Daily Market Newsletter
February 3, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
February Expiration
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Market Commentary
I had written on Thursday: “The ATR continues to increase which tells me that big volatility is just around the corner.” Earlier in the week I had also mentioned that between the huge events on Wednesday (FOMC, MSFT, and FB), Thursday (AMZN, AAPL, GOOGL), and Friday (Jobs) we had the opportunity for something big. Friday was a big day for “risk off” and profit taking in the midst of a rate storm as the ten-year note rate now approaches 3% after years of declining rates. Inflation might be back with a bang, not that we the public haven’t felt the effects of inflation for years. The dollar index is diving as well and the $10 loaf of bread might be right around the corner.
I know that everyone is dying to sell premium again but this might just be the opening act. Friday might have been the “shot across the bow” day that we’ve been waiting years for, but the rising ATR shows me that we might be just getting started.
For this reason I’m going to play it cool with new plays (especially credit spreads) until I start to see some established targets hit. There is no rush to attack the first red candle in months.
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 (Top Five Safest Coins for 2018) 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.
- I will enter 9FEB calls against my NUGT shares on Monday.
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 large on Friday and breadth was extremely weak with -452 advancers minus decliners.
SPX Market Timer : The Intermediate line fell below the Upper Reversal Zone, now showing a bearish bias. This chart is now showing a weak bullish cluster for the second day in a row which has been a reliable bounce in the last 2 years.
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 17.31, above the bollinger bands. The RVX rose to 20.09 and is also above the bollinger bands.
Fibonacci Retracements: the 38.2% fib retracement of the major swing in the back half of 2017 lines up with about the 2700 level on the SPX.
Support/Resistance: For the SPX, support is at 2672 … with overhead resistance at 2878. The RUT has support at RUT 1505 with overhead resistance at 1619. 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 24. The Weekly chart is now in exhaustion with an energy reading of 25, due to the recent trend. The Daily chart is showing a level of 46 which is above technical exhaustion. These recent values are the lowest readings that I have ever seen in the past twenty years.
Other Technicals: The SPX Stochastics indicator fell to 76, below overbought. The RUT Stochastics indicator flattened at 61, 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 2725 and resistance at the upper band at 2879 and price is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1547 to 1619 and price is at 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, and Friday looks to have signaled the end of that 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” as we saw at the end of last week.
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:
- 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 FEB18 $17 calls (1/2) against my stock position for $.17 credit.
- NUGT stock – I entered the NUGT 2FEB $31.5 puts for $.31 credit (1/26) and I was assigned on these puts on Friday. I will enter 09FEB $31.5 calls on Monday.
- DUST – We are out of DUST for the time being.
NUGT got slammed with the rest of the markets on Friday so I was assigned at a higher cost basis than the current price, so the position is currently under the water. The first thing that I want to do on Monday is to sell calls for this Friday at that strike price, hopefully attaining 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 – Looking for the next setup. There are several RSI(2) setups firing but I’ll wait a couple of days first.
- 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.
The crypto market continued being weak today and we might be seeing the final, eventual capitulation that is so necessary after December’s blow-off. One piece of bad news after another is a recipe for a wash-out that is overdue.
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 a recent video which is “Top Five Safest to Invest in 2018”
Viewing the SPY from the current Friday closing price at 275.45, there is a +/- 5.688 EM into this coming Friday. This is above normal compared to the average EM that we’ve seen this past year, and actually larger than last week’s.
The EM targets for this Friday’s close is 281.14 to the upside, and 269.76 to the downside.
I don’t really have any interest in fading the EM this week, because the market is in transition.
I have no current positions:
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 9FEB 271/272 Debit Put Spread (1/16) entered for a $.10 debit.
- BIDU 23FEB 255/257.5 Debit Call Spread (1/29) entered for a $1.25 debit.
No other positions at this time. The put spread might be in play this week with further downside.
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 MAR18 240 long puts (12/20) – I entered this position for a $.94 debit. We still need a lot more downside before this one will light up.