Daily Market Newsletter

February 4, 2017

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Market Commentary

Tech slowed down at resistance this week, and handed the baton off to the Financials when Trump talked about rolling back the Dodd-Frank regulations on financial institutions. In Friday’s press conference, he made the case for how excessive regulation brought on by trying to rein in the banks over the past several years has actually led to an epidemic of small business failure due to extraordinarily tight lending standards, which has also led to the death of many small regional banks. In a celebration of that discussion, the KRE (regional banks) rallied 2.62%, and the XLF rallied 2.02% itself.

.In addition, the Jobs report came out Friday morning and went WAY beyond expectations, scoring 227k vs. 175k consensus, with participation rate gaining .2%. Overall, it was extraordinary way to end the week with optimism running high.

Once again, skepticism is being run over as one piece of “pro-business” news after another comes out; something discussed yesterday was how a new rule would be put in place to remove two pieces of regulation for every new law signed in. We’re also finding out that many of the jobs that were created in the previous administration were government-based, so the reasons for the sluggish recovery since 2008 are becoming more apparent every day. With optimism running so high and risk premium so low, is now the time to start being concerned about the “killer tweet” that everyone’s been looking for since January 20?

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

Offensive Actions

Offensive Actions for the next trading day:

I have one trade setup to enter on Monday, and another to monitor closely, detailed 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 somewhat above average Friday. Breadth was strong with +330 advancers minus decliners.

SPX Market Timer : The Intermediate line fell slightly below the Upper Reversal Zone, showing a neutral bias. This chart is very close to once again showing the somewhat rare “Full Bearish Cluster” which sometimes foreshadows a pause in the trend..

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 8.05% to 10.97, inside the bollinger bands. The RVX dropped 8.08% to 17.06 and is inside the bollinger bands.

Fibonacci Retracements: Fibs are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2300. 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 39, almost into exhaustion. The Weekly chart is now technically exhausted with an energy reading of 35, due to the recent breakout. The Daily chart is showing a level of 58 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 68, below overbought. The RUT Stochastics indicator rose to 54. mid-scale. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2257 and resistance at the upper band at 2299 and is at the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1343 to 1384 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.

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 will discuss a slightly new approach to this setup in today’s video.

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.

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 MAR17 $28 puts if the pullback continues and I can receive at least a $.28 credit.
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 added the $12 MAR17 puts (1/30) for $.19 credit. .
X – I added the MAR17 $25 puts (1/30) for $.47 credit. .

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’ll look for more of these in the near future..
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.

I have the following position:

DIA 10MAR 199/201 Debit Put Spread (1/30) was entered for a $.94 debit. I will look for a 50% return from this position. I show this as a $1.46 credit limit.

I have the following positions:

BIDU APR17 190/195 Debit Call Spread (1/30) entered for a $.98 debit.Understand that I do not have a “stop” in this trade so if the price breaks down or does not move at all I will wave goodbye at it and not try to “mitigate the loss” via some other technique.

There are a couple of setups that I like going forward:

TIF – we might see an attempted breakout prior to TIF earnings which I’d estimate would be in late February. A break above $82.20 would see me buying a 30-35 day $2-wide call spread for about $1 debit.
TWTR – no matter what you think or this stock or business, it is so wound into the world’s consciousness that I see an eventual suitor playing “white knight” and taking them over and increasing value in the process. I would like to set up a longer-term OTM debit spread, like a 16JUN 21/22 debit call spread for about $.20

There are many, many charts currently showing a very large amount of energy on the daily chart, but are still in exhaustion on the weekly or even monthly charts. It appears to me to be a poor time to get too aggressive with directional upside plays.

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 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.
SPY APR17 206 long puts – I entered this position (1/27) for a $.92 debit.