Daily Newsletter
January 25, 2020Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
February Expiration
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Market Commentary
Let me start out today’s week-end review with a quote from Winston Churchill, one that I believe accurately sums up where markets are in the overall rally:
“Now….this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning...”
When we discuss the US Stock Market rally, which really started in October 2019 to break out of an almost two year-long consolidation, punctuated by a full-on Bear move into the end of 2018…I think that Friday’s move might be signaling the “end of the beginning.” Investors that went long late December 2018 can now take profits and be taxed at long-term capital gains, so this is why we often see volatility into the end of January, particularly after a strong year.
- 2018: We saw volatility begin on January 29th and it accelerated into early February…after a very strong 2017.
- 2014: Vol began on Jan 23rd after a huge 2013.
- 2010: Vol begain Jan 20th after the strong rally off the bottom in 2009
It’s never the same, and there’s always some new negative catalyst to start the selling into fear. And a market that was in exhaustion on both parent timeframes is susceptible to selling on the first exogenous risk. I have presented graph after graph of “dumb vs. smart money” spreads being extremely wide, which ALWAYS converge in time.
So don’t get me wrong; I think this might be the prelude to the “Intermission” of this huge monthly consolidation pattern, driven by a 400+ point Weekly timeframe trend. The market might move into “corrective” at this point which might mean some difficult trading conditions in the near term. Corrective price action is notoriously non-linear and confusing. A full 10% correction would eat up most of this rally and drop the price down to the level of the 200ma, (SPX 3003) which it has not seen since June 2019.
And let’s not factor out the opposite occurring, which would be a quick daily recharge and one final rip higher in price to perhaps SPX 3400+. The potential for mayhem in the next week is very large, due to all of the earnings reports and FOMC risk. Something else to keep in mind is a factor that I’ve warned you about, the breakdown of the TNX. Rates are dropping; how will the FOMC respond?
So far I’ve avoided the whole “impeachment” topic because, quite honestly, the market has always discounted a vindication. If there is even the slightest sense that some of the Majority party senators would shift their vote, we might see a “very rapid re-pricing of assets.”
Sentiment took a hit this week in the fear/greed chart:
For our offense, I think we’re still best off playing the probabilities and the exaggerated reward/risk of an OTM put spread. I’ll detail a new one in the “Synthetic Shorts” section.
Next Wednesday is going to be a real circus, with some huge names reporting earnings as well as the FOMC policy report. This is a huge week for earnings and the volatility could be amazing.
The following stocks are reporting earnings over the next few days:
- Monday: DHI
- Tuesday: AAPL, AMD
- Wednesday: ADM, BA, DOW, FB, GE, MA, MCD, MSFT, PYPL, T, TSLA
- Thursday: AMZN, AMGN, V, VLO, VZ, WDC, X, WYNN
- Friday: CAT, XOM
- Upcoming earnings of interest: AAPL 1/28, FB, MSFT, TSLA 1/29, FOMC 1/29, AMZN 1/30, GOOGL 2/3,
Subscriber Update: I will be “grandfathering” OptionsLinebacker and DocsTradingTools customers over to a new advisory service, targeting the February timeframe. I intend to make this service more “actionable” with more trade alerts, and plan to include guest contributors who are experts in their specific strategies. If there are any elements of the OLD (existing) service that you want to make sure are carried into the new service, please let me know by dropping me at line at doc@docstradingtools.com
Short-Term Outlook: Prices are breaking from a massive consolidation pattern in play since early 2018, or almost another “horizontal bear market” like we had in 2015-2016. The first weekly trend from that consolidation is already into exhaustion and looks to be ready to consolidate.
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Offensive Actions
Offensive Actions for the next trading day:
- I’ll outline another bearish long put spread in the “Synthetic Shorts” 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.
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 above-average Friday, with the advancers minus decliners showing a very weak -339 at the close, and were as low as -424 during the afternoon.
SPX Market Timer : The Intermediate line has flattened in the Upper Reversal Zone and is still “Bullish.” No leading signals at this time.
DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.
VIX: The VIX rose to 14.56, inside the Bollinger bands. The RVX rose to 16.28 and is inside the Bollinger bands.
Fibonacci Retracements: The price is just off all-time highs again and no point in looking at retracements yet.
Support/Resistance: For the SPX, support is at 3070 with no overhead resistance. The DOW has support at 27325 and no overhead resistance. The RUT has support at 1580 and resistance around 1742.
Fractal Energies: The major timeframe (Monthly) is into exhaustion now at a value of 36, and is starting to reflect energy bleed from the very linear trend from late 2018. The Weekly chart has an energy reading of 27, deep into exhaustion. The Daily chart is showing 37, bleeding off energy again and into exhaustion. We’re seeing a runaway bull once again but now both parent charts into exhaustion. Very few daily trends continue when the energy level is at 25 or lower.
Other Technicals: SPX Stochastics flattened at 89, overbought. RUT Stochastics flattened at 65, mid-scale. The SPX MACD fell above the signal line, showing a decrease in positive momentum. The SPX is below the upper bollinger band with the range 3204 to 3343. The RUT is above the lower bollinger band with the range 1647 and 1699.
Position Management – NonDirectional Trades
I have the following positions in play at this time:
- SPY 21FEB 323/324*337/338 long condor (1/21) entered for $.50 debit. I will seek a 25% return on the trade. At the time of entry, the price of the SPY was 331.4 with a +/- 9.93 move into the 21FEB EM.
No additional trades at this time.
We are not in a good mode for the traditional “High Probability” short iron condors since the price movement has been incredibly directional, and the Implied Vol is reflective of this with a very low/complacent value. Not good odds to sell options right now, better odds to buy them and go “long gamma.”
I have no positions in play.
No further trades with this strategy until this parabolic runaway move terminates and volatility gets out of the gutter. This is a great strategy while the price is in quiet/trending character with “stair-stepping” price movement, but a poor strategy when price is in a runaway “tail” move.
I have no current positions:
Calendar spreads would be good trades in expected chop, however we’re still suffering from a lack of short-term vol.
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:
- SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. Looking for the next rally to sell calls against.
We’ll look for the next pullback to potentially sell puts against our next candidate.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – Awaiting the next signal.
- RSI(2) CounterTrend – I’ll look for the next setup.
- Daily S&P Advancers – Looking for the next signal to go long with single-digit advancers to close the day; stay tuned for this signal to show in the near future.
- Swing – I have no positions in play:
BTC and other top-ten coins have been breaking higher over the last week. Not sure at this point whether the gains will hold, or whether this will just turn the advance into another Weekly “lower high.”
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.”
From Friday’s close at SPY 328.77 there is a +/-5.266 EM into this coming Friday; this is much larger than the 4-day 2.988 EM from last week. The EM targets for this Friday’s close are 334.04 to the upside, and 323.5 to the downside.
Volatility is increasing; the price hit the lower weekly EM of the SPY on Friday on CoronaVirus fears and that level did not hold. I do not believe we will look to fade any levels this week.
I have the following positions in play:
- SPY 31JAN 312/313 debit put spread (12/30) entered for $.14 debit. At this point I am looking to secure any kind of positive return from this trade with only a week left.
- SPY 21FEB 319/320 debit put spread (1/22) entered for $.11 debit. I would look for at least 100% return from this trade.
I will add another position on Monday; one could either enter five contracts of the 28FEB SPY 316/317 debit put spreads, for about $.17 debit…or you could enter a somewhat more efficient SPY 28FEB 315/320 debit put spread for about $.79 debit with just one contract. I’m going to choose the latter. Thanks to Robert for the suggestion of this wider-spread approach.
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 in play at this time:
- WMT 24JAN 121/122 debit call spread (12/16) was entered for $.50 debit and expired OTM.
No further trades at this time. I think that the Weekly swing is over for now, or presents very poor reward/risk characteristics for us to take additional longs, unless they are non-correlated to the markets.
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.
Unless we see another rally leg into the end of January, we’re too late to double up on our position. .
I have the following open positions at this time:
- SPY 21FEB 279 long puts (11/15) entered for $2.21 debit. I will look to clear half of the position on any test of the 200 sma, and the other half upon a 10% haircut in price.