Daily Market Newsletter

December 7, 2016

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Market Commentary

I wrote yesterday: “Throughout the past eight years we’ve seen markets basically perform this maneuver of “this can’t keep going higher!” and then it does, for far longer than we expect before it corrects. And even the corrections are occurring overnight. Let’s not drink the kool-aid, but at the same time we can’t fight this tape.”

Quiet/Trending markets are going to continue to attract capital and punish the bears for as long as it takes before the next correction occurs, which could very well occur in early January, or the next time the President-elect says something that the market does not like. Until that point, keep riding the tape.

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Offensive Actions

Offensive Actions for the next trading day:

I will add short RIG puts tomorrow, 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.
The LP Iron Condor is risk-managed with the initial setup, however if the price is going to continue screaming to the upside, we’ll hedge the position with the SPY spreads .

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 today. Breadth was strong with +365 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened within the Upper Reversal Zone, showing a bullish bias. The Near Term line joined it in the Upper Reversal Zone today, creating a Strong Bearish Cluster for the second day in a row with the two stronger timeframes overbought .

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 3.65% to 12.22, back inside the bollinger bands. The RVX rose .06% to 17.41 and is back inside the bollinger bands.

Fibonacci Retracements: The RUT 161.8% extension is up at the 1375 level; that might represent some token level of resistance.

Support/Resistance: For the SPX, support is at 2188 … with no overhead resistance. The RUT has support at RUT 1300 with overhead resistance at about 1375. 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 still charged with a reading of 47. The Weekly chart is declining with an energy reading of 51, due to the recent breakout. The Daily chart is showing a level of 41 which is quickly approaching exhaustion. This increases the probability that we’ll see a short-term consolidation in the near future.

Other Technicals: The SPX Stochastics indicator fell to 76, below overbought. The RUT Stochastics indicator flattened at 71, below overbought. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is outside the Bollinger Bands with Bollinger Band support at 2154 and resistance at the upper band at 2231 and is above the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1253 to 1378 and price is below the upper band.

We are seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. I think this will bring about a big shift in how the market behaves.

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.

I have the following positions.

SPX 2165/2170*2230/2235 LP Iron Condor (12/5) was entered for a $2.50 credit. I will look for a $2.00 closing debit in the coming days. I do not have any “defense” for this position, it is risk-managed from day one.

This position got physically run over today and might be looking at max debit. I will hold the long vertical and fly positions on the SPY as a hedge, and we might still come out well ahead.

I have no current positions:

I didn’t see any trades that I want to take this weekend. I will look again in a couple of days.

Early this week I might consider setting up a longer-term calendar spread which has a large range to work with.

I set the risk for these such that I have no “stop” other than closing the position on expiry. If we see a quick downdraft the profits will come quickly; shooting to exit at about half of the credit value.

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, and will continue to write time against these shares on every rally. I will look to sell more calls in the next bounce higher in SLV.
GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit
TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit.

I’m going to enter short 17JAN puts at the 12 or 13 level tomorrow for RIG; I’ll use the $12 strike as long as I can get at least a $.12 credit.

Nothing to do at this time with current positions. I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover. .
RSI(2) CounterTrend – Awaiting the next signal.
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.

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge.

No positions at this time.

I have the following positions:

SPY 28DEC 224/226/228 Call Butterfly (12/5) – added this position for $.21 debit.
SPY 28 DEC 225/227 Call Vertical (12/5) added this position for a $.19 debit.

There is normally a persistent bias into year-end and we have the requisite pullback now. Both of these are “cheap” trades and I have entered them with a “Viking Funeral” mentality….there is no “stop loss” and I will only close them near the end of the year if there is value to them. Enjoy.

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.

I added the FEB puts today, just in time to see the price tack on another 30 handles.

I never got the upside “burst” to allow me to sell call spreads above SPY 230 that I wanted; now I can concentrate on selling put spreads at some level below SPY 190. Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment.

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

SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.
SPY FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.