Daily Market Newsletter
December 17, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
December Expiration
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Market Commentary
We have been playing the “musical chairs” market for the past several years. You know the game; as long as the music keeps playing, you keep circling the chairs. When the music stops, be quick to find a chair because there are not enough chairs for everyone. And the music has been playing non-stop for the past ten years, through four major corrections.But just like that, the music stopped and no one can find a chair as correction #5 turns into an all-out Bear. 
As of September, US markets were looking bulletproof. Economists were trumpeting “zero percent chance of a recession” for the next year. The United States was “an island of prosperity in a sea of decline.” All the numbers looked great with respect to unemployment, GDP, and Earnings. What me worry?
But one by one the bricks are starting to fall. Much of this started with our “Trade War” with China which has been broiling for the better part of the year. For the last several weeks, many regions of the world have been in decline, and China’s numbers last week were shocking. It doesn’t matter how well the USA does if all of the other regions are faltering; such is the world of global trade.
And now we come down to THE FED to “save” this market this week. It won’t happen. At this point the ONLY thing that Powell should do is to pause the rate hikes, but there is a 73% chance that he won’t because if the Fed were to pause, not only would they “lose face” in the face of recent political attacks (they must prove that they are independent, after all) but there’s also a chance that the market would be confused by this action, introducing more uncertainty. I was in the camp of “OK, go ahead and have your hike but MAKE IT CLEAR you are done for now.” I now believe that Powell MUST pull back from a rate hike this week.
Most readers who get to this point of my narrative probably are wondering, “well, what next?” This has been a very headline-driven market and the negative news is getting overstated as it does in a Bear/Corrective market. This is going to be a hyper-sensitive week for market direction as we have markets coiled into a tight spring and looking for any excuse to move in a big way. Sentiment appears to be leaning in the direction of the Bears, however keep in mind that a positive surprise will quickly lead to a 100+ point rally, even if it’s to a lower high. What I find is best in turbulent times is to just trade the volatility, and stop trying to predict the forward direction which is going to be impossible to do in the short run.
Before markets break into a huge bear, odds, sentiment and history favors that a significant monthly “lower high” would print first, accompanied by feelings of complacency, relief, and survival. Any downside release that we see will be relatively short, quick, and painful, at which point that monthly “lower high” might start the building process.
I do not want to throw on any more “long” risk right now and in fact would prefer to clear what I have. Humans are irrational and so are markets. We are looking at a potential 500-1000 point SPX swing over the next year and getting the first 50 points of it is irrelevant. Be patient. I will continue to layer on long iron condors to play to this volatility, and I will continue to clear long risk that we set up prior to this move.
Here is the current scorecard:
- S&P is down ~410 points or 13.94%
- Dow is down 3495 points or 12.97%
- /NQ is down 1334 points or 17.20%
- RUT is down 369 points or 21.18%
What is our approach to trading this market, which has once again moved into a “Sideways/Volatile” character?
- Sell credit spreads/create iron condors on the SPX into relative extremes, beyond the current range of movement.
- Establish long iron condors when the price shows potential of moving a great distance in the near future.
- Exercise caution with long stocks/short puts as we see the 50/200 death cross hit each index
- Look to establish debit spread-based swing trades against sentiment extremes, and/or EM boundaries
Markets are at a very important tipping point going forward; be mentally nimble enough to allow the price to go either way from here.
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)
- We are green light for a long swing based on the test of the lower Weekly EM.
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 for a bounce over the next two weeks to see if our 28DEC Long Condor call spreads can throw off some value.
- I will attempt to close my SSO and HPE short puts before the Wednesday FOMC policy release; see “stocks” section below.
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 large today and breadth ended the day very weak at -413 advancers minus decliners, with the low on the day in the last few minutes with -472 advancers minus decliners.
SPX Market Timer : The Intermediate line turned down into the Lower Reversal Zone, still showing a bearish bias. This chart is now showing a Full Bullish Cluster with all timeframes oversold; this is a relatively rare signal and shows that all three timeframes are now considered “oversold.” This signal can be a leading signal for a bounce.
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 24.77 after peaking at 50.3 ten months ago, outside the bollinger bands. The RVX rose to 28.32 and is outside the bollinger bands.
Fibonacci Retracements: The 38.2% Fib Retracement of the entire 2016-2018 swing higher would be at the SPX 2509 level.
Support/Resistance: For the SPX, support is at 2500 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 1375 with overhead resistance at 1553. Only one major index chart that we follow is still showing a Golden Cross with the 50 day moving average above the 200 day average (DJI), however this index will print the Death Cross this week unless a huge rally is seen. The S&P500, Russell 2000 and Nasdaq 100 have all 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 68. The Weekly chart has an energy reading of 49. The Daily chart is showing a level of 40 which is just above exhaustion on the swing down and will likely get there tomorrow. 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 40, mid-scale. The RUT Stochastics indicator fell to 31, above 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 2560 and resistance at the upper band at 2789 with price is below the lower band. The RUT is back outside the Bollinger Bands with its boundaries at 1392 to 1566 and price is below the lower band.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPY 21DEC 251/252*277/278 Long Iron Condor (11/26) entered for $.16 debit on the puts and $.18 debit on the call spreads. Per my advisory to close either side at 200%, my call spreads were sold off at $.54 credit (11/30) and I used recent weakness to clear off the put spreads (12/6) for a $.17 exit. The overall profit on this trade was $32/contract on the calls and -$3/contract on the puts, for a net profit of $29/contract, or an 85.3% return on capital for the entire trade.
- SPY 28DEC 269/270*289/290 Long Iron Condor (12/3) entered for $.17 debit on the puts and $.17 debit on the call spreads. I sold off the put spreads (12/6) for $.56 credit, leaving the call spreads open and ensuring at least a 50% return on the overall trade. The overall profit on the puts was $35/contract so even if the calls expire worthless at the end of the month we will net a minimum $16/contract net profit after commissions, or a 47% return on capital. I will look for the price to bounce by the end of the month and possibly score a return on the call spreads.
- SPY 04JAN 257/258*281/282 Long Iron Condor (12/7) entered for $.18 debits on both the puts and calls, for a total trade debit of $.36. I cleared the put spreads at target $.54 credit (12/17) and will the opposite side call spreads in play to remove as the volatility allows it.
- SPY 11JAN 247/248*270/271 Long Iron Condor (12/17) entered for $.17 debit on the call spreads and $.18 debit on the put spreads. I will look for a 200% return on either side individually, and keep the other side in play to see if the volatility will allow us a favorable exit.
We are scoring big % returns on the long condors and our risk is very limited in this extreme volatility. I am very glad that we took the opportunity to close our short condors and spreads; absolutely horrible to hold short options in this type of price movement, especially in a short-vega trade.
I set up the 11JAN Long Condor today per Saturday’s advisory. The long put spreads have been firing at the target credit; this may reverse in the next few weeks and we might get a chance to remove the call spreads as well.
I’ll wait until the price probes the edge of the current range before I set up the next credit spread. We’ve got to have a massive sentiment extreme before I want to sell again in this volatility. Let’s continue to stay long theta/vega.
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 that we’re currently seeing.
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.
With three out of the four major indices in a death cross, I am suspending additional short put selling until those signals clear. 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. If this little bounce continues I might be selling $15 calls into FEB.
- SSO – I sold SSO 21DEC $95 puts (11/14) for $1.02 credit. I will try to close this position before the Fed meeting this Wednesday. I have edited the debit buyback to $.20 to see if any little bounce will allow me an exit. This position is still profitable but Gamma will make this position difficult to manage this week while the price slips off the “edge” as we’ve seen.
- HPE – I sold 21DEC $14 puts (11/12) for $.23 credit and looking to close for $.05. This option has gone ITM and I don’t want to see it trade below $13. I might have to roll it down later this week; a shame as the midpoint was at $.06 several times over the last two weeks.
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05. Starting to transition into a serious downtrend but still OTM. Will need to close these on the next bounce up.
The recent trades were relatively small positions that would create a discount entry should I be assigned. Our priority at this point is to close our open positions and ride out the storm until conditions improve. With that said, if I see truly epic selling that allows me to secure puts at levels where I would be an enthusiastic buyer, I will take those trades. At the very least we would need to wait on Daily/Weekly exhaustion levels.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – The 8/21EMA crossover showed another false signal, which this study is famous for. We have to avoid these false breakouts and aggressively pursue the “real” one when it shows; not an easy task.
- 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 – We will look for the next available swing soon.
Crypto markets were up about 10% today, well before equity markets began to sell off. Could it be digital gold?
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 260.47, there is a +/-6.897 EM into this coming Friday. This is smaller than last week’s 8.261 EM. The EM targets for this Friday’s close are 267.37 to the upside, and 253.57 to the downside.
Lately we have been seeing the largest moves on Mondays as weekend risk is processed, and this was once again the case today. The lower weekly EM was hit today, so we are “green light” for a long swing if one sets up. I’ll discuss this in today’s video.
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.