Daily Market Newsletter

October 8, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies

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Market Commentary

Just when you think it could not get any worse, the US presidential election took another twist down the rabbit hole last evening. I suspect that it will get much, much worse before this is all over as millions of political career operatives depend on their candidate getting elected, so you’ll see some furious dumpster-diving in the subsequent weeks to come. This “political class” has gotten to be larger and larger over the years; I did a lot of traveling to the DC area from 2008-2011 to help a friend’s business and there was not the slightest hint of a recession in that area. I saw government workers by the hundreds moving into million dollar McMansions on the outskirts. Make no mistake that we are in the process of creating a government-supported bubble.

And this has found its way to the stock market as well. We see a market absolutely paralyzed by doubt and uncertainty, yet every dip is bought because of the “fed” backstop. Friday’s jobs report was light – again – which gives less weight to a December rate hike. And the unemployment rate increased again. Let me make one thing perfectly clear:

The US Economy is currently in a form of recession with declining corporate earnings growth (five straight quarters about to move into the sixth) and we are not seeing strong employment numbers nor strong GDP numbers, which backs up this assertion. So the nly explanation for this “ever up” stock market is central bank policy creating this tidal wave of cheap money which must find a home.

This market desperately wants to correct, but it cannot. This is akin to a person being kept alive against their will with all vital organs shut down and replaced by assorted mechanical pumps. This is socialized economics run amok.

But I still have faith in Fear. I hear from subscribers every day that “wait until the hurricane hits the east coast” or “the market will tank when the wikileaks emails come out.” Nope. Those are already KNOWN risks and have been baked into the pie. FEAR is what happens when some risk catalyst comes along which NO ONE has anticipated, NO ONE sees coming, and leaves people in a state of panic, leading to fear. When in doubt, palms out which means SELL.

So I believe that with the massive amount of skepticism that is out there in the market yet every minuscule dip being bought, we will continue to grind higher until some risk event occurs, which will be our signal to act.

Once upon a time I used to wish for “flat” markets. Now that they’re here, I want markets to TRADE again and MOVE. There is nothing worse than the siren song of “no risk” because that also means “no reward.”

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Offensive Actions

Offensive Actions for the next trading day:

  • On Monday I will set up a bearish QQQ put debit spread; please see “bearish/fade trades” section below.
Defensive Actions

Defensive actions for the next trading day:

  • Very little to “defend” or manage at this point. Any vertical debit spreads that we set up are risk-managed from day one.
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. Breadth was weak with -235 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened below the Upper Reversal Zone, still showing a neutral 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 downtrend, an intermediate uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX rose 4.98% to 13.48, inside the bollinger bands. The RVX rose 3.96% to 18.92 and is inside the bollinger bands.

Fibonacci Retracements: No retracements in play at this time..

Support/Resistance: For the SPX, support is at 2100 … with overhead resistance near 2200. The RUT has support at RUT 1090 with overhead resistance at about 1300. 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 still highly-charged with a reading of 54. The Weekly chart is recovering quickly from recent technical exhaustion by showing an energy reading of 52, due to the recent chop. The Daily chart is showing a level of 70 which is fully-recharged after the recent drop. We are very close to the rare condition of Full Energy again, and we will be there on Monday!

Other Technicals: The SPX Stochastics indicator fell to 57, mid-scale. The RUT Stochastics indicator fell to 58, mid-scale. The SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2126 and resistance at the upper band at 2181 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1213 to 1266 and price is below the upper band. The bands are starting to squeeze again.

If Central Banks go “all-in” to save each sovereign economy, this will not be sustainable in the long run. We will continue to monitor price action that will show us if the character of the market is moving towards a change in character to a Quiet/Trending Bull again. For now, we’re seeing necessary corrective action come in to “shock-start” markets and volatility again. Markets have become complacent to all of the central bank monetary policy and that’s not a good thing.. 

SPX chart

 

 

Position Management – NonDirectional Trades
I have no positions in play; I will wait on the first significant pullback to allow me to secure put spreads below support.

 

 

Offense: We might have to wait weeks for the next dip in price. The last one was only 70 points. I am anticipating further upside grinding, low-vol price action which are poor conditions for HP Condors.

 

I have no positions in play: We’ll look for the next range to take advantage of. I might have to look beyond the usual index candidates for these in today’s market, since I don’t see any index candidates right now, however the RUT is close.

 

 

 

 

 

I have no time spreads at the current time. My preference is to take these on DAILY exhaustion and not WEEKLY exhaustion signals, since the weekly exhaustion creates unwanted price volatility. Similar to the LP Condors above, I will likely have to expand my view to include equity candidates that are showing a likely short-term consolidation. This is never my first choice due to the additional variables that we encounter.

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 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, and will continue to write time against these shares on every rally. I wrote 21OCT 20.5 calls (9/7) against half of my position for a $.21 credit.
  • SSO – Waiting for the next pullback to sell puts against the SSO, preferably at the 50 level or lower. .

Nothing to do at this time with current positions. 

Position Management – Directional Trades

Thoughts on current swing strategies:

 

  • 8/21 EMA Crossover -I entered the 8/21 ema long setup (10/5) with an ATM SPY vertical spread, using the 26OCT 216/218 call spread, paying $1.12 debit. I will look for about a 50% return from this trade.
  • RSI(2) CounterTrend – Looking for 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.

 

 

 

 

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge. .

 

 

 

 

 

 

Even though I believe the bias is to the upside, I think that there is potential for a quick downside “flush” over the next month to really stoke up the negativity. I’ll place the following trade on Monday morning:

  • QQQ 11NOV 117/119 debit put spread – I will enter this trade by buying the 119 put and simultaneously selling the 117 put, for about an .80 debit:

 

 

 

 

 

 

 

 

 

 

I have no positions at this time. Nothing showed up in my scans this weekend, other than mostly Energy stocks which have been dead money for the past several months.

I see many stocks showing a nice pattern, like MRK and UPS, however no concrete signals just yet. Markets are coiling up into the next range and are about to show their next hand. I’ll look for more opportunities this week.

 

 

 

 

 

 

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.

To remove the current series of puts, I will look for a move down to and below the SPX 2100 level.

I never got the upside “burst” to allow me to sell call spreads above SPY 230 that I wanted; now I can concentrate on selling put spreads at some level below SPY 200.

We currently have the following positions in play with this strategy:

  • SPY OCT 194 Long Puts – I entered this position (7/18) for a $1.52 debit.
  • SPY NOV 197 Long Puts – I entered this position (8/22) for a $1.56 debit.