Daily Market Newsletter

October 15, 2016

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October Expiration

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Market Commentary

Once again Janet Yellen spoke at a press conference on Friday, stating that we might need to run a “high pressure” economy. I searched around and tried to find exactly what this meant without specifics, but my guess is that we continue to let rates stay low and let inflation ramp up a little bit before trying to put the clamps on it via hikes. Another speculation by Yellen herself is that the FOMC might begin to buy equities, and not just treasuries like before.

If we don’t start seeing real growth soon, then who’s to argue with the track record of the FOMC? They have made very specific actions to propagate this “wealth effect” thinking that if they kept rates low and money found its way into equities, that they could stimulate a 1999-like economy. Well, this was great in theory but only the investor class of society was able to benefit, actually harming the middle class that could no longer count on savings.

But I think that there’s an excellent chance that some form of exogenous risk will hit the markets over the next month as this election cycle gets nastier, and we get into the meat of the earnings cycle. Something’s gotta give. In a perfect world we see a relatively quick/violent downdraft, and then the Fed steps in and we’re off to the races. This scenario makes sense to me with the rampant amount of skepticism out there, which usually supports higher prices to the disbelief of the majority herd.

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Offensive Actions

Offensive Actions for the next trading day:

I’m going back to the well with another QQQ debit put spread; see the “bearish/fade” section below.
I’ll set up a new LP Iron Condor on the SPX; see “LP Iron Condor” section below for details.

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

Technical Analysis Section

Market Internals: Volume was about average on Friday. Breadth was mixed by day’s end on Friday with +3 advancers minus decliners.

SPX Market Timer : The Intermediate line continued to turn down below the Upper Reversal Zone, showing a bearish bias. No leading signals at this time.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term downtrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.

VIX: The VIX fell 3.42% to 16.12, back inside the bollinger bands. The RVX dropped 1.56% to 20.87 and is back 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 55. The Weekly chart is now fully-charged showing an energy reading of 68, due to the recent chop. The Daily chart is showing a level of 58 which is fully-recharged after the recent drop. We are showing the rare condition of Full Energy again! We should see a relatively large move very soon.

Other Technicals: The SPX Stochastics indicator fell to 42, mid-scale. The RUT Stochastics indicator fell to 37, mid-scale. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2127 and resistance at the upper band at 2180 and is above the lower band. The RUT is outside the Bollinger Bands with its boundaries at 1214 to 1266 and price is below the lower 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..

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: If this dip in price hits the 2050-2100 level on the S&P, we are game on for NOV put spreads.

Let’s fire up another LP Iron Condor on the SPX. While we’re still staring down the barrel of a very large move, price is just range-bound right now and might continue to be until very close to the election, when the “Market” will proclaim a winner and start to run….or will crater on the risk. Either way I don’t see the price breaking the range just yet.

On Monday morning I will enter the following position:

SPX 11NOV 2080/2085*2185/2190 LP Iron Condor – I will enter this position asking for a minimum $2.50 credit, and might have to move my strike prices around on Monday morning to accommodate the gap. I will seek a 10% return on risk for this trade and will not defend this trade in any manner. .

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. .

I have the following positions in play:

QQQ 11NOV 118/120 debit put spread (10/10) – I entered this trade by buying the 120 put and simultaneously selling the 119 put, for a .79 debit, and closed this position (10/13) for a $1.22 credit. This trade gave me a net profit of $41/contract or a 51% return on capital.

I’m going to go back to the well one more time with another bearish position! I will enter the following position on Monday morning:

QQQ 11NOV 116/118 debit put spread – I will enter this trade on Monday morning, paying about an $.80 debit, and adjusting the strikes up or down to approximately “center” the price. I will look for about a 50% return from this trade.

I have no positions at this time. I scanned again today and there’s very little worth “chasing” at this point with many stocks up near all-time highs.

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 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.

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.