February 4, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Oil was kind of a drag on markets today after early gains. Trends have not changed on any of the timeframes for oil so everyone that gets excited when the daily chart makes a little pop are equally disappointed when the larger trend takes over again and it declines.
This market is “nervous” and it’s not hard to see why. What I initially viewed as potentially bullish back in December due to all of the chronic negativity….is starting to come true bit by bit. Some of the recent disappointment in the market is due to what I believe is absolute incompetency on the Fed’s part….calling for a rate hike in the face of global evidence to the contrary. We’ll never know how much of that decision was politically motivated, even though the Fed claims that it’s insulated from such things. Regardless, it appears to be one more in a long string of poor decisions.
The next big “risk event” will occur tomorrow morning with the latest incarnation of the Jobs report; current consensus is only for 188,000. The PREVIOUS consensus was 200,000 and the actual number blew that out of the water with a 292k reading. As you remember, however, January didn’t really start out well. February is starting out a little better but this torturous, grinding move off of the bottom is not convincing anyone.
On Monday I did a case study on what Bernie Sanders’ “college for all” plan would do to the retail trader. I have also reviewed Hillary Clinton’s proposed “tax the traders” plan and it does not target the retail trader, only those institutions employing HFT. I am going to keep this posted here as a “sticky” for a while until everyone’s had a chance to review the plan and educate themselves on the impact.
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. I have changed the “stop” value for this position; please see the “swing” section below.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and this week we added SPY 206/208 call spreads to somewhat “complete” the Iron Condor for the MAR cycle. Please see the HP Iron Condors tab below for more discussion.
- I’m monitoring the SLV to see if I can sell calls against this stock for at least $.25 for MAR SLV $15 calls.
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 well above average. Breadth was good-but-not-great with 318 S&P advancing issues vs. 180 declining.
SPX Market Timer : The Intermediate line 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 downtrend, an intermediate downtrend, and a short-term downtrend. The Dow is in an intermediate downtrend and short-term downtrend.
VIX: The VIX fell 1.46% to 21.66, inside the bollinger bands. The VIX ratio is 1.23 and still above the mean. The RVX rose .04% to 26.01 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 which is where resistance came in on Tuesday. The price appeared to bounce at the 50% fib retracement of the latest swing up from the SPX 1812 bottom.
Support/Resistance: For the SPX, support is at 1812 … with overhead resistance at about 1950, 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 63. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 45, but is starting to recharge due to recent chop. The Daily chart is showing a level of 57 now which is recovering rapidly from all of the non-linear price behavior. The Intraday chart is just going to follow the higher-timeframe energies at this point.
Other Technicals: The SPX Stochastics indicator fell to 77, almost overbought. The RUT Stochastics indicator rose to 61, mid-scale. The SPX 5/34/5 MACD histograms fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1847 and resistance at the upper band at 1971 and is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 963 to 1090 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, and the “scary higher low” might have been printed today.
Position Management – NonDirectional Trades
Here are the current positions in play with 11 trading days in the FEB cycle, and 31 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 $.06.
- 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 $.04.
- SPY MAR 206/208 Bear Call Spread (2/2) was entered for a $.15 credit with a half-sized position. The current negotiated debit exit is $13.
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, which is what I believe the SPY MAR 206/208 call spread will do. I will play the remaining positions by Static Risk Management. These are small positions without a ton of overnight risk.
The short-term focus is still on 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 more bear call spreads above the current trading range, preferably above SPY 210, however I am running out of time to secure a decent entry. If there are any further entries to be made, they would be placed further OTM than the current call spreads, such as SPY 207/209.
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 $.40. I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.66. 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; the price continues to rally 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 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, or I will close this position on a “stop” below today’s candle low of $54.34.
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. On Wednesday we might have set up the lower edge of the “higher low” for now. 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 $.08.
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.