Daily Market Newsletter

December 10, 2016

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Market Commentary

Most of us talk with reverence about the occasional “black swan” that hits the markets, and it’s always the “swan” that hits to the downside. Recent examples of the Swan have occurred in October 2008, May 2010, August 2011, and August 2015. But I think we’re seeing the emergence of an UPSIDE black swan after the election last month. We’re now seeing “panic buying” of assets into year-end.

I’ve talked about this many times….how the “pain” of watching an upside move leave the station without you being on board, is actually greater than that of taking a “stop” on a live position. The stop-out inflicts a brief burst of pain, but the rally that goes on without you will make you lose sleep and generally incites traders to do things that they otherwise would not, such as “panic and buy” with the price near a top. If too many do that, as they usually do all at the same time in herd behavior, then that action exhausts the buyers temporarily and causes an “air pocket” to develop, marking the top. You’ve heard other traders tell each other, “if you see me buying, take the other side” and there might be a grain of truth to that.

Myself, I’m not going to join the rest of the herd denouncing this rally, nor trying to attach meaning to it. The price is simply in accumulation mode for a very real, meaningful reason after wandering in an economic daze for years, seeking direction from a body of academics. Real honest-to-goodness supply and demand….we have not seen this in YEARS and quite honestly traders and investors are frozen with paralysis in the prospect of actual, measurable growth. Don’t chase it, but don’t fight it.

There is no backup link to this weekend’s video. If the above video does not play, make sure that you have Flash installed.

Offensive Actions

Offensive Actions for the next trading day:

I’m going to set up the C 23DEC/30DEC Call Diagonal on Monday; please see “time spreads” 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 that we already have in place .
I will close my 28DEC SPY vertical spread; it’s already up by 500% as the expected move has been hit in a week vs. a month.

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 slightly above average Friday. Breadth was mixed and diverging with +96 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 fourth 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 rose 3.44% to 12.64, back inside the bollinger bands. The RVX rose 2.41% to 17.83 and is back inside the bollinger bands.

Fibonacci Retracements: Fibs (retracements and extensions) are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with no overhead resistance. The RUT has support at RUT 1300 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 still charged with a reading of 45. The Weekly chart is declining with an energy reading of 48, due to the recent breakout. The Daily chart is showing a level of 38 which is at technical exhaustion for the second day in a row. We’ll likely see another short consolidation at this level soon.

Other Technicals: The SPX Stochastics indicator fell to 75, below overbought. The RUT Stochastics indicator flattened at 70, 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 2175 and resistance at the upper band at 2240 and is above the upper band. The RUT is outside the Bollinger Bands with its boundaries at 1275 to 1384 and price is above 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 this week 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’m seeing a setup now on Citigroup, one of the banksters. The price has rocketed up to hit the $60 level with exhaustion on both the weekly and daily charts. I show that we could set up the C 23DEC/30DEC 58.5/60.5 Call Diagonal spread for close to a $1.00 credit given Friday’s closing prices. Will the price hold at $60? We have no way of knowing but I am willing to risk $100/contract to find out.

Understand that I might have to move the strike prices slightly to accommodate gaps on Monday morning. If the price happens to gap higher than the 60.95 level then I will want no part of this trade.

Remember, I’ll give this trade a “viking funeral” on entry, setting it on fire as I push it off from shore, and assuming a complete loss. Only when I “release” this trade can I effectively manage it.

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.
RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 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. I will close this position on Monday.

Please note that I’m going to close the vertical spread on Monday. It’s already up 500% in value and the expected move has been hit five days into the trade, with another three weeks to go, so it does not make sense to hold further, and it’s already hedged a full loss on the Iron Condor so it’s job is done.

I liked EFA for a whale trade on Monday but unfortunately, the options are somewhat poor/illiquid.

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.