Daily Market Newsletter

Finally, the end of 2017. Like most years, I don’t think anyone accurately predicted what we’d see. In hindsight, of course, it all seems so easy to have predicted this. Skepticism was running off the charts after the election, with most of the media spreading the message: “Wait until his first tweet, boy the market’s going to crash!” Low interest rates and a generally business-friendly administration created massive demand through buybacks and general momentum buying through algorithms, and we saw a strangely quiet, strongly positive year as a result.

Here’s how 2017 stacked up on the index front:

S&P500: up 422 points on the year, or 18.74%
Dow Industrials: up 4846 points on the year, or 24.39%
Russell 2000: up 178 points on the year, or 13.07%
Nasdaq composite: up 1478 points on the year, or 27.24%

Well above average across the board, where average is 12.25% annual return on the S&P since 1923. Let’s see how those numbers compare to last year’s (2016) numbers:

S&P500: up 245 points on the year, or 12.05%.
Dow Industrials: up 2357 points, or 13.54%.
Russell 2000: up 223 points, or 19.67%.
Nasdaq Composite: up 485 points, or 9.91%

What we have seen in 2017 is the rapid unfurling of the huge amount of energy that was coiled up in the market in November 2016, which not only turned the 2016 numbers positive, but also created very strong 2017 numbers.

So that’s my read on what HAPPENED this year; what are the probabilities for 2018? I have to caveat this by saying “barring an exogenous event” which would be something unforeseen, a wild card that no one had priced into the market….then I am sticking to my forecast of a mildly positive year. Recall how 2014 produced an “average” 11.5% return after a monster 2013 that produced a 29.6% return.

But one thing will come with that “average” return – volatility. I believe that 2018 will be more volatile than 2017 was (not a high bar to jump over!) and I believe that it will start that transition in the back half of January.

I would like to make mention of my thanks to you, my subscribers, for another great year in which I get to participate and write about the thing that I still find fascinating in my now thirteenth year of producing this newsletter. I hope you all have a fantastic 2018!

There will be no newsletter on Monday due to the market holiday.

The scan for the “Cheap Stocks with Weeklys” is available here.

The RSI(2) FE scan is available here.

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

The latest crypto video (Ripple) is available here

Please sign up for our free daily crypto report 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:

SPY Expected Move levels have been derived; see the “Weekly EM” section below for actions.
See the “Whale” section for a bearish setup into late January.
See the “stocks” section below for new calls to sell against my SLV position.

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 above-average Friday and breadth was very weak with -334 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened in the Upper Reversal Zone, still showing a bullish bias. No leading signals at this time.

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 rose to 11.04, back inside the bollinger bands. The RVX rose to 14.99 and is inside the bollinger bands.

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 2652 … with no overhead resistance. The RUT has support at RUT 1505 with no overhead resistance. 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 23. The Weekly chart is now in exhaustion with an energy reading of 27, due to the recent trend. The Daily chart is showing a level of 53 which is now recovering rapidly and could power the next swing, whatever direction that is.

Other Technicals: The SPX Stochastics indicator fell to 78, below overbought. The RUT Stochastics indicator rose to 72, below overbought. 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 2624 and resistance at the upper band at 2704 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1505 to 1557 and price is below the upper band.

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.

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.I have not put this strategy into play since the 2016 Brexit reaction as the ultra-low risk premium in today’s market has not made this a wise strategy to pursue due to the inherent risk against the backdrop of super-low risk premium.

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 at this time. Not the right type of market for non-directional trades.

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 personally believe that while markets are in “runaway” mode, easy gains may be had however there is always a huge amount of risk to “buying at the top.” To combat this risk, I am targeting stocks using short puts/covered calls that offer a much lower absolute risk point, where in event of crash we can almost define our total risk by the price of the underlying. While this is not how I intend to manage risk in these positions, I view this as fundamentally more solid than trying to actively manage risk on assets that are going for $$$hundreds which have also gone parabolic.

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 19JAN $15 puts (12/4) for $.19 credit. I will sell FEB18 $16.5 calls against my stock position on Tuesday.
NUGT stock – We are once again green light on NUGT. I did not see a decent pullback to enter NUGT puts so we might be out of luck for the 5JAN series..
DUST – We are out of DUST for the time being.

Please note the above SLV position; I will look for the next pullback to sell NUGT puts.

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 – 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.

Bitcoin and Ethereum are still the ones to accumulate. I believe what we’re seeing now is the beginning of a longer corrective period, so look for dips to the bottom of a range to pick up inventory.

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 “Ripple”

Viewing the SPY from the current Friday closing price at 266.86, there is a +/- 2.907 EM into this coming Friday. This is larger than the average EM that we’ve seen this year.

The EM targets for this Friday’s close is 269.77 to the upside, and 263.95 to the downside.

I will fade either of these levels this week as long as I see some reaction to the level as it hits it. I will use front-week spreads into mid-week, and then long options on Thursday or Friday. Keep in mind that there are only 4 trading days this week so the options market is pricing in some turbulence.

I have no current positions:.

I have no new trades to add with this strategy. Markets are in a final euphoric parabolic run to the upside.

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/hvWmMl

I have the following positions:

SPY 29DEC 269/270 Debit Call Spread (12/26) entered for $.11 debit; I closed this trade for a $.09 credit on Friday, at the open.
SPY 29DEC 267/269 Debit Call Spread (12/26) entered for $.80 debit, I closed this trade for a $1.32 credit on Friday at the open, producing a $48/contract profit or a 59% return on capital.
SPY 31JAN 261/262 Debit Put Spread (12/29) entered for a $.12 debit. I will look for a minimum 100% return from this trade after commissions.

I did not do a good job last Thursday of outlining the bearish trade that I wanted to set up for the end of January; I talked about it on the video but forgot to call it out in the newsletter. I want to set up a SPY 31JAN 261/262 debit put spread which is still going for about $.15 debit.

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.
SPY MAR18 240 long puts (12/20) – I entered this position for a $.94 debit