Daily Market Newsletter

December 20, 2016
Non-Directional Strategies
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Semi-Directional Strategies
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Directional Strategies
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Market Commentary

Talking heads continue babbling on about DOW 20,000, as if that’s all that traders care about, however that’s far from the truth. No one in the profession really cares. If anything, it’s a marker to sell into once achieved. Looking at the Dow chart, it’s certainly gotten ahead of itself and has priced in a huge bump in forward earnings already with the expected infrastructure projects.

Yes, I think that it’s likely that there is an underlying bid below everything, leading to a slow grind higher into year-end, but what happens after that is where I think we’ll see the fun stuff.

I’m pretty happy with the trades that I have set up into year-end, and will let the stay-at-home-on-holiday Retail crowd duke it out over the next few days.

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Offensive Actions

Offensive Actions for the next trading day:

  • No new trades for tomorrow.

Defensive Actions

Defensive actions for the next trading day:

  • Any vertical, butterfly, or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
  • If the S&P continues strong to the upside, then I need to remove my SPY 28DEC Butterfly as it’s slightly past the profit peak, see “whale trades” below.
  • Please note my comments on the Citigroup Diagonal in the “time spreads” section below.

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 OK with +179 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened within the Upper Reversal Zone, showing a bullish bias. No leading signals at this time, but all three timeframes are once again close to a Full Bearish Cluster which can be a leading signal for a pause.

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 uptrend, an intermediate uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell 2.22% to 11.45, back inside the bollinger bands. The RVX rose 2.77% to 16.67 and is inside the bollinger bands.

Fibonacci Retracements: Fibs (retracements and extensions) are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with no overhead resistance. The RUT has support at RUT 1300 with no overhead resistance. 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 charged with a reading of 44. The Weekly chart is declining with an energy reading of 40, due to the recent breakout. The Daily chart is showing a level of 35 which is at technical exhaustion for the ninth day in a row. We are seeing the expected short consolidation at this level but it’s not going to last much longer.

Other Technicals: The SPX Stochastics indicator rose to 87, overbought. The RUT Stochastics indicator rose to 79, below overbought. 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 2172 and resistance at the upper band at 2288 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1306 to 1399 and price is at the upper band.

We are seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. I think this will bring about a big shift in how the market behaves. 

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:  I still do not want to set up OTM credit spreads in this low-vol environment until we see real movement to the downside. If and when we get this movement we’ll need to identify levels that we want our credit spreads to be “below.” This is the same type of price action that was so perilous to HP condors back in 2013, so let’s not fight it.

I have the following positions.

  • SPX 23DEC 2165/2170*2230/2235 LP Iron Condor (12/5) was entered for a $2.50 credit. I will take a quick exit if I see the price pull back into the Condor range.
  • SPX 3JAN 2225/2230*2285/2290 LP Iron Condor (12/15) was entered for a $2.50 credit. I closed the position today (12/19) for a $2 closing debit; this gave me a net $84 profit on 2 contracts or a 16.8% return on risk.

..We have three days remaining for the price to pull back and give us an elegant exit on the 23DEC position. This will take a 30+ point pullback which is unlikely. I will focus on closing the call spreads only when the time comes. I have hedged the position with multiple vertical/butterfly spreads so it’s of no concern..

 

I have the following positions:

  • C 23DEC/30 DEC 58.5/60.5 Call Diagonal (12/12) was entered for a $.96 credit. If I see the price pulling down to the $59 level again I will close the trade. If I see the price breaking above the $61 level I will just close the trade. I might have whiffed on my last opportunity to close it on Monday. Financials are under incredible accumulation.
  • SPY 28DEC/20JAN 226 Put Calendar (12/15) was entered for a $1.30 debit. I closed this position down today (12/20) for a $1.47 credit, which produced a net $13/contract profit after commissions for a 10% return on risk. .

Please note: If you trade these positions please keep the size small, to the point where you “do not care” about the success or failure of this position.

 

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 will look to sell more calls in the next bounce higher in SLV. If the price continues pulling back, I will likely sell more puts against the $13 level.
  • GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit
  • TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit.
  • RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 credit.

 

Nothing to do at this time with current positions. I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. On the next decent pullback I will be fairly active; I don’t want to “chase” prices right now.

 

 

Position Management – Directional Trades

Thoughts on current swing strategies:

 

 

  • 8/21 EMA Crossover -This one is gone. Looking for the next crossover. .
  • RSI(2) CounterTrend – Awaiting the next signal; it should be very powerful and worth the wait..
  • 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No positions at this time. Once the S&P hits an exhaustion level on the weekly chart, I will consider a vertical debit put spread to catch any volatility to the downside.

 

 

 

I have the following positions:

  • SPY 28DEC 224/226/228 Call Butterfly (12/5) – added this position for $.21 debit.Unless the price fades tomorrow, I will need to close this position on Wednesday.
  • SPY 28DEC 226.5/228.5/230.5 Call Butterfly (12/19) – I entered this position for a $.33 debit .
  • SPY 30DEC 228/230 Call Vertical (12/19)-  I entered this position for a $.31 debit. Please note that I used the 228 long strike instead of the 227.5 strike as the new 228 strike was printed on Monday.

 

I like the idea of a grind higher into year-end. If we do get this move higher, these trades will explode in value. If the price does NOT move higher, then the iron condor will score. I think it’s too late to set up another Condor into year-end.

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 am due to add the MAR puts now. I will hold off until the SPX Weekly chart shows exhaustion and we can start to anticipate at least a volatile consolidation period. I do not believe we will see a crash from these levels until the sentiment hits euphoria.

Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment. I will only sell put spreads on decent pullbacks that allow me to secure put spreads 10% OTM

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

  • SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.
  • SPY FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.