Daily Market Newsletter
December 24, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
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Market Commentary
I think what we’re facing here shortly will be a self-fulfilling prophecy. Here’s an economy which is humming along very nicely, thank you, when we start to look for the glass being half-empty. As we know from NLP, we can always see whatever we put our minds to seeing. Next thing you know, you can have 10 positive data points and 1 negative, and all that you can do is to focus on the negative. We all focus on what we fear without regard to anything else. It’s “target fixation.”
With markets down yet again today…today it was Treasury Secretary Mnuchin calling up big banks and ensuring that they were well-capitalized. Here we go again, it’s the whole “what does he know that we don’t know?! SELL!!!!” syndrome. On top of that today, there was the rumor that Trump was going to fire Powell, which is on top of the fact that the US government has no approved funding so is temporarily shut down for the third time this year. Trump’s opponents have to be rubbing their hands together in glee as the major networks continue to dig for dirt on his administration.
All of this leads to UNCERTAINTY which is spiraling out of control and this is the key element as to why we continue to see markets selling down. Once “certainty” comes back to the markets, you’ll see an amazing rally and it will lull everyone back to sleep before the next leg lower.
Don’t forget that markets will be closed tomorrow for Christmas day. My next report will be Wednesday.
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 and we now have that and better. Markets usually have some kind of relief bounce at the Bear Market delineator because weak hands say “OK! Let’s short now!” The S&P has hit this level today so we are technically showing a Bear Market decline after 2.5 months, very similar to 2007/2008.
- 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 last 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 ~590 points or 20.06%
- Dow is down 5160 points or 19.15%
- /NQ is down 1863 points or 24.02%
- RUT is down 475 points or 27.27%
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:
- No entries for Wednesday.
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 -484 advancers minus decliners, with a low-water mark of -496 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 sixth 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 more than 3 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 36.07 after peaking at 50.3 ten months ago, back outside the bollinger bands. The RVX rose to 34.74 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 has been run through.
Support/Resistance: For the SPX, support is at 2200 … with overhead resistance at 2800 and 2941. The RUT has support at RUT 950 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 57. The Weekly chart has an energy reading of 39, almost at exhaustion. The Daily chart is showing a level of 30 which is into extreme exhaustion on the swing down. I find it surprising that the monthly chart is even starting to pick up on the downtrend. We were seeing all three timeframes showing big levels of potential energy in early December and this is what happens when all that energy has to find a place to go.
Other Technicals: The SPX Stochastics indicator fell to 15, oversold. The RUT Stochastics indicator fell to 3, 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 2393 and resistance at the upper band at 2850 with price is below the lower band. The RUT is back outside the Bollinger Bands with its boundaries at 1276 to 1596 and price is below the lower band.
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 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 was assigned 500 shares in the DEC2018 cycle and my initial cost basis on this position is $13.78/share. I sold the 15FEB $14 calls (12/24) for a $.23 credit.
- 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.
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 have been moving higher as money moving out of equity markets finds itself moving into crypto as a form of hedge.
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.