Daily Market Newsletter
May 19, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
June Expiration
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Market Commentary
Another profitable month, albeit a quiet one for us, mostly because there was so much risk during the drop in markets to re-test the spring lows again. And we’ve certainly watched the markets run the gauntlet of risk in the past month, between the risk of rising rates, and a potentially crippling trade war. And where are the markets at present? Just about 5% off of the highs.
Now look, I’ve lived through 2008 to tell about it, and the price bounced up during late May of that year in an eerily similar manner before it fell like a rock. So we’re not quite out of the woods yet, but I have to respect the fact that the price has absorbed every punch that the market has thrown at it and continues to hold support.
Friday’s close of our short condor marks the first successful short condor that I’ve done in quite some time. I still believe that overall the metrics are against the short condor right now, but we can still spot short-term edge where it fits.
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 Ten That Will Be Top Ten) is available here
Please sign up for our free daily crypto report here.
If you need a video link with an embedded player you can use this link.
Offensive Actions
Offensive Actions for the next trading day:
- I will set up an 8/21 EMA OTM call debit spread; 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 average Friday and breadth ended the day mixed with -56 advancers minus decliners
SPX Market Timer : The Intermediate flattened in the Upper 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 uptrend, and a short-term uptrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.
VIX: The VIX flattened at 13.42 after peaking at 50.3 three months ago, inside the bollinger bands. The RVX rose to 14.44 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 2600 … with overhead resistance at 2878. The RUT has support at RUT 1530 with no overhead resistance. 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, with a reading of 43, and recharging quickly. The Weekly chart is now massively charged with an energy reading of 62. The Daily chart is showing a level of 34 which is at exhaustion. 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 86, overbought. The RUT Stochastics indicator rose to 90, 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 2612 and resistance at the upper band at 2748 and price is below the upper band after starting to squeeze again. The RUT is back inside the Bollinger Bands with its boundaries at 1524 to 1634 and price is at the upper band. BANDS ARE RELEASING FROM THE SQUEEZE AGAIN.
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, but unlikely to stay in this consolidation for much longer.
I had the following results for the 18MAY 2018 Options Cycle:
High Probability Iron Condors
No trades this cycle.
Low Probability Iron Condors
- SPX 25MAY 2675/2680*2740/2745 Iron Condor was entered for $2.50 credit with 2 contracts, and closed for $1.80 debit. This gave me a net profit after commissions of $124 or a 24.8% return on risk.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- NUGT 04MAY $31.5 calls were closed for a $225 profit on five contracts after commissions.
- NUGT 25MAY $31.5 calls were closed for a $160 profit on five contracts after commissions.
“Whale” Trades
No trades this period
Swing Trades
No trades this period.
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
- SPY 11MAY 261.5/262.5 debit put spread was closed for a $160 profit on five contracts.
- SPY 11MAY 273/274 debit call spread was closed for a $35 loss on five contracts.
- SPY 18MAY 260/261 debit put spread expired for an $85 loss on five contracts.
- SPY 18MAY 273/274 debit call spread was closed for a $105 profit on five contracts.
Lessons Learned from this cycle:
This cycle showed a classic re-test of the bottom with all of the associated fear and histrionics, and what looks to be a potential recovery and transition to the upside. There was massive potential for the price to rip much lower but in the end it was (as it often is) much ado about nothing.
What we did get right was to play the long condor positions as the price started to really become unstable and blow past the expected move markers. We also shut down that offense at the right time, and transitioned into a short condor with just about perfect timing this past week – it’s been the first short condor that we’ve placed since being run over to the upside last November.
Changes for the next cycle? I think that there is a good chance that the price recovers to the upside and we transition back into quiet/trending summer tape. I’ll miss this volatility and we’re back into the grind.
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 the following positions in play:
- SPX 25MAY 2675/2680*2740/2745 Iron Condor (5/16) entered for a $2.50 credit. I closed this position (5/18) for a $1.80 debit, which gave me a net $124 profit and a 24.8% return on risk after commissions.
It feels good to have a near-perfect short condor setup go off like this. This might be an effective weapon on an upside recovery but the signals will be rare. We’ll look for the next setup but it won’t be for some time.
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 IV is starting to resolve lower so we might be back in business if the price resolves back into quiet/trending.
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 rolled to the 25MAY $31.5 calls for $.35 credit. (4/27) and I closed these on Friday (5/18) for a $.02 debit. I rolled these to the NUGT 22JUN $31 calls for $.30 credit (5/18).
- 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. I was not able to secure an entry into the in-out spread trade last week, the skew just made it too expensive. I’m going to set up an OTM-EM vertical spread on Monday with an 8JUN 277/278 Call Debit Spread, which is currently running at about $.17 to $.18 debit
- 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.
- 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 has come under a lot of pressure lately and I attribute this to the market still being under the influence of a bear. Until a major “higher low” is printed these rallies will persist and be faded.
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 271.33, there is a +/- 3.387 EM into this Friday. This is almost precisely what it was last week, and the price stayed well within the EM.
The EM targets for this Friday’s close is 274.72 to the upside, and 267.94 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, although last week was the first week that we saw that featured a smaller-than-EM move. Transition might be happening again.
I am not going to play a long iron condor this week, even though there is some energy left on the daily chart at present. We have seen a 131 point move higher in the SPX in just over a week, which is a stretch in any circumstances.
I have the following positions in play:
- SPY 18MAY 260/261 debit put spread (5/7) entered for a $.15 debit. This position expired on Friday.
- SPY 18MAY 273/274 debit call spread (5/7) entered for a $.15 debit.I closed this position (5/10) for a $.40 credit based on the fact that the price was at the back-week EM and also the descending trendline. This gave me a net profit of $105 on this position with five contracts.
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.
I think that there is a good chance of seeing the Whale Trade being back in business soon. Unfortunately, no setups showing this weekend..
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 entered the 17AUG SPY 245 puts (5/14) for a $1.41 debit. I will hold these through the next test of the 200 dma.