Daily Market Newsletter
December 22, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
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January Expiration
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Market Commentary
When Santa Claus should fail to call, Bears will roam on Broad and Wall.
It’s been ten years since we’ve seen selling to equal this, which coincidentally was our last true (vertical) bear market. Yes, Jim Cramer was right a few weeks ago, we are now fully into a Bear Market. This was my concern for a few weeks back in the spring that we were falling into a 2007-like correction which led to the 2008 Bear. Everything about this Bear has been eerily similar to the one in 08, which means that it’s unlikely to end up in the same way.
It’s at times like this that I get questions such as “Hey, how come your energy indicator didn’t stop the price from going lower?” I have to remind people that we’re in the statistical analysis game, not predicting the future. A well-trusted source of mine has been showing a high probability of a bounce – for days on end. Price can do whatever it wants.
And price will “do what it wants” when emotions overtake reason. Or maybe reason adds to the urgency of emotions. A drop of seven percent of an index’s value in a week is a large move indeed. And it wasn’t just the size of the move, it’s the persistent nature in which it happened. It’s like a banner went up at every trade desk in the world: “SELL EVERY INTRADAY RALLY.” Even the news item from Fed’s Williams that they might re-visit the number of rate hikes – which sent the S&P briefly up 38 handles in about 15 minutes – was used as a new shorting anchor.
I’m not going to waste any more time on analyzing WHY or WHO did what. It’s immaterial and will not help us going forward. This entire sell-off is about UNCERTAINTY. As I write this, the US Government is in partial shutdown as a result of not being able to come to a deal on funding it. Seems like we’ve been through this before, and previous shutdowns have not had a material impact on the market’s price because the implication was that it would not hurt the GDP and effects would be minimal. In today’s environment, that could be more uncertainty than this market can handle.
Don’t forget that markets close early (1pm EST) this Monday for Christmas Eve. I will put out an abbreviated report on Monday.
Where is “potential” support on the S&P500? Let’s toss out a couple of targets so that we can “frame in” the problem.
- The 20% Haircut/Bear Market level – This would be at SPX 2353. Markets usually have some kind of relief bounce at the Bear Market delineator because weak hands say “OK! Let’s short now!” That’s about 60 points away from Friday’s low and incredibly, we might get there on this swing.
- The Bear Flag Target level – I discussed this earlier this week, as we had an average 240 point move down to start the flag which was centered at SPX 2700, and a 240 point move down from there would target SPX 2460. This was undercut this week so this level has been hit.
- The Next Big Fib Retracement – The entire rally since 2009 has a 23.6% fib at about SPX 2400. The 50% retracement of the 2016 swing is at about 2374. That would be a good confluence point for support.
- The 2008 Bear Analog – Between 2007 to 2009, the SPX lost 57.7% of its former value, starting at 1576, finishing at 666 in March of 2009. If the 2018 high water mark lost 57.7% of its value, as a comparison we’d be at SPX 1244. Keep in mind that most of the damage was done near the end of the move
Once we get a bottom to print, and it will be a torturous process, unlikely to just stop & reverse….then I believe that we would see an extended rally whose only purpose is to create the next “lower high” on the monthly chart. Then the real fun begins; we do not want to carry any longs past that point.
Here is the current scorecard:
- S&P is down ~532 points or 18.09%
- Dow is down 4556 points or 16.90%
- /NQ is down 1727 points or 22.26%
- RUT is down 453 points or 26.00%
What is our approach to trading this market, which has now moved into a “Volatile/Trending” 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
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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 add short calls to my new long HPE position; see “stocks” 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.
- I will look for a bounce in the near future to clear the call spreads on our Long Condors.
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 is increasing to panic levels and breadth ended the day very weak with -406 advancers minus decliners, with a low-water mark of -451 advancers.
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 (for the fifth day in a row) with all timeframes oversold; this is an extremely rare signal and shows that all three timeframes are now considered “oversold.” This signal can be a leading signal for a bounce. I do not recall ever seeing five days in a row like this with a full cluster.
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 30.11 after peaking at 50.3 ten months ago, back outside the bollinger bands. The RVX fell to 30.93 and is back outside the bollinger bands.
Fibonacci Retracements: The 50% Fib Retracement of the entire 2016-2018 swing higher is down to SPX 2374 and appears within reach.
Support/Resistance: For the SPX, support is at 2400 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 1300 with overhead resistance at 1553. The S&P500, Russell 2000, Dow, 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 60. The Weekly chart has an energy reading of 42. The Daily chart is showing a level of 33 which is well into exhaustion on the swing down. I find it surprising that the monthly chart is even starting to pick up on the downtrend. The weekly chart should be showing exhaustion (or close to it) by Monday.
Other Technicals: The SPX Stochastics indicator fell to 16, oversold. The RUT Stochastics indicator fell to 4, oversold. SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back outside the Bollinger Bands with Bollinger Band support at 2445 and resistance at the upper band at 2827 with price is below the lower band. The RUT is back outside the Bollinger Bands with its boundaries at 1306 to 1588 and price is below the lower band.
I had the following results for the 21DEC 2018 Options Cycle:
High Probability Iron Condors
- SPX 7DEC 2490/2500 Short Put Spreads were entered for $.80 credit, and closed for $.35 debit, for a $41 profit on one contract.
- SPX 21 DEC 2490/2500*2950/2960 Iron Condor was entered for $1.60 credit, and closed for $1 debit. This provided a net profit after commissions of $52 on one contract.
- SPY 21DEC 251/252*277/278 Long Iron Condor entered for $.34 debit and closed for $.71 credit for a net profit of $29/contract,
or an 85.3% return on capital for the entire trade. With ten contracts, this trade produced a profit of $290. - SPY 28DEC 269/270*289/290 Long Iron Condor entered for $.34 debit and puts closed for $.56. With one side closed and the remaining open, this trade has produced a profit of $160 on ten contracts, or a 47% return on capital.
- SPY 04JAN 257/258*281/282 Long Iron Condor entered for $.36 debit, and puts closed for $.54. With one side closed and the remaining open, this trade has produced a profit of $120 on ten contracts, or a 33% return on capital.
- SPY 11JAN 247/248*270/271 Long Iron Condor entered for $.35 debit, and puts closed for $.54. With one side closed and the remaining open, this trade has produced a profit of $130 on ten contracts, or a 37% return on capital.
- Long call spreads remain for the 28DEC, 04JAN, and 11JAN positions, and have been factored in this cycle as losing trades. Any profits harvested from a bounce will be factored into the JAN options cycle.
Low Probability Iron Condors
No trades this period.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- INTC 21DEC $37 puts entered for $.37 credit, and closed for $.05 giving me a net $31/contract profit. With a five contract position, this provided a profit of $155.
- CSCO 21DEC $40 puts entered for $.40 credit. and closed for $.05. This gave us a net profit after commissions of $34/contract, or $170 on a five-contract position.
- SSO 21DEC $95 puts for $1.02 credit, closed for $1.05 debit. I have rolled this position out to the FEB cycle as described in today’s edition.
- HPE 21DEC $14 puts for $.23 credit, and this position was assigned. I kept the net $110 credit after commissions.
“Whale” Trades
No trades this period.
Swing Trades
- 7DEC 269/270 Debit put spread entered for $.46 and closed for a $.64 credit. This gave me a $14 profit per contract after commissions, or a 30% return on capital. With a ten contract position, this trade produced $140.
- SPY 23NOV 280/281 debit call spread (8/21 EMA strategy) entered for $.35 and expired OTM for a net $185 loss on five contracts after commissions.
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
No trades this period
Lessons Learned from this cycle:
Wow, that was quite a cycle and things are just getting started. We will have at least another YEAR before we get back to quiet/trending price action, and that’s the earliest that we’ll see it. Bear markets are when fortunes are won or lost. Let’s stay on the right side of this beast.
What I think we did right this cycle: We acknowledged the possibility that things could get to be “interesting” after ten straight years without a full Bear showing, and nothing but good news on the horizon. That’s precisely when we should be defensive, and we were. We waited until we had edge before entering our trades, and then we got out of them (for the most part) as the risk began to increase. Probably the most important step was to transition away from premium-selling and into long-gamma condors, which tripped several of our profit targets and creating nice returns. Very little drama and no loss of sleep.
What I think we screwed up in this cycle: I had many, many opportunities to get out of the short puts for partial profits and I became too stubborn to cling to my original profit target. I was one penny away from closing the HPE position at least twice, and I tried to remain patient for that fill. Now I have inventory to manage which is underwater. When the stuff hits the fan, get out.
What we have to do going forward: This a Bear, and it’s only the opening act of the Bear. Once we see the capitulation bottom, we’ll see a torturous bottoming process, and then a substantial rally. All of these will be great profit opportunities if we can remain focused on the edge and not the news.
Position Management – NonDirectional Trades
I have the following positions in play:
- 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 closed the put vertical spreads (12/20) for a $.54 credit. I will keep the call spreads in play to look for any kind of positive credit.
- SPY 19JAN 232/233*262/263 Long Iron Condor (12/21) entered for $.17 debits on the puts and calls. I will place $.51 GTC credit orders on each “side” of the trade so that if one side fires at a profit target, I will retain the other side for a bounce.
- SPX 15FEB 2150/2140 put credit spread (12/20) entered for $.80 credit. I will close this position if the delta of the short option hits .45; it is currently showing a delta of .15.
We are scoring big % returns on the long condors and our risk is very limited in this extreme volatility. I added another Long Condor on Friday so that we can get ahead of the big Monday move that we’ve consistently seen for weeks.
The big opportunity for us would be a relief rally where we could clear our call spreads from the long condor inventory that we hold.
We do have one short put spread on the SPX at what I believe would be an unattainable level for this first swing down, but we will manage it by the numbers.
This strategy works best with a quiet/trending market, and not with a sideways/volatile or trending/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, and I closed this position out (12/19) for $1.05 debit. I rolled this position to the 15FEB SSO $65 cycle.
- SSO – I sold the SSO 15FEB $65 puts (12/21) for a $1.15 credit. I will look to close these positions on the next rally higher.
- HPE – I sold 21DEC $14 puts (11/12) for $.23 credit and I was assigned this position on Friday. My initial cost basis on this position is $13.78/share. That will drop after selling calls on Monday.
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05. Will need to close these on the next bounce up.
I will sell the HPE 15FEB $14 calls on Monday; they are currently showing $.23 x $.28. If, for some reason there is a big rally moving on Monday morning, I will see if I can sell the 18JAN $14 calls instead, as long as I can secure at least a $.14 credit.
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 – Looking for the next signal.
- 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 again today. Could they be a hedge against the equity 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 240.70, there is a +/-8.935 EM into this coming Friday. This is larger than last week’s 6.897 EM. The EM targets for this Friday’s close are 249.64 to the upside, and 231.77 to the downside.
The realized volatility has been much larger than the implied forward volatility; Weekly EM levels are not being respected.
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.
We will look for the next bounce back up on the indices to start playing directional bear spreads
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.
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.