Daily Market Newsletter

July 27, 2017

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Market Commentary

Wow…an actual burst of volatility for once! Today’s session was punctuated by a stiff 20 handle move lower on the S&P’s, and just about a 150 handle move on the NASDAQ futures. In today’s video I discuss how the “character” changes between uptrends and downtrends, and I urge you to prepare for what’s next.

But seriously folks, we haven’t even seen a trend change yet. This is NOTHING compared to real volatility, such as that we saw in 2007, 2008, 2010, 2011, and through parts of 2015/2016…..but almost never since then. Bulls get lulled to sleep buying every dip until it’s too late.

I’ve gone on record saying that this market “needs” to set up a lower, louder range. I still think that, although it’s doing so kicking and screaming.

This weekend’s report will likely come out on Sunday morning due to a workshop that I’m teaching on Saturday .

In August I will be traveling for three weeks overseas; during this time I will be trading less-than-usual and my ability to produce the report and video in a timely manner in the evenings will be dependent on my ability to source connectivity. I’m hoping that this continues to be a quiet period but my experience with travel says otherwise.

If the above video does not play, please use this link.

Offensive Actions

Offensive Actions for the next trading day:

Weekly EM levels have been set; see “weekly EM” section below. Please note my comments on a lower EM level fade for tomorrow.
Not going to be setting up much offense over the next couple of weeks due to my upcoming travel.

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 higher today. Breadth was mixed with -16 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up below the Upper Reversal Zone, now showing a bullish bias. This study has faded lower after showing a STRONG BEARISH CLUSTER in the Upper Reversal Zone last week, with the two strongest timeframes in the upper reversal zone; this can precede a pause as we saw….but the next cluster appears to be around the corner.

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term uptrend. 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 rose to 10.11, inside the bollinger bands. This is near a twenty-year low on the VIX. The RVX rose to 15.22.

Fibonacci Retracements: Fibs are out of play again.

Support/Resistance: For the SPX, support is at 2355 … with overhead resistance at 2484. The RUT has support at RUT 1335 with overhead resistance at about 1452. 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 31. The Weekly chart is now recharging quickly with an energy reading of 49, due to the recent chop. The Daily chart is showing a level of 32 which is technically exhausted and should lead to a short consolidation.

Other Technicals: The SPX Stochastics indicator rose to 93, overbought. The RUT Stochastics indicator flattened at 83, overbought. The SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2404 and resistance at the upper band at 2494 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1402 to 1452 and price is below the upper band, squeezing again. The SPX Bollingers are starting to squeeze again as well and appear to be breaking the squeeze.

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 want to sell an SPX LP Condor due to the daily chart exhaustion….but common sense tells me to wait out this week as we could see one final upside ramp.

I have no current positions; no current setups showing. I have looked at setting up some calendar spreads, but they are NARROW and not worth exploring right now. If we see a positive volatility differential then I’ll get more aggressive.

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 15SEP $16.5 calls (7/24) for $.17 credit.
X – I was assigned at the $25 price level. I added new AUG17 $25 calls for $1.12 credit (7/17). The price continues to rally higher and is at my assignment point now, so the calls are ATM and I’m hoping to be called out for max profit. If not, we’ll continue to look for ways to either sell the position or sell more premium against it.
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. I would like to be an owner of AMD stock.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry. I might have missed this one on the SPY with last week’s big breakout; if the price pulls back into the space between the 8 and 21ema then I will go long a call spread.
RSI(2) CounterTrend – Looking for the next setup.
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 have already started. Not thrilled by the prospects of these but will look for some tech earnings to play this week.

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 246.88, there is a +/- 1.921 EM into this Friday.

The EM targets for this Friday’s close is 248.80 to the upside, and 244.96 to the downside.

Due to the Daily exhaustion, fading the upper leg looks to be a very good setup. Fading the lower leg has been the best setup over the last few months. I will not take a directional “target” position this week due to the daily exhaustion. If the lower leg is tested tomorrow, then I will fade it with an ATM 28JUL call option purchase.

I have no positions at this time. Nothing else to enter at this time.

I have no positions at this time. I do not have any setups that look really great at this time, and markets likely to consolidate in the short run.

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

With a new all-time low VIX, the opportunity to buy inexpensive short deltas was too great, so I added some OCT puts. .

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.
SPY OCT17 222 long puts (7/24) – I entered this position for an $.85 debit.