Daily Market Newsletter

May 13, 2017

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Market Commentary

Every index has stalled at resistance, save for the NASDAQ which continues to power ahead based on the usual FAANGM bunch of stocks – is NOW perhaps the time that markets take a rest into the summer? Looking for rational, logical means of a catalyst leaves me empty this weekend…yeah, there’s another FOMC meeting in a month and there’s a 78.5% probability that rates will rise.

But the bigger story might be the shift in funds away from the “traditional” economy and more towards the “virtual” one. Where I live, new Amazon server farms are being thrown up one after the other to keep up with demand. Jobs are plentiful at the local Amazon distribution centers. Meanwhile, brick-and-mortar retail begins to fall hard as the freight train that we all saw coming is finally here.

While all of this overall uncertainty is in the air, only a small handful of stocks is garnering any real volume, and this is having a real impact on options trading as well. I am continuing to focus on finding very short-term edges to trade, as timing the big swings is getting to be very difficult.

If the video above does not play, please try this version of the video with embedded player.

Offensive Actions

Offensive Actions for the next trading day:

Watch for the SPY levels on the EM fade listed below.
I have a short call diagonal entry on CTRP for Monday morning, see “Time Spreads” below.
Please see “bearish/fade trades” section below for a new SPY put vertical spread.
I will put on a Whale trade for C on Monday; see “whale” 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 average Friday. Breadth was weak with -184 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, now showing a bullish bias. No leading signals today after some strong bearish clusters over the last two weeks.

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 sideways trend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term sideways trend.

VIX: The VIX fell 1.89% to 10.40, back inside the bollinger bands. The RVX rose to 15.78 and is back inside the bollinger bands.

Fibonacci Retracements: The SPX has come down to the 23.6% Fib Retracement of the entire November-March rally.

Support/Resistance: For the SPX, support is at 2320 … with overhead resistance at about 2400. The RUT has support at RUT 1335 with overhead resistance at about 1426. 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 into exhaustion with a reading of 38. The Weekly chart is now recharging quickly with an energy reading of 53, due to the recent chop. The Daily chart is showing a level of 70 which is fully-charged again. Charts are doing precisely what they need to do to work off the enormous move off of the election bottom. We will start to see movement very soon.

Other Technicals: The SPX Stochastics indicator flattened to 82 overbought. The RUT Stochastics indicator fell to 43, mid-scale. The SPX MACD histogram dropped above the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2340 and resistance at the upper band at 2420 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1360 to 1424 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. Markets are still showing perfect “Quiet & Trending” behavior regardless of what we “think” that they should do.

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 2300 level, this might be our first opportunity to sell premium against that level.

No current trades at this time. It would be great to have a higher IV to work with to set up this Short Vega strategy. If the SPX sells down to the 2360 area we might have a very good setup for a LP Condor.

I have no positions at this time:

I will set up the following trade on Monday morning:

CTRP 26MAY/2JUN 54/56 Short Call Diagonal, seeking to collect about $1 in credit. I may have to move the strike prices in or out to better accommodate Monday’s opening price.

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 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. I sold 19MAY $18 calls (3/27) against this position for a $.22 credit.
X – I added the 19MAY $25 puts (3/13) for $.37 credit. This stock is getting hammered and now looks to be party to a class-action suit. I would accept assignment if it comes to that, however my “get out of dodge” level is $16/share which is where I no longer want to be an owner of X. If assigned this week I will battle back.
AMD – I sold 19MAY $10 puts (3/27) for a $.25 credit, and 16JUN $9 puts (5/8) for $.25 credit. Bounced nicely at $10/share.
NVDA – I sold the 19MAY $80 puts (3/13) for $.90 credit.
XLF – I sold the 16JUN $22 puts (4/10) for $.25 credit and will accept assignment if the price pulls back.

If the summer pullback finally comes, I’ll have to be careful not to enter too early, and look for values/levels that correspond with “value” entries.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover – I entered the IWM 2JUN 140/142 (4/26) for a $1.01 debit, and will look for a 50% return from this position.
RSI(2) CounterTrend – I entered the CAT 12MAY 99/100 call spread (5/8) for $46, and I closed this position (5/11) for an $.80 credit. This gave me a net profit of $30/contract, or a 62.5% return on capital. COST is currently showing a signal, but I don’t like this one because the options are screwy. I will continue to look for additional setups.
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.

Earnings for 1Q2017 are just about done with; the next cycle will start in early July.

This is a new section that I’m going to start laying out trades for weekly “expected moves.” The S&P500 has done a nice job of moving pretty much to one end of the overall expected move every week. We can either speculate on that direction ahead of time using OTM spreads, or we can “fade” the price when it hits one of the EM levels.

Viewing the SPY from Friday’s close.at 238.98, there is a +/- 2.439 EM into Friday.

, the EM for this Friday’s close is 241.42 to the upside, and 236.54 to the downside.

We can also look to fade either level when touched with an ATM debit spread. At this point if the price rallies up to the 241.4 level then I will set up a 19MAY in/out put spread against it, otherwise if we see a move down to the 236.54 level we will set up a 19MAY in-out call spread

I have the following positions:

QQQ 19MAY 116 Puts (2/16) were bought for $.70 debit. Still need more downside movement to light this position up.

I am going to set up a speculative SPY vertical spread that targets the SPY 230 level by mid-July. On Monday I will set up a 21JUL 229/230 debit vertical put spread for about $.16-$.17 debit and will have greater than a 4-1 reward-to-risk on the trade should we see a quick downdraft.

I have the following positions:

TWTR 16JUN 21/22 Debit Call Spread (2/6) was entered for a $.20 debit.

I like the energy and potential of C right now, but only as a speculative flier. On Monday I will set up a 23JUN 63.5/64.5 debit call spread seeking to pay no more than $.25.

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

I will likely clear all put options if the price drops 5% from the recent highs at SPX 2400. Not sure that I can expect much more than that given the current climate.

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

SPY JUN17 215 long puts – I entered this position (3/17) for a $1.19 debit.
SPY AUG17 214 long puts (5/2) – I entered this position for a $1.22 debit.