February 24, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Today’s “key reversal bar” with a “lower low and higher close” might be a sign that we’re about to see higher prices, at least for a while. For the past few days I’ve been making the case that we’ll see prices revisit the most recent breakdown level at SPX 2000 and/or the 200 simple moving average….before we see the next potential downdraft kick in.
Until that point we might see markets relax into a choppy uptrend. In today’s video I’ll discuss how we can take advantage of this potential move.
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. I’m not trying to tell anyone how to vote or for whom to vote for, I just want you to understand the impact of the proposed policies to active traders.
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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.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and then 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 added short calls to “cover” my shares on the SLV, and I added another cycle of short SSO puts; please see the “stock” section below for more discussion.
- Please see the “HP Condor” section below for initial HP Iron Condor position entries for APR; we need to add the call spreads now to complete the Iron Condor.
- There might be a quick opportunity to play Whale positions to the upside in the near term; see “whale” section below.
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; we need to be on guard for a long duration of heavy “realized” volatility up and down through the rest of this year.
- The MAR SPY spreads are a huge distance OTM, and my debit spreads are risk-managed from day one. The cash-secured put positions are doing exactly what I want them to do. We got started with our APR HP Iron Condor offense today, so the best defense for that position will be securing bear call spreads to “neutralize” the position deltas.
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 today. Breadth was mixed with 281 S&P advancing issues vs 216 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 uptrend. The RUT is in a long-term downtrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.
VIX: The VIX fell 1.24% to 20.72, inside the bollinger bands. The VIX ratio is 1.13 and still above the mean. The RVX dropped .71% to 23.89 and is inside the bollinger bands.
Fibonacci Retracements: We are still tracking 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 1979. The 38.2 fib is at 1915, and the 50% fib is at SPX 1947 which is where resistance came in on the last swing up and again this week.
Support/Resistance: For the SPX, support is at 1810 and 1800 … with overhead resistance at about 1950, 2000 and 2080. The RUT has support at RUT 872 and 958 with overhead resistance at 1100. 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 64. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 47, and is starting to recharge due to recent chop. The Daily chart is showing a level of 46 now which was fully recharged from all of the non-linear price behavior and ready to trend again. The Intraday chart is just going to follow the higher-timeframe energies at this point. The market has the potential for another large move right now.
Other Technicals: The SPX Stochastics indicator rose to 89, overbought. The RUT Stochastics indicator rose to 86, overbought. 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 1832 and resistance at the upper band at 1965 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 954 to 1042 and price is below the upper 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. The price has now re-tested the January lows on the SPX, and now looks to be playing out as expected into a rising wedge pattern, although this has not been confirmed yet. The energy is there for this to happen. We also have to consider the possibility of a very strong rally to the upside.
Position Management – NonDirectional Trades
Here are the current positions in play with 16 trading days remaining in the MAR cycle, and 36 trading days remaining in the APR cycle::
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.01.
- 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 $.01.
- 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 $06.
- SPY APR 168/170 Bull Put Spread (2/23) was entered for a $.15 credit. The current negotiated debit exit is $.14.
Defense: I will play the current positions by Static Risk Management. The SPY MAR series has a tremendous amount of room to work with, an effective 470 point wide iron condor.The best defense for the APR position is to secure a matching APR call spread above resistance .
Offense: We are finished with MAR cycle offense and we are in the middle of APR offense.
I would like to see if we rally into the end of the week so that I can secure a SPY APR 208/210 bear call spread for a minimum $.15 credit. If I am not filled by the end of this week then I will accept a fill at the highest strike pair to create a $.15 credit.
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” or “volatile/trending” 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.
- 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. I sold the SLV MAR 15.5 calls for $.23 on 2/8. I do not want to let this position be assigned, so I would roll those calls to APR if necessary.
- SSO -I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.20. I will not “defend” this position since I am OK with assignment, but I will let the price dictate how we address it going forward . Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric. I also added the SSO APR 48 puts for a $.95 credit (2/22) and the exit debit is currently $1.03.
Nothing to do with the current positions for now.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – This signal has crossed to the upside, however I already have a SPY swing trade in place with the SPY MAR 200/201 debit spread.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma. This signal was showing earlier in February but I will not attempt to use it.
- Squeeze/60 Minute – I’m not following this indicator/timeframe in this current market.
- 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.
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 have no positions at the current time. We are looking for the price to bounce to higher levels so that we can become more aggressive with bearish spread strategies, similar to the Bear Put Spread that we closed recently. My target would be around the SPY 200 level on an exhausted daily chart, and perhaps also the 200ma overhead:
Waiting on the next setup….In today’s video I’ll go over a couple of candidates that we might watch for on the IBD20. I like AT&T tomorrow as long as it does not go lower….and just buying the APR 39 call might be a better choice than buying the 39/40 call spread .
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.
- SPY MAR 200/201 long call spread (2/17) entered for $.20 debit, seeking 100% return at $.46 credit.
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.
I will likely sell call credit spreads in the APR cycle to help finance subsequent cycles of long puts.
We currently have the following positions in play with this strategy:
- SPY MAR 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.
- SPY MAY 175 Long Puts – I entered this position (2/23) for a $2.54 debit per Monday’s advisory.