Daily Market Newsletter

January 21, 2017

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Market Commentary

The last year has seen the market hold its breath numerous times in anticipation of some “event,” be it a Yellen speech, a Draghi speech, a Brexit vote, an election, an FOMC meeting, etc. Each time the volatility gets absolutely pulled straight out of the market yet the risk increases; a very odd scenario.

I believe that “risk” is more going to be felt by small, distributed microshocks felt through subsequent sectors, as the new administration weighs in on what Trump likes or does not like. Recipients of this punishment have already been felt in the Defense and Biotech sectors through random tweets. But face it, what’s left now? The inauguration is over, and what’s left will be the day-to-day grind of a new administration battling with Congress, with the various agencies, and with corporate America. We will have to be a little more nimble than in years past, and opportunity will be fleeting. .

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

Offensive Actions

Offensive Actions for the next trading day:

I will take the IBM breakout long as described in the “Whale” 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.

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 fairly high on Friday. Breadth was good with +229 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, but once again close to a full 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 downtrend. The Dow is in an intermediate uptrend and short-term sideways trend.

VIX: The VIX fell 9.70% to 11.54, inside the bollinger bands. The RVX fell 8.27% to 16.96 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 38, due to the recent breakout. The Daily chart is showing a level of 55 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 fell to 74, almost overbought. The RUT Stochastics indicator fell to 37. 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 2246 and resistance at the upper band at 2284 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1345 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, but a pullback to stoke up the negativity would be a good thing to see first.

I had the following results for the 20JAN 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

SPX 23DEC 2165/2170*2230/2235 LP Iron Condor was entered for a $2.50 credit.I closed the call spreads for a $4.90 debit. On a two-contract position, this gave me a net debit of $492 for about a full loss. I should mention that this trade was hedged about 100% by the vertical spread closed in the DEC16 cycle. .
SPX 3JAN 2225/2230*2285/2290 LP Iron Condor was entered for a $2.50 credit.I closed the position for a $2 closing debit; this gave me a net $84 profit on 2 contracts or a 16.8% return on risk.
20JAN SPX 2215/2220*2285/2290 LP Iron Condor was entered for a $2.50 credit. and closed (1/5) for a $2.00 debit. This gave me a net $84 profit on 2 contracts or a 16.8% return on risk after commissions . .
20JAN RUT 1335/1340*1395/1400 LP Iron Condor was entered for a $2.75 credit. I closed this position for a $2.35 debit. This gave me a $64 profit on 2 contracts or a net 11.6% return on risk after commissions.

Time Spreads

C 23DEC/30 DEC 58.5/60.5 Call Diagonal was entered for a $.96 credit. I closed this position for $1.33 debit, which gave me a net loss of $41 on this position. .
SPY 28DEC/20JAN 226 Put Calendar was entered for a $1.30 debit.I closed this position down for a $1.47 credit, which produced a net $13/contract profit after commissions for a 10% return on risk, or a $130 profit on 10 contracts.

Cash-Secured Puts/Covered Calls

GE JAN17 30 puts were entered with five contracts of $30 puts for $.39 credit, for a net $190 profit or a 1.3% return on capital.
TWTR JAN17 $15 puts was entered with ten contracts of $15 puts for $.22 credit, for a net $210 profit or a 1.4% return on capital..
RIG JAN17 $12 puts was entered with ten contracts of $12 puts for $.18 credit, for a net $170 profit or a 1.42% return on capital.

Expected-Move or “Whale” Trades

SPY 28DEC 224/226/228 Call Butterfly was entered for $.21 debit.I closed this position for an $.86 credit. This gave me a net profit after commissions of $57/contract, or a 228% return on capital, creating a $285 profit on 5 contracts..
SPY 28DEC 226.5/228.5/230.5 Call Butterfly was entered for a $.33 debit and expired OTM for a net loss of of $74 on two contracts after commissions..
SPY 30DEC 228/230 Call Vertical was entered for a $.31 debit and expired OTM for a net loss of of $66 on two contracts. .
20JAN SPY 228/230/232 call butterfly was entered for a $.34 debit and expired OTM for a net loss of of $76 on two contracts after commissions. .

Hindenburg Positions

SPY JAN17 193 Long Puts were entered for a $1.33 debit and expired OTM for a net $134 loss after commissions..

Earnings Trades

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

RSI(2) Swing Trades

AET 27JAN 121/122 call spread for $.48, and exited for $.55 credit, which produced a net $3 profit per contract on five contracts after commissions, or $15 net.

Lessons Learned from this cycle:

This cycle started off with a huge leg higher in early December that either went against our non-directional trades, or created great gains in our directional expected-move trades. We gave back some of it at the end of the cycle when the overall move petered out, however this was not unexpected with the exhausted larger timeframe charts. I’m a big believer in understanding the rhythm of “expansion” and “contraction” and we’ve been in the latter phase for a little too long.

This cycle also marked the return of selling cash-secured puts on free capital, with the hope of eventual assignment after significantly reducing the cost basis; those worked very nicely and required zero management as usual.

I have also started to look for “earnings” opportunities in lack of other opportunity. We have to find the movement where it exists.

We will continue to trade in this manner in the ongoing future until the markets shake loose a little bit.

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. TSLA is also in a very nice position but I don’t like trading the wider spreads from a risk-management perspective.

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 I will look to sell FEB17 $29 puts if the pullback continues.
TWTR I added another ten contracts (1/3) of $13 FEB puts for $.20. I don’t care about the recent bad press.
RIG I would like to sell against the $12 or $13 level again. .

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 – I entered the AET 27JAN 121/122 call spread for $.48, and I closed it on Friday for a $.55 credit.
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. We have some big tech earnings coming up this week, starting with YHOO on Monday and companies like BABA and GOOGL later in the week. I’ll take a look on Monday evening to see if we want to trade any of these. I’m more in favor of trading these into the end of the week simply because we get a better read on Market mood by then.

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 no current positions.

I like the breakout on IBM Friday; this has some potential left to go and we can trade it a number of ways. I like the 24FEB IBM 170/172.5 call spread for <$1.25/contract, and will enter this on Monday morning unless I see a big gap down that puts the price below the $170 level again.

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

I would like to see if the price ramps up slightly this week, and I will buy APR puts into that strength.

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

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.