Daily Market Newsletter

July 1, 2017

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Market Commentary

The first half of the year has clocked in with the following performance numbers from major indices:

S&P500 is up about 185 points, or 8.26%
NASDAQ composite is up about 757 points, or 14.06%
Dow Jones Industrials up 1587 points, or 8.03%

This compares against the rough analog of 2013, which clocked in at a similar 180 point move by this point in 2013, which at that point was good for a 12.62% move in the first half, which ended up accelerating into an eventual 29% move by the end of 2013, What’s also eerie is how markets were enduring a similar pullback into late June 2013, before exploding higher to finish off the year. Will lightning strike twice?

We all know what the catalyst was back in 2013 – quantitative easing from central banks, which still exists in one form or another today…the difference is that central banks are trying to “taper” this effect today before their balance sheets get out of control, especially the EU central banks. The other similarity is that the monthly energy levels dipped to historically low levels while the price shrugged that off and kept chugging higher.

I’m left at a strange inflection point with today’s markets; there is EVERY reason in the world why we should see markets pull back into a summer “funk” which will just establish a lower range, not a crash…..which in my experience, is precisely why we might not see such an event. Every time I’ve come up with a solid reason as to why something SHOULD be happening, the opposite usually occurs. This is because the market is always irrational, and the vast investing herd expects complete rationality.

The only way that I can effectively trade this market is to continue trading short-term opportunities, because big swings are just not happening right now.

This upcoming week is either going to be a complete dud, or very interesting….Monday will be a half-day, Tuesday will be a full Market Holiday, and Wednesday should offer low volume as well….but then the week heats up into Friday’s jobs report which will be pivotal.

If you cannot get the above video to play, try this link.

Offensive Actions

Offensive Actions for the next trading day:

No neutral spread selling now….price is about to move.
Weekly EM levels have been set, see “weekly EM” section below.
A potential Whale trade on UPS is discussed 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.

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

Technical Analysis Section

Market Internals: Volume was average Friday. Breadth was modest with +135 advancers minus decliners.

SPX Market Timer : The Intermediate line fell below the Upper Reversal Zone, now showing a neutral bias. No leading signals at this time but still showing a strong potential of a bearish cluster with the next breakout..

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term sideways trend. The RUT is in a long-term uptrend, an intermediate sideways trend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell 2.27% to 11.18, back intside the bollinger bands. The RVX rose to 15.20 and is back inside the bollinger bands.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2355 … with no overhead resistance. The RUT has support at RUT 1335 with overhead resistance at about 1434. All three major index charts that we follow are now showing a Golden Cross with the 50 day moving average crossing above the 200 day average.

Fractal Energies: The major timeframe (Monthly) is now down into exhaustion again with a reading of 35. The Weekly chart is now recharging quickly with an energy reading of 50, due to the recent chop. The Daily chart is showing a level of 61 which is massively charged up and we do not see markets pause for long in this state..

Other Technicals: The SPX Stochastics indicator fell to 52, mid-scale. The RUT Stochastics indicator flattened at 47, mid-scale. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2419 and resistance at the upper band at 2449 and is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1392 to 1430 and price is below the upper band. The SPX Bollingers are starting to squeeze again.

We are seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. Markets are still showing perfect “Quiet & Trending” behavior regardless of what we “think” that they should do.

Position Management – NonDirectional Trades

I have no positions in play; I will wait on the first significant pullback to allow me to secure put spreads below support.

Offense: I still do not want to set up OTM credit spreads in this low-vol environment until we see real movement to the downside. If and when we get this movement we’ll need to identify levels that we want our credit spreads to be “below.” This is the same type of price action that was so perilous to HP condors back in 2013, so let’s not fight it.

If I see price drop to the SPX 2300 level, this might be our first opportunity to sell premium against that level.

I have no positions in play.

I will look for the next daily/weekly consolidation signal to sell LP Condors again.

I have no current positions.

ABBV 30JUN/7JUL 70/72 short call diagonal (6/20) was entered for a $1.10 credit; I closed this position down on Friday for a $1.69 debit, which gave me a net $63 loss per contract.

No current setups showing.

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 have the following positions in play:

SDS Stock – I still own 100 shares of this stock from 2011 and will continue to write calls against this position with every correction/pullback.
VXX Stock – I own 12 shares of this stock and will hold until Armageddon occurs.
SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 21JUL $17.5 calls (6/6) for $.19 credit.
X – I was assigned at the $25 price level.. I sold 21JUL X $25 calls against this position for a $.40 credit. I will bail out of this position if the price closes below $16/share. Ultimately I would like to bail on this position as there has been so much technical damage that it might be difficult to get this stock bid up again.In the short term, we have weekly exhaustion and a high level of energy on the daily chart, so this might encourage a quick bounce to at least set up a “lower high” which we could use.
HPE – I sold the 18AUG $16 puts (6/12) for $.30 credit.

I will look for a deeper pullback in stocks before selling more puts.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry.
RSI(2) CounterTrend – We’ll keep looking for these setups.
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.

Earnings for 2Q2017 will start in early July.

This is a new section that I’m going to start laying out trades for weekly “expected moves.” The S&P500 has done a nice job of moving pretty much to one end of the overall expected move every week. We can either speculate on that direction ahead of time using OTM spreads, or we can “fade” the price when it hits one of the EM levels.

Viewing the SPY from the current Friday closing price at 241.80, there is a +/- 2.48 EM into this Friday.

The EM targets for this Friday’s close is 244.28 to the upside, and 239.32 to the downside.I will watch for either of those levels to be tagged, and will fade that level with an ATM debit spread. If either level is hit on the Friday, I will use ATM “front day” long options to fade that level.

The downside EM target was hit last Thursday in the SPY, yet the call in-out spreads with 30JUN options were just too expensive due to vol skew. I punted and went long a SPY 30JUN 242 call for $.48, which I closed Friday for a $.67 credit. This gave me a net $17/contract profit on the trade, which was a net 35% return on capital after commissions.

I have the following positions:

SPY 21JUL 229/230 Debit Put Spread (5/15) was entered for a $.14 debit.

Nothing else to enter at this time.

I have the following positions:

SPY 21JUL248/249 debit call spread (6/26) was entered for $.16. This is an inexpensive, high reward-to-risk trade that’s looking for the SPY to head up to the expected move by the JUL expiry.

The only long that I like right now is UPS; a break above $111 means that I would take a $1-wide debit spread for about $.50 debit, using 28JUL options.

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.

Quite honestly, 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

I will likely clear all put options if the price drops 5% from the recent highs at SPX 2400. Not sure that I can expect much more than that given the current climate.

We currently have the following positions in play with this strategy:

SPY AUG17 214 long puts (5/2) – I entered this position for a $1.22 debit.