Daily Market Newsletter

December 27, 2016

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January Expiration

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Market Commentary

A big early rally in the NASDAQ gave way to profit-taking as the breakout appeared to be premature. Just about every chart that we follow has an “exhaustion” signal on the weekly chart, showing that just about any attempted upside breakout will have headwinds. As I’ll discuss in today’s video, I am expecting to see volatility increase as we get into January, however it’s unlikely that we’ll see it sell off outright.

If the above video does not work, please try this link.

Offensive Actions

Offensive Actions for the next trading day:

I will set up my 17MAR long Hindenburg puts on Wednesday morning; see “hindenburg” section below.

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.
Nothing really at risk right 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

Technical Analysis Section

Market Internals: Volume was well below average today. Breadth was good with +249 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 this chart is once again close to a bearish cluster.

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

VIX: The VIX rose 4.81% to 11.99, back inside the bollinger bands. The RVX rose 4.05% to 17.45 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 41, due to the recent breakout. The Daily chart is showing a level of 38 which is showing technical exhaustion again; 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 fell to 76, below overbought. The RUT Stochastics indicator fell to 63. below overbought. 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 2185 and resistance at the upper band at 2299 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1313 to 1405 and price is below 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.

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 no current positions at this time.

I feel that now would be a good time for another condor but I don’t have the signals for it. Perhaps if we get an additional breakout higher into the new year that exhausts the daily chart again, we can pursue another setup. .

I have no current positions:

I looked through my time spread scans this weekend and saw some candidates close to a setup, but nothing worth risking capital on.

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. I don’t care about the recent bad press
RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 credit.

I am going to hold off selling any more put positions until the new year; it would be a big edge to patiently wait on the first material pullback after the Trump rally.

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.I closed this position (12/23) for an $.86 credit. This gave me a net profit after commissions of $57/contract, or a 228% return on capital.
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.

I like the idea of a grind higher into year-end. If we do get this move higher, these trades will explode in value. 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.

OK, I am ready to add my MAR puts now. I show that a 10% correction would target the SPY 203 strike price, The SPY 17MAR 203 puts are going for about $1.11 apiece. I will enter that strike price of puts on Wednesday morning. I was supposed to enter these trades today but failed to do so!

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.