February 1, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Today is the first primary for the 2016 presidential election in the States. (for those of you outside of the US, my apologies for this brief detour) If you weren’t aware of it, some of the candidates are promising the known world to voters, and the big, bad bully is going to pay for it again – Wall Street – this time through a financial transaction tax,” or FTT. I’ve seen this proposal floated out year after year by various anti-capitalist groups in Congress, but this is the first time I’ve seen a presidential candidate propose the idea.
I sat down and read their proposal and worked through the numbers.
Well, in a nutshell, it’s going to double the cost of trading for retail traders. I did a video on it today here:
I generally avoid diving too deeply into politics as I get weary of defending myself against those to whom I’ve unintentionally offended, however this is very important as it will put 50% of traders out of business, and essentially raise the barrier to entry for a new retail trader so as to make it nearly impossible to make a profit. Choose wisely.
If the video above does not play or display, please use this link
Offensive Actions
Offensive Actions for the next trading day:
- The Market has shown its hand for 2016 and the path of least resistance is “down.” This will affect how we create edge going forward; we will look to focus on call spreads above the range, and then be patient enough to sell into the fear when it arrives.
- Per the “swing” section I have had a long-standing trade entry that I want to look for conditions where the number of advancing stocks in the S&P is less than “10.” I saw this condition recently and I purchased a small SSO position in order to participate in the next oversold bounce. There is no stop for this trade but I will discuss the exit target in the “swing” section below.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and now we want to add call spreads to complete the Iron Condor for the MAR cycle. Please see the HP Iron Condors tab below for tomorrow’s entry.
Defensive Actions
Defensive actions for the next trading day:
- We have just seen the SPX and the DOW go through a second major correction separated by only three months. I will monitor the FEB DIA bull put spreads for a static risk exit/rollout. These bull put spreads have lots of room to work with now but could also require an exit/roll should the price drop significantly below recent lows. One thing working in our favor is that time is burning quickly towards FEB expiration and there is less than three weeks left.
- Should the FEB DIA bull put spreads require a forced exit at a $.61 exit debit, I will roll this position further out in distance, moving to the MAR expiration cycle of the DIA. I will martingale/double the position size. Friday’s bounce really took this position out of immediate danger for 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
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Technical Analysis Section
Market Internals: Volume was about average. Breadth was mixed with 266 S&P advancing issues vs. 227 declining.
SPX Market Timer : The Intermediate line rose above the Lower Reversal Zone, now showing a bullish Bias. No leading signals at this time, however the two shorter timeframes are close to showing a Weak Bearish Cluster if they both arrive in the Upper Reversal Zone.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term uptrend. The RUT is in a long-term downtrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate downtrend and short-term uptrend.
VIX: The VIX fell 1.09% to 19.98, inside the bollinger bands. The VIX ratio is 1.14 and still above the mean. The RVX dropped rose 3.12% to 24.81 and is inside the bollinger bands.
Fibonacci Retracements: We are starting to track the Fib Retracements of the main swing lower from the 2080 level down to about 1812; the last overhead target is the 61.8% Fib retracement at about SPX 1978. The 38.2 fib is at 1915, and the 50% fib is at SPX 1947. The 38.2% fib was blown through last week which is a sign of short-term strength and short-covering.
Support/Resistance: For the SPX, support is at 1812 … with overhead resistance at about 2000 and 2080. The RUT has support at RUT 872 and 958 with overhead resistance at 1200. The RUT, SPX, and DJI charts are now all showing a “Death Cross” with the 50ma below the 200ma.
Fractal Energies: The major timeframe (Monthly) is super-charged again with a reading of 62. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 43, and is starting to bleed energy from the downtrend. The Daily chart is showing a level of 56 now which is recovering rapidly from technical exhaustion from the downtrend and is ready to provide a 70+ point burst of energy to the next swing direction; almost 47 points came on Friday last week. The Intraday chart is just going to follow the higher-timeframe energies at this point, but it’s exhausted from Friday’s move and might need a day or two to recover, like today.
Other Technicals: The SPX Stochastics indicator rose to 79, almost overbought. The RUT Stochastics indicator rose to 47, mid-scale. The SPX 5/34/5 MACD histograms rose above the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1831 and resistance at the upper band at 2008 and is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 954 to 1122 and price is above the lower band.
At this point index charts are one-by-one falling into a Bear Market, so it’s now much less of a mystery as to what we’ll see occur in 2016. Even if the SPX and DJI avoid becoming a true “bear,” we will still see very volatile, difficult price action for likely the remainder of 2016. We started to see the counter-trend to the corrective move begin last week.
Position Management – NonDirectional Trades
Here are the current positions in play with 13 trading days in the FEB cycle, and 33 trading days remaining in the MAR cycle:
- SPY FEB 177/179 Bull Put Spread (12/21) entered for a $.16 credit; per my recent advisories I rolled out to MAR SPY 153/155, and was able to close this trade on a quick pullback for a $.58 debit.
- SPY FEB 218/220 Bear Call Spread (12/24) was entered for a $.19 credit; negotiated exit debit is $.01.
- DIA FEB 143/145 Bull Put Spread (1/11) was entered for a $.16 credit with a 2x-sized position; negotiated exit debit is currently $.02. It would really take a true crash to take out this position but anything can happen, as we know.
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.05.
- SPY MAR 153/155 Bull Put Spread (1/20) was entered as a rollout entry from the FEB SPY trade for a $.16 credit with a 2x sized position. This position is currently showing a negotiated exit of $.03.
Defense: The best defense for the MAR SPY position will be to add a matching bear call credit spread if we see this bounce create a position that is outside of the current price range. I will play the remaining positions by Static Risk Management. These are small positions without a ton of overnight risk.
Now the focus moves to the FEB DIA positions. I will watch for a full debit exit of $.61 on the FEB put spreads. The FEB put spreads have quite a bit more room to work with; if those also show an exit debit then I will roll those further out in the MAR cycle as well on the DIA. Realistically, at this point it would take a full Black Swan to take out this position, especially after Friday’s huge bounce. I will not send out a trade update if these actions are required.
Offense: We are finished with our FEB cycle offense.
We started the MAR cycle a little early as we had several edges working in our favor….a spike in IV as well as the price re-testing the August lows, actually undercutting them. The price would have to show an epic crash from these levels in order to attack those new MAR positions. Right now we’re patiently waiting to see if this relief rally allows us to enter a bear call spread above the current trading range, preferably above SPY 210, however I am running out of time to secure a decent entry. Tomorrow I will enter a “small” $2-wide call spread at the best strike pair that I can secure. I might be able to get the SPY MAR 207/209 for at least a $.15 credit at today’s closing price. If the price continues to rise from today’s level we’ll see if we want to enter any more call spreads in the near term.
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” which creates difficult conditions when the realized vol outraces the implied vol. I think that these are more appropriate conditions for the HP Iron Condor, however we might get a shot here soon if the price approaches the SPY 200 level; I think we would see at least a short-term consolidation under that level.
Waiting until the market character rotates back to “quiet/trending” before playing this strategy again. This is a “long vega” strategy which works best in quiet, low-IV markets. (not what we currently have) I am also working on a Diagonal Spread strategy that we can play in a Bearish market, and I hope to have that released to this newsletter shortly. My goal is to see if we can play off of the SPY 200 level with zero downside risk.
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. I sold the FEB $26 call option for $.30 on 1/6/2016.
- VXX Stock – I own 25 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, and will continue to write time against these shares on every rally.
- SSO – I added the FEB SSO 50 puts (12/22) for a $.70 credit; exit debit is currently $.29. I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.50. I will not “defend” either of these positions since I am OK with assignment. Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric.
Nothing planned in the short-term unless I see the SLV rally higher; this week’s move was a nice start and I’d like to see if we can sell time against the $15 calls for at least $.25/contract.
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Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – Nothing in play at this time.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma.
- Squeeze/60 Minute – awaiting the next signal.
- 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. I saw this signal during the day on Friday (1/15) so I went long 100 shares of the SSO at a cost basis of $52.59. I have no “stop” for this position. I will take profits on this position as the price of the SSO hits the 50% fib level of the recent swing down, which would be the SSO $57.39 price.
At this point we need to find our next “edge” to trade against; this will likely not happen until we have the next “higher low” and next “higher high” set up so that we can start to identify the trading range to position again. No setups currently in play.
I am now holding the following position:
- FEB SPY 179/180 bear put spread (1/28) entered for a $.14 debit. This is a relatively small position put in place in case of a re-test of the January lows. I will be looking for at least a 100% return on capital for this position. Exit credit is showing approximately $.05.
I set up an expected-move play on the dollar index as I think conditions are ripe for a continued rise in this chart. I played the UUP ETF, which appears to have some liquidity and is currently wound up and ready to trend.
I have the following positions in play:
- MAR UUP 26/27 long call spread (2/1) entered for $.17 debit, will hold seeking 100% return on capital.
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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.
On 1/19 I added MAR-cycle financing trades. We’ll have to wait for the eventual rebound before we add the next cycle of long puts. I would like to see a little more upside and a little more complacency on the VIX before reloading with long puts.
We currently have the following positions in play with this strategy:
- MAR SPY 158/160 Bull Put Spread financing trade – I entered this position (1/19) for a $.15 credit with a 12 contract position to help finance a future long put position.