watchlist that I’m scanning against in thinkorswim is available here.
The latest crypto video (Top Five Ways to Prepare for a Crypto Bull) is available here
Please sign up for our free daily crypto report here.
If you cannot view today’s video, please click here to view an embedded flash video.
Offensive Actions
Offensive Actions for the next trading day:
- SPY Expected Move levels have been derived but I’m not interested in fading them just yet.
- We have a SPY 8/21 EMA swing trade setup showing; see “swing trades” 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
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Technical Analysis Section
Market Internals: Volume was about average Friday and breadth ended the day weak at -313 advancers minus decliners
SPX Market Timer : The Intermediate rose above the Lower Reversal Zone, now showing a bullish bias. No leading signals at this time.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.
VIX: The VIX rose to 16.88 after peaking at 50.3 two months ago, inside the bollinger bands. The RVX rose to 17.35 and is inside the bollinger bands.
Fibonacci Retracements: The price has retraced 38.2% of the election rally; so far this has been a garden-variety correction.
Support/Resistance: For the SPX, support is at 2650 … with overhead resistance at 2878. The RUT has support at RUT 1436 with overhead resistance at 1619. 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 above exhaustion for the first time in months, with a reading of 41. The Weekly chart is now fully charged with an energy reading of 55. The Daily chart is showing a level of 51 which is starting to show the upside trend. Markets are doing PRECISELY what they must in order to restore energy that has been incredibly depleted. Extreme Range Expansion leads to extreme range contraction (big swings).
Other Technicals: The SPX Stochastics indicator rose to 79, below overbought. The RUT Stochastics indicator rose to 82, 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 2572 and resistance at the upper band at 2718 and price is below the upper band after starting to squeeze again. The RUT is back inside the Bollinger Bands with its boundaries at 1488 to 1590 and price is at the upper band.
We recently saw the market reaching into a full “runaway” condition, where “fear of missing out” means abandoning any former patience and “wait for the dip” strategy. This usually occurs near the top of the intermediate move. We should be in sideways/volatile behavior for months.
I had the following results for the 20APR 2018 Options Cycle:
High Probability Iron Condors
No trades this cycle.
Low Probability Iron Condors
No trades this cycle.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- SLV 20APR $16.5 calls were closed for a $140 profit on ten contracts after commissions.
- NUGT 20APR $31.5 calls were closed for a $90 profit on five contracts after commissions.
- GLW 20APR $25 puts expired OTM for a $240 profit on ten contracts.
- XLF 20APR $27 puts were closed for a $330 profit on ten contracts after commissions .
“Whale” Trades
- LUV 6APR 59.5/60.5 Debit call spread expired for a $260 loss on five contracts.
- MSFT 6APR 96.5/97.5 Debit call spread expired for a $260 loss on five contracts.
- V 20APR 124/125 debit call spread was closed for a $25 net profit on five contracts.
Swing Trades
- SSO long stock swing was closed for a $1010 profit with 100 shares.
- SPY 6APR 285/286 debit call spread expired for a $230 loss on ten contracts.
- SPY 20APR 260/259 Debit Put Spread was closed for a $170 profit on ten contracts.
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
- SPY 20APR 261.5/262.5 debit put spread expired for a $200 loss on ten contracts.
- SPY 20 APR 270.5/271.5 debit call spread was closed for a $320 profit on ten contracts.
Lessons Learned from this cycle:
If I look at my results from this period, the majority of the profits came from the one big swing off the bottom that we took on the SSO. This was one of those trades that I took in the last fifteen minutes of the market day, so I could not send out an update, however the same entry level was available over the next few days. This is an example of a trade that I would not have taken ten years ago, yet does not represent a sense of “risk” to me today, simply because I’ve seen my share of these “scary bottoms” and the VAST majority resolve to the upside, even if it ends up being a “lower high.”
By contrast, the other vertical spreads were hit and miss. Probably the best of them was the “virtual strangle” or long condor that we took last week off of the high-energy setup that I was calling out days in advance.
Perhaps my biggest regret was the inability for the price to come low enough for me to sell put credit spreads at the lows. My sense is that we’ll get one more shot before this pattern is over.
Position Management – NonDirectional Trades
I have no positions in play.
The next extrapolation trade is a long, long way away from being filled. The price would have to drop more than 100 SPX points before we’d be in a position to even begin to look for a fill. Realized volatility continues to out-run the implied volatility; this is a dangerous time to be complacent, selling options. I will continue to look for long-gamma (directional) trades and wait until we see an appropriate fear-based move to sell spreads into.
I have no positions at this time. Not the right type of market for these trades. As we can see by the price blowing through the EM on a weekly basis, IV < HV these days.
I have no remaining positions. Calendar spreads are good for markets with some volatility but they are long vega so we can’t enter them during IV spikes or periods of elevated volatility.
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 am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of crash we can almost define our total risk by the price of the underlying. While this is not how I intend to manage risk in these positions, I view this as fundamentally more solid than trying to actively manage risk on assets that are going for $$$hundreds which have also gone parabolic. I have the following positions in play:
- 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 15JUN SLV $17.5 strikes for an $.18 credit. (4/19).
- NUGT stock – I was assigned on NUGT at the $31.5 price level. I opened up the $31.5 04MAY calls for a $.50 credit (4/13).
- GLW – I sold the 20APR $25 puts (2/12) for a $.25 credit. These puts expired OTM.
- SSO – I sold the 15JUN $70 puts (4/4) for $.70 credit.
No other setups at this time; I want to look for the next “scary” drop in the markets to sell puts again.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – The next upside crossover is showing; if the support holds then I’ll try one more time tomorrow to secure an 18MAY $1-wide call spread on Monday. Vol skew has made this trade expensive so I don’t really want to pay more than $.55 for the entry price. If the price falls below the Friday lows in the S&P then I will cancel this setup.
- RSI(2) CounterTrend – Looking for the next setup. Several were showing recently but I avoid this strategy during corrective action.
- 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.
- Swing – I entered a GLD 20JUL 128/129 call spread for $.40 (4/12) and will hold this for the eventual breakout.
The crypto market is starting to perk up and rally off of the bottom. Market character might be changing to quiet/trending again which would be a surprise, as strong as this bear has been.
Investors should currently be looking to find technical entries to warehouse BTC/ETH/LTC assets for eventual trades on Alt-coins. You should also be looking to devices like “trezor” or other cold-storage devices to keep your assets off of the network, or other secure wallet such as Navcoin. Relying on the security of your broker is no longer good enough; no one can log into your ETrade account and “steal” your stock assets, but the whole nature of Cryptocurrencies and their portability means that someone can grab your assets and transfer them elsewhere. I will continue to discuss the tradingview platform in daily videos as I think that it is currently the best way to chart the “big three.”
Viewing the SPY from the current Friday closing price at 266.61, there is a +/- 4.768 EM into next Friday. This is smaller than last week’s EM was at +/- 4.9 points.
The EM targets for this Friday’s close is 271.38 to the upside, and 261.84 to the downside.
I don’t really have any interest in fading the EM this week, because the market is in transition, and we are more likely to see expanded range movements during this type of character. Realized volatility is out-running the Implied right now.
Last week’s long condor/virtual strangle secured a nice profit for us, but a timely exit was required on the call spreads else zero profits would have shown. We will look for upcoming conditions where the same signal fires.
I have no current positions. I will consider setting up another ratio fly as price approaches resistance:
Entry criteria are:
- Using calls
- 17 to 50 calendar days
- center strike .25 to .40 delta
- ratio is 1/3/2 quantity, from the bottom, calls are long/short/long
We will exit the spread at a 60-70% level of credit received. The max risk on the trade is defined on the graph if the price goes much higher. There are no early exits, only exiting the week of expiry to avoid assignment. Also avoid dividend periods. I am currently trialing some trades and will discuss them in the newsletter; after a few cycles, I will start adding these trades to circulation. TOS scan code: http://tos.mx/hvWmMl
I have no positions at the current time.
No new trades for this week; we’ll mostly be doing swings on the S&P500 in the next week or two. We want to see markets in a consistent upswing first.
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. Frankly, 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 have no positions at this time and need to see the price rally to recent highs again to reload. It’s not just the price, it’s also the implied vol which needs to drop. I missed my opportunity by a couple of days on the recent bounce back up. Conditions are never perfect to enter this trade, you have to do it mechanically.