Daily Market Newsletter

January 14, 2017
Non-Directional Strategies
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Semi-Directional Strategies
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Directional Strategies
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Market Commentary

We’re now into the third week of January, the volume has returned, and so has the realized vol. Unfortunately, the implied vol is still on the floor and appears unable to get up. I feel a bit like a stopped clock in maintaining this stance, but I feel that we are going to start to see volatility tick up in the near future, and that’s going to mean opportunity for us.

Here are some of the opportunities that we could see:

  • HP Vertical Spreads and Maybe HP Condors – a deep enough “dip” in the price will have me hauling out the heavy lumber with these deep OTM trades.
  • Cash-Secured Puts – I will become very aggressive with short puts if the price drop and IV spike allows us to secure better entries on stocks that I want to own.
  • Directional Swing Trades – More movement, more opportunity here.  .

Remember, doing the opposite of what the investing “herd” is doing is likely to give us good returns. I see perhaps one more pop to the upside which gets turned away, then the fun begins.

Please note that Monday is a Market Holiday and there will be no newsletter produced that day. 

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Offensive Actions

Offensive Actions for the next trading day:

  • I have an RSI(2) entry for Monday on AET; see “swing trades” below.
  • Looking for at least a $.17 credit on $17 SLV FEB calls.

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.

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 mediocre with +111 advancers minus decliners.

SPX Market Timer : The Intermediate line rose into the Upper Reversal Zone, showing a neutral bias. No leading signals at this time but this chart is once again closing in on a Full Bearish cluster.

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 sideways trend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell 2.69% to 11.23, inside the bollinger bands. The RVX dropped 4.48% to 17.27 and is inside the bollinger bands.

Fibonacci Retracements: The SPX has recently retraced about 23.6% of its election rally. The more important 38.2% fib retracement sits at the 2203 level.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2277. The RUT has support at RUT 1300 with overhead resistance at 1393. 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 43. The Weekly chart is declining with an energy reading of 40, due to the recent breakout. The Daily chart is showing a level of 54 which is completely recharged again; we are seeing the expected short consolidation at this level but it’s not going to last much longer as the daily energy must go somewhere.

Other Technicals: The SPX Stochastics indicator rose to 67, mid-scale. The RUT Stochastics indicator flattened at 42. mid-scale. The SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2245 and resistance at the upper band at 2283 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1353 to 1385 and price is above the lower band. The Bollinger Bands are starting to squeeze, especially on the RUT.

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.

If I see price drop to the SPX 2200 level, this might be our first opportunity to sell premium against that level.

I have no current positions:

I expect movement very soon so I’ll put this strategy on the shelf until I see the next signal.

I have no current positions. If I see this current move continue to the upside, I’ll start to look for exhaustion signals that line up with resistance, and then sell Weekly Diagonals again. I looked through my scans this weekend and none were quite set up. EFA appears to be the chart showing the best near-term potential for a Weekly Short Call Diagonal.

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. I will look to sell $17 calls against the FEB SLV options but they need to bring in at least $.17.
  • GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit. I will look to sell FEB17 $29 puts if the pullback continues.
  • TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit, and added another ten contracts (1/3) of $13 FEB puts for $.20.  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 will see if the pullback gets a little stronger.

I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. Last week’s dip didn’t give me much of an opportunity to secure new positions.

 

 

Position Management – Directional Trades

Thoughts on current swing strategies:

  • 8/21 EMA Crossover -This one is gone. Looking for the next crossover, however it will be to the downside, and the first downside crossover is usually a poor signal. .
  • RSI(2) CounterTrend – AET is coming up on my RSI(2) scan. On Monday I will add the 27JAN 122/123 call spread for $.50 or less. The exit for the position will be a close above the 5ma, or a 50% return on capital .
  • 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.

 

I have the following positions:

  • DAL 13JAN 51/51.5 call spread (1/11) entered for $.26 debit. I sold this position (1/13) for a $.29 credit, which was essentially a break-even exit after commissions.
  • BAC 13JAN 22.5/23.5 call spread (1/12) entered for $.48 debit. I sold this position (1/13) for a $.77 credit, which gave me a net $25 profit per contract or a 50% return on capital.

 

 

 

 

I have the following position:

 

  • SPY 10FEB 225.5/227.5 debit put spread (1/10) was entered for a $.79 debit. I will look for about a 50% return on capital with this position.

I have the following positions.

 

  •  20JAN SPY 228/230/232 call butterfly (1/5) was entered for a $.34 debit. There’s little harm in carrying it a few days further to see if the price wants to grind higher into the inauguration.

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.

 

 

 

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.
  • SPY MAR17 203 long puts – I entered this position (12/28) for a $1.07 debit.