Daily Market Newsletter
January 26, 2019Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
February Expiration
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Market Commentary
One of the mantras that I’ve stuck to over the years is “Tops Are a Process, Bottoms Are An Event.” If we zoom WAY out, the huge volatility that we’re currently experiencing might be indicative of a massive topping process, a much larger version than what occurred in 2000. Even if we are in a topping process, that does not mean that the price can’t make new highs before distribution kicks in.
A new record for ATR: Something I pointed out in late December was how the media outlets were still “anchored” to “n-hundred point Dow days.” There has been no “reset” of volatility to the new price levels, and we’ve seen this quite directly lately as the realized vol keeps overrunning the implied vol. This is the result of the distortion that the Fed introduced by injecting too much cheap money into the system to inflate asset prices.
Of my three scenarios that I called out at the end of December, I am starting to lean towards the “1998” model kicking in for the next few months. There was a lot of money that went to the sideline during the December crash, and it’s hungry to get back in play now that we have a “dovish” Fed again, or at least that seems to be the latest incarnation.
And of course we have the FOMC policy report and Chairman conference on Wednesday; there is currently a 99.5% chance that the Fed will not raise rates on Wednesday. As always, the real issue is the language in the statement as well as what Powell says in the Q&A session afterwards. Between the Fed and earnings, we’ll see huge volatility next week.
Here are some of the upcoming earnings reports:
- Monday: CAT
- Tuesday: AAPL, AMGN, VZ
- Wednesday: BA, BABA, FB, MCD, T, TSLA, V
- Thursday: AMZN, UPS
- Friday: XOM
A number of earnings heavyweights next week, and GOOGL reports the first week of February.
In the short-to-medium term, we have three possible outcomes:
- Bottom Re-Test: With the 14% rally off of the bottom, I believe that the chances of this occurring are starting to dim. This would require an immediate second bout of panic selling that would re-test or potentially undercut the December 24 low. I believe that subsequent FOMC language/statements made since the beginning of the year have temporarily mollified investors.
- Grinding Rally to Monthly Lower High: It’s possible for the bottom re-test to be bypassed through the use of a “scary higher low” that creates the same slingshot effect. In this case, we’d see about a three-month rally to recapture as much as 61.8% of the drop from the September highs. If the price exceeds the 200 day simple moving average, which is currently well above the 61.8% fib and the important SPX 2700 level, then I think the odds of this scenario start to dim.
- A 1998 LTCM Repeat: This one featured a bottom re-test (like above) and then a blistering “melt-your-face-off” rally higher. This was a very different rally from a “grind higher to a monthly lower high” so we’ll recognize that if it occurs. We also have to consider that this move might show WITHOUT a bottom re-test a la 1998.
I think that the next couple of months will be particularly hard to secure a “direction” on price. Just when the siren blows for “all clear” is when the next down-leg will materialize. And just when everyone gives up hope a rip-yo-face-off rally will show up. This type of market is not typically one where the newer trader will flourish.
If you’re not sure where you fit in this continuum, use this period to experiment trading AGAINST your emotions. When all looks bleak and hopeless, place very small long positions. When all looks clear and the world is bullish, close those long positions and set up very small bearish trades. Continuing to read/watch the same news as everyone else and trade based on that news will almost certainly guarantee poor performance.
Here is the current scorecard for the correction from the September 2018 highs:
- S&P is down ~594 points or 20.20%
- Dow is down 5239 points or 19.44%
- /NQ is down 1908 points or 24.69%
- 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 since the 50/200 death cross has hit each index
- Look to establish debit spread-based swing trades against sentiment extremes, and/or EM boundaries
- Use short-term long options to play within the intraday volatility
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Offensive Actions
Offensive Actions for the next trading day:
- I’ll add a “Whale” trade long on GLD Monday morning; see “Whale” 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.
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 back to average on Friday and breadth ended the day very positive with +316 advancers minus decliners, from the high water mark of +448 at the open.
SPX Market Timer : The Intermediate line rose into the Upper Reversal Zone, still showing a bullish bias. No leading signals at this time but this chart is very close to showing a bearish cluster short-term.
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 downtrend and short-term uptrend.
VIX: The VIX fell to 17.42 after peaking at 50.3 eleven months ago, inside the bollinger bands. The RVX fell to 20.93 and is inside the bollinger bands.
Fibonacci Retracements: The price has moved through several important Fib levels and is not caring about any confluence levels that these present, however the SPX 2700 might present the last overhead obstacle WRT fib “resistance.”
Support/Resistance: For the SPX, support is at 2350 … with overhead resistance at 2700, 2800 and 2941. The RUT has support at RUT 950 with overhead resistance at 1500 and 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 charged again, with a reading of 58. The Weekly chart has an energy reading of 49, recharging quickly again. The Daily chart is showing a level of 41 which is recharging quickly on the rebound back up. A couple more weeks of non-linear movement and we’ll be ready for the next major swing.
Other Technicals: The SPX Stochastics indicator fell to 88, overbought. The RUT Stochastics indicator fell to 86, overbought. 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 2452 and resistance at the upper band at 2704 with price is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1318 to 1521 and price is below the upper band.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPY 25JAN 231/232*266/267 Long Iron Condor (12/28) entered for $.18 debits on the puts and calls. I closed the call spreads for a $.54 credit (1/18); this locks in a minimum $12/contract profit on the entire trade, or 33% return on capital. The puts expired on Monday .
- SPX 15MAR 2820/2830 call credit spread (1/17) entered for $.80 credit. I will look for the next retracement to remove this position for a profit.
- SPY 27FEB 225/256*275276 Long Iron Condor (1/25) entered for $.18 debit on the put spreads and $.20 debit on the call spreads for a total $.38 overall debit. I will look to fill either side at a 200% gain by using separate GTC credit limit orders.
I added the Long Condor on Friday, unfortunately we were once again one day too late to enter prior to the “movement” kicking in, so we lost some edge on the call spreads and I ran out of available strikes to pick so I had to pay slightly more for the call spreads.
If we see a very sharp move lower in the near future, then we’ll start to scope out a downside put spread entry for MAR. In a perfect world we’d be filled at the bottom re-test but there might be a “higher low” that shows up first.
I have the following position in play:
- SPX 4FEB 2515/2520*2640/2645 Iron Condor (1/14) was entered for a $2.50 credit based on this weekend’s advisory. I will look for a $1.80 debit exit.
- SPX 15FEB 2590/2595*2710/2715 Iron Condor (1/22) was entered for a $2.50 credit based on Saturday’s advisory. I will look for a $1.80 debit exit.
I think I have enough inventory for now.
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 all 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 opened up new short calls for the 15FEB cycle at SLV $15 calls, securing a $.23 fill (12/28).
- SSO – I sold the SSO 15FEB $65 puts (12/21) for a $1.15 credit. I will look to close these positions for a $.05 debit.
- 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.
No additional entries at this time due to the death cross.
The only remaining long positions that I need to clear yet are the HPE covered call position, as well as the SSO short puts.
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, which occurred last week and the first signal has passed. I will consider taking the next pullback to the space between the 8 & 21 ema with a debit call spread.
- RSI(2) CounterTrend – Looking for the next setup.
- Daily S&P Advancers – Looking for the next signal to go long when we have single-digit advancers on the ADSPD.
- Swing – I have the following positions:
- SPY 30JAN 247/248 debit put spread (1/3) for a $.42 debit. I will look for a 50% return.
- SPY 8FEB 260/261 debit put spread (1/17) for $.40 debit. I will look for a 50% return exit
Crypto markets have been strong when equities are weak; it appears like they might be negatively correlated and could create some important opportunities for us in 2019 if the equities market takes a dump.
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 265.78, there is a +/-4.733 EM into this coming Friday. This is slightly larger than last week’s 4.151 EM, probably to account for the FOMC and Tech Earnings this week. The EM targets for this Friday’s close are 270.51 to the upside, and 261.05 to the downside.
We got some hard tests of the lower EM last week but most of the good action against that level was premarket, especially Friday. We’ll try again to fade these levels, especially the downside one this week.
My conclusion after recent experience is that this strategy is best reserved for stocks experiencing a snap-back rally in a primary bear trend, which we magically now have. I would like to remain patient for this snap-back rally as it could be intense.
We will look for the next bounce back up on the indices (to about SPX 2574 or higher) 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 the following positions in play:
- MSFT 1FEB 106/107 debit call spread (1/16) entered for $.50 debit. I will look for a 50% return from this trade and need to close it prior to 30JAN earnings.
I would like to enter an ATM debit call spread on Monday on GLD. I will select the GLD 1MAR 123/124 call spread, or whatever strike pair that is ATM on Monday morning for $.50 or less.
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 most recent set of puts on the drop to the 200ma back in October. I will “reload” again soon. The three-month puts are still somewhat expensive. (3 months out/90% of current price).