Daily Market Newsletter
July 21, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
August Expiration
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Market Commentary
Markets have enjoyed a nice rally off of the lows over the last three weeks, but are now hitting multiple exhaustion points and here’s where things get interesting; three of the major Tech stocks that are “supporting” the market report this week and we should see some massive volatility either way. Has the market already priced in the expected good news? Or will they under-perform, as did NFLX last week? Even MSFT which did well on their latest report and jumped about 3%, has faded back down. I think that we have an excellent opportunity to see a “gap & fade” this week.
Longer-term, I am still conflicted that the least little catalyst can send the market careening down the hill, as there are so many similarities to 2007 that I’m seeing, price-wise. Both were/are rising-rate environments and the Fed always pushes it too hard for too long, and then cannot catch up after the cart tips over. The next twelve months will probably see the majority of investors on the wrong side of the tape again and again and I think it’s likely to be very difficult to read. Right now we’re still pointed higher until the daily chart prints a lower high.
A huge chunk of the S&P500 reports this week; we have the following earnings events to watch for:
- Monday: GOOGL, HAL, ITW
- Tuesday: MMM, T, UBS, VZ
- Wednesday: BA, F, FB, V
- Thursday: AMZN, AMGN, CELG, CMG,
- Friday: CVX, ABBV
- Next Tuesday: AAPL
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Check out the monthly review below for my wrap up and review of the July options cycle.
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 (Cryptocurrency Market Visualized) is available here
Please sign up for our free daily crypto report here.
If you need a video link with an embedded player you can use this link.
Offensive Actions
Offensive Actions for the next trading day:
- I’m going to set up a RUT Duration “HP” Iron Condor on Monday; see today’s video and “HP Condors” below.
- We might have a LP Condor setup on the SPX this week; I’ll cover that in today’s video.
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.
- Closing orders have been entered for all new spreads.
- A test of the 200 day SPX moving average would cause an exit from the Hindenburg strategy; see below.
- We might have to take an early exit on the XRT call spreads; see “whale” section below.
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 above-average Friday and breadth ended the day slightly weak with -158 advancers minus decliners, somewhat rare to see.
SPX Market Timer : The Intermediate line flattened into the Upper Reversal Zone, still showing a bullish bias. After the full bearish cluster this week, this study is almost showing a weak bullish cluster.
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 downtrend and short-term uptrend.
VIX: The VIX flattened to 12.86 after peaking at 50.3 five months ago, back inside the bollinger bands. The RVX fell to 14.02 and is inside the bollinger bands.
Fibonacci Retracements: The price has retraced 38.2% of the election rally; so far this has been a garden-variety correction.
Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2878. The RUT has support at RUT 1530 with overhead resistance at 1708. 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 above exhaustion, with a reading of 51, almost fully-charged. The Weekly chart is just below fully charged with an energy reading of 46. The Daily chart is showing a level of 33 which is in exhaustion due to the linear upside trend. Markets are doing PRECISELY what they must in order to restore energy that has been incredibly depleted. Extreme Range Expansion leads to extreme range contraction (big swings).
Other Technicals: The SPX Stochastics indicator rose to 92, overbought. The RUT Stochastics indicator rose to 75, almost overbought. The SPX MACD histogram fell above the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2685 and resistance at the upper band at 2840 and price is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1638 to 1717 and price is below the upper band. We recently saw 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. Markets are about to release from the sideways/volatile correction.
I had the following results for the 20JUL 2018 Options Cycle:
High Probability Iron Condors
- SPX 10AUG 2650/2660*2910/2920 Iron Condor entered for $1.85 credit and closed for a $1.00 debit. This gave us a net profit of $77/contract or 9.45% return on risk.
Low Probability Iron Condors
- SPX 3JUL 2745/2750*2810/2815 Iron Condor entered for a $2.50 credit and closed for a $1.80 debit limit. This gave us a net profit of $124 after commissions on two contracts, or about a 25% return on risk.
Time Spreads
No trades this period.
Cash-Secured Puts/Covered Calls
- NUGT 13JUL $30.5 short calls were closed early for an $85 profit on five contracts after commissions.
- NUGT ETF stock was closed for an average closing basis of $24.26/share with a cost basis of $31.50. This incurred a net loss on the underlying stock of $3366. Overall options profits on NUGT/DUST premium sales since October 2017 have totaled $3088. so overall trade strategy loss was $278 over this period.
- BAC 17AUG puts closed for net $27 profit/contract, or $270 on ten contracts.
“Whale” Trades
- IBB 20JUL 112/114 debit call spread was closed for a net $280 profit on five contracts after commissions.
- INTC 29JUN 55/57 debit call spread expired for a loss of $297 on three contracts.
- ABT 6JUL 62/64 debit call spread was closed for a loss of $195 on three contracts.
- XLV 6JUL 84.5/85.5 debit call spread was closed for a net profit of $130 on five contracts.
Swing Trades
- GLD 20JUL 128/129 call spreads expired for a net loss of $210 with five contracts.
Hindenburg Positions
No trades this period.
SPY EM Fade/Target
- 06JUL SPY 268/269*277.5/278.5 Long Iron Condor expired for a net $80 loss on two contracts.
- 20JUL SPY 272/273*281/282 Long Iron Condor was closed for an $18 profit on two contracts.
- 22JUN SPY 274/276 call spreads were an EM fade for a net $240 profit..
Lessons Learned from this cycle:
What a difficult cycle to trade; in the June report I went “all in” on the market moving back to quiet/trending, and we found that it was very unstable and was not really back to quiet/trending. I am even more conflicted by the market moving forward; I want to believe the price telling me that it’s moving into quiet/trending upside behavior again, but it’s not acting like that.
We finally kissed the NUGT position goodbye after trading it since October last year. The combination of the Gold market getting absolutely, inexplicably destroyed since the Spring and violating one of the most bullish price patterns that I’ve ever seen, makes me realize that there’s something fundamental about what we thought we knew about Gold that I don’t know anymore, and when you no longer understand the characteristics of what you’re trading, it’s time to bail on it. In addition, the drag on the leveraged ETF made it an instrument that we were never supposed to hold for any length of time, the rally up to $26 was our last shot to get off with any value remaining before it started to reverse-split again. Never again will I play a triple-leveraged ETF as a premium-writing basis stock.
Going forward, I have to believe that the market has one more big surprise under its hat before we get into the historically-bad period between August and September.
Position Management – NonDirectional Trades
I have no positions in play at this time.
Let’s put a position in play on the RUT; it has led the market higher for months but appears to be stalling and large-caps have taken over.
After-hours the position would be set up at RUT 1585/1595*1795/1805 for about a $2 credit. Keep the position size small.
Our next offensive cycle on the SPX will commence when either 1) the price continues to rally and hits daily exhaustion, or 2) we see the price sell off from this level and we hit an exhaustion level on the downside move, allowing us to enter put spreads.
I’m seeing Daily exhaustion but quite honestly, since the price is coming from a fairly large consolidation area, there might be more meat on this bone yet, so I’d rather wait until there is diminished Weekly chart energy before I set up the next duration condor. We could easily see this move hit SPX 2900 in short order with the current amount of skepticism.
I have no positions at the current time.
I may enter a LP Condor on the SPX this week if we see a spike higher which will further exhaust the SPX .
I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so there is a good shot that we can start to play these again.
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 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 currently have 17AUG $16.50 SLV calls (6/8) for $24 credit. .
No entries at this time.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – No current positions; the next crossover is showing right now. I will wait on a pullback to the 8ema before entering.
- 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.
- Swing – Looking for the next setup.
The crypto market has seen a decent rally to the upside over the past two weeks; watch the BTC/USD $7800 level to see whether or not this move is “real.”
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.”
Viewing the SPY from the Friday closing price at 279.68, there is a +/-3.217 EM into this coming Friday. This is slightly larger than last week’s 2.99 EM, which shows importance of this week’s earnings and the likelihood of volatility.
The EM targets for this Friday’s close is 282.9 to the upside, and 276.46 to the downside.
The price stayed within the EM range last week, and I feel that it will stay within the range again this week, so EM fades are green light for this week.
I have no current positions. I will consider setting up another ratio fly as price approaches resistance:
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:
- XLB 10AUG 58.5/60.5 call vertical (7/11) entered for $.91 debit. I will look for a 50% return from this trade.
- XRT 17AUG 49/51 call vertical (7/17) entered for $1.02 debit. I will look for a 50% return from this trade. If the price hits the $51 level and gets stuck there, let’s exit the trade rather than fight overhead supply.
No other trade setups at this time. We are better off looking for ETFs and Indices to play in the near term while earnings season is going full tilt.
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
- I entered the 17AUG SPY 245 puts (5/14) for a $1.41 debit. I will hold these through the next test of the 200 dma.