Daily Market Newsletter
November 17, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
December Expiration
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Market Commentary
Another profitable cycle for us (see summary below) but it was not particularly efficient. Any time that we see a transition from “quiet/trending” market character, which we were in from July – October….into “sideways/volatile” character, there are going to be toes stepped on as support levels get cut through.
The recent pundit clippings in the financial media are amusing; many think that we’re about to plunge into a huge Bear market, while others claim that we’ll print new highs before the year’s over. Looking at the charts, we might get neither of those outcomes. Interest rates are quickly coming in, although the trend has not reversed. Probability of a rate hike in December is now at 65%, as pressure is starting to increase on the Fed to “do something” about the housing sector, which has been plummeting since the beginning of the year and has gotten especially bad since October.
I’ll talk about what the charts are showing in today’s market video, and the potential outcome into year’s end that no one seems to be accounting for.
Here is the current scorecard:
- S&P is down ~337 points or 11.46%
- Dow is down 2830 points or 10.5%
- /NQ is down 1148 points or 14.85%
- RUT is down 283 points or 16.3%
Earnings are now pretty much out of the way for the quarter. The market’s on its own until the next Fed meeting on December 19.
Our approach will be to sell credit spreads into what we perceive as relative extremes, and look to take directional trades into swings. We need to be looking to take the trades that “feel” bad, as well as sell profitable positions too early. It’s going to be a period filled with opportunity for those willing to go against the grain.
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.
An embedded flash video is available here.
Offensive Actions
Offensive Actions for the next trading day:
- I will look to enter the SSO (stock) long on a wash-out low based on a single-digit number of advancing stocks in the S&P. (see “Swing” section below)
- I will sell 19JAN BAC puts on Monday; see the “Stocks” section below.
- If we start to see bottoming signals, I might look to sell some short-term credit spreads against stocks in the near term.
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.
- I will look to close the short puts that we sold for this cycle
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 Friday and breadth ended the day modestly higher with +151 advancers minus decliners.
SPX Market Timer : The Intermediate line dropped above the Lower Reversal Zone, now showing a bearish bias. The two smaller timeframes are almost showing a Weak Bearish Cluster in the Upper Reversal Zone.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term uptrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.
VIX: The VIX fell to 18.14 after peaking at 50.3 ten months ago, inside the bollinger bands. The RVX fell to 21.82 and is back inside the bollinger bands.
Fibonacci Retracements: The price is now trapped between the 61.8% fibs on the bounce back up and the secondary reaction back down. This might be the formation of a triangle.
Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2816 and 2941. The RUT has support at RUT 1436 with overhead resistance at 1742. Three major index charts that we follow are now showing a Golden Cross with the 50 day moving average above the 200 day average (SPX/DJI/NQ). The Russell has printed a Death Cross with the 50ma crossing below the 200ma; this can be a leading signal for a true Bearish move.
Fractal Energies: The major timeframe (Monthly) is super-charged again, with a reading of 63. The Weekly chart has an energy reading of 45. The Daily chart is showing a level of 47 which is almost fully charged again. The RUT has the weekly chart showing massive exhaustion now; we normally see trends “pause” or reverse in this state. With the bounce back up, all SPX timeframes could be in position to support a massive move, regardless of direction. It’s very important that we get “on” the next trend when it shows, regardless which way that it goes.
Other Technicals: The SPX Stochastics indicator fell to 66, mid-scale. The RUT Stochastics indicator fell to 63, mid-scale. SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2638 and resistance at the upper band at 2815 and price is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1465 to 1586 and price is above the lower band.
I had the following results for the 16NOV 2018 Options Cycle:
High Probability Iron Condors
- RUT 16NOV 1490/1500 Short Put Spreads entered for $.80 credit and exited for a $3.70 debit on one contract. This gave me a $294 net loss after commissions, or a -32% return on risk.
Low Probability Iron Condors
No trades this period.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- SSO 16NOV $109 puts sold for $1.20 credit and closed down for a $.68 debit. This gave me a net profit of $50/contract, or a .46% return on capital for the cycle after commissions. With a five contract position, this gave me a profit of $250.
- GLW 21DEC $26 puts for $.26 credit.I closed this position for a $.05 debit. This gave me a net profit of $19/contract, or a .73% return on capital for the period. With a five contract position, this gave me a net profit of $95.
“Whale” Trades
- NVDA 02NOV 285/287.5 debit call spread entered for $1.22 debit and expired OTM. This gave me a net loss of $248 after commissions.
Swing Trades
No trades this period
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
- SPY 26OCT 271.5/272/5 call spreads for $.56 debit and closed them in the last hour for a $.74 credit. That gave me a net $14/contract profit or a 25% return on capital. With five contracts, that gave me a net profit of $70.
- SPY 2NOV 271/272 Debit Put Vertical was entered for $.45 and closed for $.70; this gave me a net profit of $21/contract after commissions, or 46.7% return on capital. With five contracts, this gave me a net profit of $105.
- SPY 2NOV 254/256/258 Debit Put Butterfly entered for $.06, and expired OTM for a net $50 loss on five contracts.
- SPY 16NOV 272.5 long calls entered for $1.05 and closed for $1.82 for a net $75 profit per contract. With a five contract position that was a profit of $375 or a 71% return on capital.
Lessons Learned from this cycle:
Another profitable cycle for us, however not very efficient. The first put spread usually gets stepped on as a market transitions into “high volatility.” Over the years this has been my number one liability although quite honestly I don’t recall a loss on a put spread since 2011. I think that if I had stuck to the S&P500, (and not the RUT) we would have survived the initial downdraft. But keeping position size small means that we lived to fight another day, and did not get “rekt” like so many options traders do on volatility transitions.
OK, now that price has gone into “corrective” what is our approach?
I think that the best approach is to play short-term swings against the EM and/or any other support/resistance levels, which was our most profitable segment this month. We should also look to continue selling premium on big scary “dips” lower as long as the Death Cross does not trip. .
Position Management – NonDirectional Trades
I have the following positions in play:
- SPX 7DEC 2490/2500 Short Put Spreads (10/22) entered for $.80 credit. I would close this position if the short put delta (2500) hits the .45 level. It is currently showing a .06 delta. I have also placed a $.10 debit limit order to close this one early if possible. The midpoint of this spread is currently $.30 so the trade is profitable and could be closed if you have any concerns.
- SPX 21DEC 2950/2960 Short Call Spreads (11/7) entered for $.80 credit. I would close this position if the short call delta hits the .35 level. It is currently at the .03 level.
- SPX 21DEC 2490/2500 Short Put Spreads (11/12) entered for $.80 credit. I would close this position if the short put delta (2500) hits the .45 level. It is showing an .09 delta.
No new entries at this time; we now have a full 21DEC SPX Iron Condor that is 450 points wide. I just hope that it’s wide enough. I will look to close the entire 21DEC Condor for $.80 debit now; it is showing a midpoint of $.83 so unless we have a big move early in the week, I should be able to close this trade at our target profit in the next day or two.
Let’s wait until the price probes the edge of the current range before I set up the next credit spread.
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, and not with a sideways/volatile one.
I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so we’ll want to wait for that type of price action to show 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 21DEC $95 puts (11/14) for $1.02 credit. I will look to close this position for $.05 – $.10 on the next bounce up.
- CSCO – I sold CSCO 21DEC $40 puts (10/22) for $.40 credit. Looking to close this for $.05
- INTC – I sold INTC 21DEC $37 puts (10/22) for $.37 credit. Looking to close this for $.05 debit.
- HPE – I sold 21DEC $14 puts (11/12) for $.23 credit.
The recent trades were relatively small positions that would create a discount entry should I be assigned. I have entered $.05 GTC exit debits to close out INTC, and CSCO early should we get the opportunity. The INTC exit should fire in the next couple of days.
Monday morning I will sell the 18JAN BAC $24 puts for a minimum $.24 credit.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – I entered a SPY 23NOV 280/281 debit call spread (11/12) for $.35 entry and will look for a 50% return.
- 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. I will set up a swing trade to the downside if the S&P prints a daily lower high.
The crypto market got hit pretty hard recently as it finally broke below support. This could be part of the final capitulation that we’ve been waiting on.
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 273.73, there is a +/-4.762 EM into this coming Friday. This is smaller than last week’s 5.078 EM and reflects how some of the tensions have come in slightly, and also because this is Thanksgiving week approaching with only 3.5 days of trading. The EM targets for this Friday’s close are 278.49 to the upside, and 268.97 to the downside.
We saw a full breakdown below last week’s lower weekly EM, although it eventually broke higher. As I discussed on Thursday “If we see the price DIP to start the day tomorrow, and then trade ABOVE the 272.68 level tomorrow, I will go long an ATM 16NOV SPY call option and will look for 100% return if possible.” I went long the SPY 16NOV 272.5 call at $1.05 and closed it out later that morning for $1.82. Trading against the EM during a larger intraday trend has been very profitable for us lately.
For this week, I will once again look to fade either EM level with a spread early in the week, and long options by Thursday and later.
We did get some recent experience with this style of trading and quite frankly it’s not as easy as it sounds. Strong bull trends do not give way easily. My conclusion is that this strategy is best reserved for stocks experiencing a snap-back rally in a primary bear trend. If the market starts to print a lower high on the weekly chart then I will become more serious about this strategy.
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 no positions at this time.
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. If we are able to secure a “higher low” off of the S&P in the short run, this might be a good environment for a couple of weeks.
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.
I passed on the recent entry; I’m going to hold off for a little longer to see if a more complex top is created off of a higher high. Recent entries were expensive due to elevated vol.