Daily Market Newsletter
October 24, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
November Expiration
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Market Commentary
Week three of the Q3 earnings season has started. The companies of note left to report this week are:
Thursday: AMZN,BIDU, GOOGL, INTC, MRK
Yesterday I had written: “Are the charts out of the woods? I would say for now, “not quite.” After big hammer/reversal candlesticks like this, I’m used to seeing a counter-reaction the next day, causing those who bought the bottom to lose all hope.” And THAT folks, was one of the ugliest days that I’ve seen over the past 15 years that I’ve been doing this full-time. What was really odd was the persistent, drip-drip-drip nature of the selling. Most of the time when I see nearly a 100 handle day on the S&P’s, we get a final “flush” to the downside on capitulation. Didn’t happen. Just persistent, tick-by-tick mutilation.
Today’s candle increases the odds that something else might be in the cards for us into year-end. I say all the time that “tops are a process” and I think we’ve got ourselves some titanic volatility for the near term. I still believe that we bounce higher in the next week or two, but today’s candle and tone makes me start to lean towards seeing the market rotate lower into year-end.
Powell will now come under intense pressure from the White House to make some kind of statement about interest rates, and include some wiggle room to be “accommodative.” The next fed meeting is a day after the next election so it’ll be too late by then. If this contagion continues to spread then the uncertainty will ruin the ace up Trump’s sleeve, “The Economy.” That will cause further uncertainty, as anyone who traded through October 2008 remembers. The incumbent party always gets the blame.
But does Trump pressure Powell into making a statement? Any statement now by the Fed will be seen as a knee-jerk panic move, much like the market initially welcomed, then rejected Bernanke’s overtures about stalling rate hikes in October 2007.
Here is the current scorecard:
- S&P is down ~289 points or 9.8%
- Dow is down 2419 points or 8.98%
- /NQ is down 943 points or 12.2%
- RUT is down 274 points or 15.7%
- TNX was down another percent today and we saw the probability of a December rate hike drop 6% alone today to 69%. Just days ago it was nearly 90%.
The only thing left that can “save” this market from plunging lower is for GOOGL and AMZN to get the market excited to buy them at a “discount.” That might buy us a day or two, little else.
The scan for the “Cheap Stocks with Weeklys” is available here.
The RSI(2) FE scan is available here.
The current MAIN “high liquidity” watchlist that I’m scanning against in thinkorswim is available here.
Please sign up for our free daily crypto report here.
Please click here for an embedded version of today’s video.
Offensive Actions
Offensive Actions for the next trading day:
- I’ll look for a bounce back up to sell the SPX 7DEC 2945/2955 short call spreads to complete my HP Iron Condor; see “Iron Condors” section below.
- I will roll my RUT put spreads to the 21DEC 1240/1250 put spreads for a minimum $.80 credit; see “HP Condors” 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.
- Closing orders have been entered for all new spreads.
- Watch for the potential exit on the RUT credit spread if the delta of the short option hits .45.
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 above-average today and breadth ended the day negative with -336 advancers minus decliners.
SPX Market Timer : The Intermediate line fell into the Lower Reversal Zone, now showing a bearish bias. No leading signals at this time but this chart is extremely close to showing a Full Bullish Cluster with all timeframes oversold.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term downtrend. The Dow is in an intermediate downtrend and short-term downtrend.
VIX: The VIX rose to 26.32 after peaking at 50.3 eight months ago, barely inside the bollinger bands. The RVX rose to 28.38 and is back outside the bollinger bands.
Fibonacci Retracements: The SPX has closed well below the 61.8% retracement of the entire swing off the February bottom; this increases the odds that we will see the price “fill in the triangle.”
Support/Resistance: For the SPX, support is at 2500 … with overhead resistance at 2941. The RUT has support at RUT 1436 with overhead resistance at 1742. 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. All charts are a long ways off from showing a Death Cross.
Fractal Energies: The major timeframe (Monthly) is fully recharged again, with a reading of 55. The Weekly chart is above exhaustion with an energy reading of 42, however it is picking up the trend on the downtrend now. The Daily chart is showing a level of 39 which is just above exhaustion. The RUT has both the weekly and daily charts showing exhaustion now; we normally see trends “pause” or reverse in this state.
Other Technicals: The SPX Stochastics indicator fell to 25, above oversold. The RUT Stochastics indicator fell to 17, oversold. SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is outside the Bollinger Bands with Bollinger Band support at 2664 and resistance at the upper band at 2985 and price is below the lower band. The RUT is back outside the Bollinger Bands with its boundaries at 1475 to 1721 and price is below the lower band and has released from a squeeze.
Position Management – NonDirectional Trades
I have the following positions in play:
- RUT 16NOV 1490/1500 Short Put Spreads (10/8) entered for $.80 credit, and exited (10/24) for a $3.70 debit. No way to save this one.
- SPX 7DEC 2490/2500 Short Put Spreads (10/22) entered for $.80 credit. I will first look to add short call spreads on the next bounce back up. I would close this position if the short put delta (1500) hits the .45 level.
Now that I’ve filled the SPX put spreads, I will look for the corresponding short call spreads on the bounce back up. I will target the SPX 7DEC 2945/2955 call spreads for $.80.
The RUT spreads were blown out today on the re-test of the bottom. Normally I would roll the position in the same direction, at this point for the DEC monthly cycle. The RUT is crashing very similar to the 2015/2016 correction. At this point I would consider rolling the position to the 21DEC 1240/1250 short put spread for a minimum $.80 credit.
I have no positions at this time.
We’ll park this strategy until the next high-probability condition shows. We’ll want to see daily exhaustion on the SPX or RUT after a strong move, at the very least. This strategy works best with a quiet/trending market.
I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so there is a good shot that we can start to play these again.
The calendar spread tracking sheet is available for your download here. Yes, if you follow the math in the sheet, all of the numbers account for commissions in and out of the trade. 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 am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of a crash we can almost define our total risk by the price of the underlying. While this is not how I intend to manage risk in these positions, I view this as fundamentally more solid than trying to actively manage risk on assets that are going for $$$hundreds which have also gone parabolic. I have the following positions in play:
- SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 31DEC $15 SLV calls (10/3) for $.16.
- SSO – I sold SSO 16NOV $109 puts (10/8) for $1.20 credit. I’m still fine with this position and will accept assignment should the price drop from these levels. I will consider buying back these positions should the price bounce higher.
- GLW – I sold GLW 21DEC $26 puts (10/22) for $.26 credit.
- CSCO – I sold CSCO 21DEC $40 puts (10/22) for $.40 credit.
- INTC – I sold INTC 21DEC $37 puts (10/22) for $.37 credit.
No other trades at this time. The recent trades were relatively small positions that would create a discount entry should I be assigned.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – No current positions. The 8/21 EMA pair has now crossed to the downside.
- RSI(2) CounterTrend – Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
- 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.
- Swing – I have no trades in play at this time.
The crypto market is holding tough while equities get slammed. So far I am not seeing a lot of correlation between these markets.
Investors should currently be looking to find technical entries to warehouse BTC/ETH/LTC assets for eventual trades on Alt-coins. You should also be looking to devices like “trezor” or other cold-storage devices to keep your assets off of the network, or other secure wallet such as Navcoin. Relying on the security of your broker is no longer good enough; no one can log into your ETrade account and “steal” your stock assets, but the whole nature of Cryptocurrencies and their portability means that someone can grab your assets and transfer them elsewhere. I will continue to discuss the tradingview platform in daily videos as I think that it is currently the best way to chart the “big three.”
Viewing the SPY from the Friday closing price at 276.25, there is a +/-6.589 EM into this coming Friday. This is about the same magnitude as last week’s 7.161 EM and reflects the fear/indecision in the markets that is not going away.
The EM targets for this Friday’s close are 282.84 to the upside, and 269.66 to the downside.
The lower EM for the week did not hold, regardless of the fact that it was nearly double recent values. We got our one “fade” in yesterday and will not look to play against that level in the remaining two days this week.
This is a new section for this newsletter; I would like to start to carefully build some bearish positions that would be the virtual opposite of a covered call, yet I will use deep ITM long puts as the short stock substitute, and write short covered puts against those long puts.
I would like to add one additional consideration to the criteria, in that I’d like to see the price print a “lower high” first on the daily chart. Otherwise what is “high” can go “higher” as we’ve seen repeatedly over the years.
I will also publish the criteria for managing the short and long positions with this strategy. This is definitely counter-trend for now but might prove to be valuable down the road.
We previously were seeing LOW and UNP show up on this scan, and both would be winners now. . Quite honestly nothing has really faded after showing on this scan.
Previously I was seeing MRK, PFE, and LLY show up on this scan; I added the MRK 16NOV $75 puts for about $7.00/contract as a paper trade. I’ll just track this one on paper for now while we develop management rules. If the price drops I will sell short-term puts against it (on paper). Even these NOV puts are still underwater after recent distribution.
The scan that I discussed in the 8/4/2018 video is available to download for thinkorswim here: http://tos.mx/OvdVnz
I will also be adding a second Larry Connors scan to this section as well; here is the Connors Crash scan: http://tos.mx/BhHuKL
I have the following positions at this time:
- NVDA 02NOV 285/287.5 debit call spread (10/1) entered for $1.22 debit, looking for 50% return on this trade. I might have missed my opportunity to make a quick 30% and get out.
No other entries at this point. I would prefer to see the market stabilize first before looking long again. We will see big volatility over the next two+ months.
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. Frankly, 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 have no positions at the current time.
I have no positions at this time. I cleared out the current puts on the drop to the 200ma. I will “reload” again on the next bounce up.