Daily Market Newsletter

The “FOMO” market continues; the market has now entered the phase of “fear of missing out” which is what usually propels them in a nearly-vertical fashion before they finally correct under their own weight. There is little analysis that I can provide from a historical basis other than the “we normally see a reaction at these exhaustion levels” but I will also acknowledge that current conditions are unlike anything ever seen in the past.

My approach continues to be to stay long through selling puts against less-expensive stocks that we would want to own at current prices, and look for directional opportunities in our whale scans. There are other niche strategies that we’ll look for, such as RSI(2), however most of the “used to work a few years ago” strategies are utterly inappropriate for today’s market.

This will change soon, and should leave us with a much larger range to trade, including more implied vol to use. Don’t wish for the market to change, just take advantage of what’s here today and be mentally prepared to shift.

Earnings of Importance this week are:

Monday: HAL
Tuesday: AMD, BIIB, CAT, CMG, LMT, MCD, MMM, T
Wedesday: AMGN, BA, KO, V
Thursday: AAL, AMZN, COP, F, GOOGL, INTC, MO, MSFT, UPS, WDC
Friday: CVX, MRK, XOM

Economic releases which might move the market this week are:

Durable Goods and New Home Sales this Wednesday.
Home Sales Index on Thursday
3Q GDP First read and Consumer Sentiment, Friday.

The market remains at extreme risk of an “exogenous event” which is news coming into the market that has not already been priced in. We could easily see a 3-5% single day event if the wrong news hit the wires. Make sure that your treatment of risk in your account can account for that potential move.

The scan for the “Cheap Stocks with Weeklys” that I discussed this weekend is available here.

The current MAIN “high liquidity” watchlist that I’m scanning against in thinkorswim is available here.

The latest crypto video (Top Five ICOs for October) is available here

If you cannot view today’s video, please click here to view an embedded flash video.

Offensive Actions

Offensive Actions for the next trading day:

Weekly EM levels have been set; see “weekly EM” section below.
I will set up a Ratio Butterfly against the DOW; see “Ratio Butterfly” section below.
I will sell 27OCT puts against NUGT; see “stocks” 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

Technical Analysis Section

Market Internals: Volume was well above average Friday and breadth was relatively strong with +263 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened in the Upper Reversal Zone, still showing a bullish bias. Another full bearish cluster on the SPX for the second day in a row, after multiple strong cluster occurrences over the past three weeks.This is a leading signal for a pause.

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 uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX fell to 9.97, back inside the bollinger bands. This is after a twenty-year low on the VIX. The RVX fell to 13.49 and is back inside the lower bollinger band.

Fibonacci Retracements: If we see an actual pullback then I’ll start to determine fib levels that might act as potential support.

Support/Resistance: For the SPX, support is at 2509 … with overhead resistance at 2575. The RUT has support at RUT 1350 with overhead resistance at about 1515. 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 29. The Weekly chart is now losing energy with an energy reading of 40, due to the recent trend. The Daily chart is showing a level of 37 which is now recharging quickly but still in technical exhaustion. We are seeing the movement that we expected, however with an exhausted monthly chart, I don’t think any breakout will be able to reach its potential. The DOW is in triple exhaustion which is a rare exhaustion signal.

Other Technicals: The SPX Stochastics indicator rose to 93, overbought. The RUT Stochastics indicator fell to 59, mid-scale. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2495 and resistance at the upper band at 2585 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1466 to 1531 and price is below the upper band with the bands starting to squeeze strongly.

We are seeing the market reaching into a full “runaway” condition, where “fear of missing out” means abandoning any former patience and “wait for the dip” strategy. This usually occurs near the top of the intermediate move.

I had the following results for the 20OCT 2017 Options Cycle:

High Probability Iron Condors

No trades this period

Low Probability Iron Condors

No trades this period

Time Spreads

SPX 6OCT/3NOV 2500 Put Calendar produced a net profit of $51 on one contract, or a 3.9% net return on capital.

Cash-Secured Puts/Covered Calls

NUGT 6OCT $30 puts created a profit of $140 on 5 contracts, or a .93% return on capital.
NUGT 13OCT $31 puts created a profit of $195 on 5 contracts, or a 1.26% return on capital.
NUGT 20OCT $32 puts created a profit of $140 on 5 contracts, or a .88% return on capital.

“Whale” Trades

SPY 27OCT 255/256 Vertical Call Spread was entered for an $.18 debit, and closed for a $.33 credit. That gave me a profit of $110 on ten contracts, or a 55% return on capital.
AAPL 3NOV 155/157 Vertical Call Spread produced a profit of $225 on 5 contracts, or a 36.6% return on capital.
LOW 20OCT 79.5/80.5 Vertical Call Spread produced a $180 profit on 10 contracts, or a 41% return on capital.

Swing Trades

None this cycle

Hindenburg Positions

SPY OCT17 222 long puts expired for a net $86 loss.

Earnings Trades

None this period.

SPY EM Fade/Target

SPY 6OCT 252.5/253.5 debit put spread created a $185 loss on 5 contracts.

Lessons Learned from this cycle:

The trend continues. I thought we did a good job of NOT trying to “force” our will on the market and let it play out on its merry trip north. Most of our trades were long delta through either short puts or call debit spreads. The one non-directional trade that I took through the SPX calendar spread was a “squirmer” in that we KNEW that we would see yet another long leg higher.

We will continue to play this “quiet and trending” market with little volatility in the manner that it wants to be played, which is long delta with as little time risk as possible.

With the current price of stocks perched at all-time highs, we must be cognizant of risk to the downside, especially when we have seen no material correction since January of 2016. We are living through 2013 all over again (or the summer of 2015 or 2016) and we must remain patient and not “press” the market for opportunities that are there but unwise to pursue. I will stay with risk-defined spreads, selling premium on stocks that I would be happy to own at low prices, look for brief consolidations to sell against, and patiently wait for the price to seek a deeper range so that I can start to sell vertical put spreads on the SPY/IWM.

There was little new information about this market provided to us this cycle. There is no evil upside conspiracy, there is just too much money looking for yield in a world of very low rates and few investment alternatives. Trade only the market that you see, not the one that you think should materialize.

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.

I would need to see a SIGNIFICANT pullback to make me want to initiate this strategy again. Those selling call spreads are screaming in pain once again.

I have no positions in play. It makes no sense to pursue an order with this strategy until we see normlization in the price action.

I have no remaining positions. This is normally a perfect time to be selling calendar spreads against the RUT or SPX due to the exhaustion levels, however with my most recent experience with them in September, the effort was barely worth the hassle since we’re selling 6% vol and buying 7.5% vol against it. I might target higher IV underlyings to overcome this, at the risk of seeing greater movement.

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 NOV $18 calls for $.22
F NOV17 $11 Puts (9/18) were entered for a $.19 credit. I also have the F 15DEC $11 puts that were sold for $.12 (10/16).
CHK DEC17 $3.5 puts were sold for $.19 credit. I also own the CHK 17NOV $4 puts (10/9) for a $.20 credit. I would rather roll positions than take the assignment like this, given the choice.

I will sell the 27OCT NUGT $31 puts for at least a $.31 credit on Monday morning, and then immediately placing a $.10 debit limit order GTC to close the position. I think that there is a good chance that Gold prices will fluctuate sideways into the ECB announcement later this week, as well as the next FOMC policy release next week. If the price dives lower into Monday morning, then I will sell a lower strike price, at whatever strike level pays me at least a 1% return.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – Looking for the next 8/21 ema entry. The last entry was at the end of August.
RSI(2) CounterTrend – I will continue looking for additional setups as long as markets are trending higher. No signals right now..
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.

Bitcoin and Ethereum have had tremendous weeks. The strategy for these two coins remains to be “buying the dip” and there was lots of bad news in September to buy. Right now BTC and ETH are in a consolidation due to daily exhaustion.

Please refer to the left sidebar section if you’d like to get caught up on “FAQ” -style intro videos.

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.”

Here is the most recent video which is “Top Five ICOs for October”

Viewing the SPY from the current Friday closing price at 257.11, there is a +/- 2.258 EM into this Friday. This has been a very “normal” EM lately of about 20 SPX points per week. Last week, the price closed within inches of the 257.19 upside EM target but was not “fade-able.”

The EM targets for this Friday’s close is 259.37 to the upside, and 254.85 to the downside.

With markets at exhaustion, I would anticipate a continued consolidation week. I will fade either target being tested.

I am relabeling this section the Ratio Butterfly strategy.

The DOW is about as exhausted on all timeframes as any chart that I have ever seen. I would like to set up a DIA 17NOV 233/235/237 Call Ratio Butterfly against the DIAmonds on Monday mornings. This will be a small position and I’d like to see how well we can create a “fade” for the Dow.

Entry criteria are:

Using calls
17 to 50 calendar days
center strike .25 to .40 delta
ratio is 1/3/2 quantity, from the bottom, calls are long/short/long

We will exit the spread at a 60-70% level of credit received. The max risk on the trade is defined on the graph if the price goes much higher. There are no early exits, only exiting the week of expiry to avoid assignment. Also avoid dividend periods.

I am currently trialing some trades and will discuss them in the newsletter; after a few cycles, I will start adding these trades to circulation.

TOS scan code: http://tos.mx/ZsIjgu

I have the following positions:

IBB 27OCT 345/347.5 Vertical Call Spread (10/2) was entered for a $.60 debit. My goal is 100% return on this trade; at the present time it has failed its latest flag so I might look for any value that I can harvest from this position.

Probably a little late to pound on the Whale trade with daily index charts at exhaustion, unless we pick on Tech.

The best setup from this weekend is OKE; a break above $57.15 would cause me to go long, however earnings are on 10/31. XME and TIF also look good.

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.

Frankly, 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

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

SPY JAN18 229 long puts (10/11) – i entered this position for a $1.19 debit.