Daily Market Newsletter

January 19, 2017

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Market Commentary

The reality of political changes has started to infiltrate the “Trump Rally.” Change like this takes time, and many companies/industries are starting to realize that it might take months or years to actually see change that will affect their bottom line. An example of this is the Financials, who have rallied like crazy on many expectations, one of which being that the Dodd/Frank bill would be tossed out and they would be under less onerous regulations. Not going to happen tomorrow! In fact, they might be pushed to the bottom of the pile as legislators roll up their sleeves and get ready to take Obamacare out behind the woodshed.

The market desperately needs a pullback, and today’s discussion on the SKEW index speaks to that.

This weekend’s newsletter will come out on Sunday due to a Saturday speaking engagement; apologies in advance for any inconvenience.

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

Offensive Actions

Offensive Actions for the next trading day:

No positions for tomorrow; I will look for a small rally on the DOW to kick off a bearish put spread, though.

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

Technical Analysis Section

Market Internals: Volume was slightly above average today. Breadth was weak with -269 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened in the Upper Reversal Zone, 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 sideways trend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.

VIX: The VIX rose 2.40% to 12.78, inside the bollinger bands. The RVX rose 1.99% to 18.49 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 now technically exhausted with an energy reading of 37, 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 77, almost overbought. The RUT Stochastics indicator fell to 41. 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 2246 and resistance at the upper band at 2284 and is below the upper band. The RUT is outside the Bollinger Bands with its boundaries at 1346 to 1387 and price is below 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, but a pullback to stoke up the negativity would be a good thing to see first.

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 I sold SLV FEB $17 calls (1/17) for $.19 credit. No action required.
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 and will let the JAN puts expire.
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.

All of the JAN puts will be left to expire tomorrow; if we have any kind of strong sell-off, I will close down the existing JAN puts for pennies to avoid assignment and will roll those positions further down to the FEB17 series, seeking at least a 1% return on the put.

I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term. Pullbacks across the board would help.

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 came up on my RSI(2) scan; per this weekend’s advisory, I entered the 27JAN 121/122 call spread for $.48. I will exit the position tomorrow based on the exit signal showing today .
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 no positions at this time. Too much risk this week for me to consider anything else.

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. I’ll need to see this one pop higher in a hurry; more than likely it will expire tomorrow.

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.