Daily Market Newsletter

January 28, 2017

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Market Commentary

After one week of the new administration, pundits’ ears have been collectively blown back and are struggling to comprehend what is going on. Even more stunning was a press conference where the President was……presidential. I think that we will see a lot of “Ready! Fire! Aim!” in the near future as the administration and Congress try to work together, as this flurry of executive orders cannot and should not continue.

And the Market’s reaction? Every dip is being bought, but very soon I think it should be a very normal expectation that some “catalyst” creeps up on us and spooks the market for a couple of days. Investors who have no experience with the velocity of “distribution” have some fun in store, and I don’t mean in a good way.

As impossible as it seems, I expect that this run will continue by shifting assets from one strong group into a somewhat-weaker one, and the shell game goes on. We have not seen anything in the charts to tell us that we have distribution in store for us a la 2008, and the market usually gives us a well-intentioned “warning shot” before that truly kicks in..

If the above video does not work, please try this link.

Offensive Actions

Offensive Actions for the next trading day:

Please see the “Stocks” section below for cash-secured put trades on RIG and X for Monday
Please see the “whale” section below for a longer-term whale on BIDU.
I’ll set up a debit put spread on the DIA on Monday; see “bearish” 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 about average Friday. Breadth was mixed with -95 advancers minus decliners.

SPX Market Timer : The Intermediate line rose in the Upper Reversal Zone, showing a bullish bias. After showing a strong bearish cluster for the second day in a row, this chart has paused.

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 .47% to 10.58, inside the bollinger bands. The RVX gained .97% to 16.58 and is inside the bollinger bands.

Fibonacci Retracements: Fibs are not in play right now.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2300. The RUT has support at RUT 1300 with overhead resistance at 1393. 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 42. The Weekly chart is now technically exhausted with an energy reading of 36, due to the recent breakout. The Daily chart is showing a level of 52 which is completely recharged again; we are seeing the expected short consolidation at this level but it’s not going to last much longer as the daily energy must go somewhere….looks like it’s breaking higher again.

Other Technicals: The SPX Stochastics indicator rose to 70, below overbought. The RUT Stochastics indicator rose to 45. 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 2244 and resistance at the upper band at 2299 and is at the upper band. The RUT is inside the Bollinger Bands with its boundaries at 1343 to 1387 and price is below the upper band. The Bollinger Bands are starting to squeeze, especially on the RUT.

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, but a pullback to stoke up the negativity would be a good thing to see first.

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.

If I see price drop to the SPX 2200 level, this might be our first opportunity to sell premium against that level.

I have no current positions:

I expect movement very soon so I’ll put this strategy on the shelf until I see the next signal.

I have no current positions. If I see this current move continue to the upside, I’ll start to look for exhaustion signals that line up with resistance, and then sell Weekly Diagonals again. I looked through my scans this weekend and none were quite set up.

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 I sold SLV FEB $17 calls (1/17) for $.19 credit. No action required.
GE I will look to sell MAR17 $28 puts if the pullback continues and I can receive at least a $.28 credit.
TWTR I added another ten contracts (1/3) of $13 FEB puts for $.20. I don’t care about the recent bad press.
RIG I will sell MAR17 puts against the $12 level on Monday.
X – I am going to sell the MAR17 $25 puts on Monday. This is in advance of next week’s earnings call, so more conservative investors might want to wait.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -This one is gone. Looking for the next crossover, however it will be to the downside, and the first downside crossover is usually a poor signal. .
RSI(2) CounterTrend – I’ll look for more of these in the near future..
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.

I had the following positions:

MSFT 27JAN 64/65 debit call spread was entered for a $.51 debit. I closed this position for a $.96 credit yesterday; this gave me a net $41/contract profit or an 80% return on capital.

This upcoming week is going to be one of the biggest weeks of the year with respect to 4Q16 earnings. On Tuesday some of the headliners are AAPL and XOM, Wednesday has FB, and Thursday has AMGN, AMZN, and CMG. Not doing any trades for Monday.

I have the following position:

SPY 10FEB 225.5/227.5 debit put spread (1/10) was entered for a $.79 debit. I will look for about a 50% return on capital with this position.

I am going to set up a 10MAR 200/202.5 Debit Put Spread on the DIA on Monday morning for a $1.25 debit or less. I will adjust the strike prices if we have a gap. .

I have no positions at this time.

I am going to set up a longer-term “whale” on BIDU for the APR17 cycle; I’m going to give this chart several weeks to break out of this huge pattern. I will set up the target at the expected move of roughly $194 by trading an APR17 190/195 debit call spread. I will discuss this trade in today’s video. Understand that I do not have a “stop” in this trade so if the price breaks down or does not move at all I will wave goodbye at it and not try to “mitigate the loss” via some other technique.

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.

Quite honestly, 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 FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.
SPY MAR17 203 long puts – I entered this position (12/28) for a $1.07 debit.
SPY APR17 206 long puts – I entered this position (1/27) for a $.92 debit.