Daily Market Newsletter

November 19, 2016

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Market Commentary

In this weekend’s report I’m going to use a little bit of long-term analysis because we *might* be on the verge of something that the market likes. There’s every indication that the new administration will be much more market-and-business-friendly than the past one. Thousands of onerous regulations could disappear with the stroke of a pen, and limiting legislation (like Dodd-Frank) could be eased over time. Could we see the second leg of a historic bull market that rose from the ashes of 2009?

I want to believe this as it looks good on the surface, but one look at the charts and my first reaction is “no way….too extended.” That’s why I’m going to use a slightly different view that might accommodate this picture….not that I’m trying to curve-fit nor predict the future, however if we see another epic run, we cannot afford to miss it because of our bias.

Without a doubt what I do believe, however, is that we’ll see increased price volatility….and perhaps even a little bit of implied vol thrown in for good measure.

That racks up another profitable month for us, out of the last 115 months; make sure that you check out the “November Results Summary” tab below to see what we did and what we learned this cycle. The fun thing about this business is that it’s always something different. The market that I started this service with in 2005 was a lifetime ago. Imagine what it’ll look like eleven years from today?

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Offensive Actions

Offensive Actions for the next trading day:

I have a call diagonal set up for MS on Monday; see “Time Spreads” section below.

Defensive Actions

Defensive actions for the next trading day:

Any vertical 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 less than average Friday. Breadth was soft with -86 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up into the Upper Reversal Zone, showing a bullish bias. After showing a strong bearish cluster for two days in a row, this study paused on Friday.

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 3.75% to 12.85, back inside the bollinger bands. The RVX fell 3.92% to 18.12 and is back inside the bollinger bands.

Fibonacci Retracements: The SPX had retraced more than 50% of the Brexit rally, but not quite 61.8% at SPX 2061. It had also retraced more than 38.2% of the full Feb-August rally. Back up to the highs now and we might start looking at extensions.

Support/Resistance: For the SPX, support is at 2080 … with overhead resistance near 2200. The RUT has support at RUT 1090 with overhead resistance at about 1300. 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 highly-charged with a reading of 54. The Weekly chart is now fully-charged showing an energy reading of 63, due to the recent chop. The Daily chart is showing a level of 40 which is starting to reflect the move to the upside, and will show exhaustion any day now.

Other Technicals: The SPX Stochastics indicator rose to 79, almost overbought. The RUT Stochastics indicator rose to 80, overbought. The SPX MACD histogram fell slightly above the signal line, showing a small fade of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2083 and resistance at the upper band at 2203 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1121 to 1335 and price is below the upper band.

We might be 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.

I had the following trades in place for the 18NOV 2016 Options cycle:

High Probability Iron Condors

No HP Iron Condors traded during this period

Low Probability Iron Condors

SPX 2DEC 2130/2135*2200/2205 Iron Condor – this 2 contract position produced a net $94 profit after commissions or a 19.2% return on risk.
GILD 4NOV 70/71*76/77 Earnings Iron Condor – this 4 contract position produces $22/contract or net $88 after commissions for a 44% return on risk

Time Spreads

No time spreads traded over this period

Cash-Secured Puts/Covered Calls

No covered calls or cash-secured puts traded during this period.

Directional Swing

QQQ 11NOV 116/118 debit put spread – closed for a net profit of $46/contract or a 51% return on capital, or net profit of $92 on 2 contracts.
SPY 26OCT 216/218 8/21 EMA debit call spread expired OTM for a net $114 loss on one contract.
BA 28OCT 141/142 debit call spread closed for a net profit of $62/contract after commissions or a net $310 profit on five contracts.
BA 28 OCT 136/137 debit call spread closed for a net profit of $32/contract after commissions or a net $96 on 3 contracts.
GILD 4NOV long put spread provided a net profit of $15 contract, or a net $60 profit on 4 contracts.
SPY 11NOV 209/211 debit call spread was closed for $32 profit after commissions on one contract..

Hindenburg

SPY NOV 197 Long Puts – expired for $157 net loss on 1 contract.

Monthly Performance Commentary – We had to get creative to manufacture a profit with this cycle. SO MUCH RISK AND UNCERTAINTY wound the market up into a ball of anxiety, and we’re seeing that uncertainty unwind to the upside right now. We had to get aggressive with some earnings trades which we had not previously done in this newsletter, and we had to aggressively pursue setups on swing/directional trades. Still a lousy market for HP Iron Condors, but we’ll adapt to what the market is giving us and simply trade along with it.

What We Did Wrong

The only really egregious error that I committed this month was to “force” the SPY 8/21 EMA long setup. Pretty much everything else worked out OK.

What We Did Right

We did the earnings trades “right.” I’m not sure that I’ll do a whole lot more of those in the next cycle, but it was fun and it produced a good result.
We did not over-trade nor generally did not “force” things into the face of massive risk.
We took what the market gave us and waiting for those setups to come to us. .

What Needs to Be Changed for Next Cycle

The market is at a very important inflection point, and may move to a new “character” very soon. If we see that character change to “risk on” then we absolutely must get more long deltas in play.

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 had the following position:

SPX 2DEC 2130/2135*2200/2205 Iron Condor (11/14) was entered for a $2.55 credit. I closed this position for a $2.00 debit exit (11/18) near the close on Friday. This gave me a net $94 profit after commissions on 2 contracts, or a 19.2% return on risk in only 5 days of hold time.

I will look for the next consolidation zone soon, and it might occur early this week.

I have the following position:

UPS 25NOV/2DEC 111/113 call diagonal (11/17) was entered for a $.97 credit. I will look to exit the position for about a 50% return on risk

I’m going to set up the following position on Monday in MS, or Morgan Stanley:

MS 2DEC/9DEC 39/41 Call Diagonal – assuming a flat open on Monday, I want to set up a $2-wide call diagonal on MS that collects about a $1 credit. If you’d like lower risk on this trade, it’s possible to set up the 39/40 spread for about a $.50 credit which risks $50 instead. I will look for about a 50% return on risk to close the trade.

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.
SSO – Waiting for the next pullback to sell puts against the SSO, preferably at the 50 level or lower. I keep threatening to sell against something else and it might be time.

Nothing to do at this time with current positions.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -We’ll look for the next crossover, which is happening now. If we see a rapid pullback that pulls the price down below the 8ema I might consider going long with a debit vertical spread.
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 no positions at the current time. Many stocks are already exhausted after moving very quickly.

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.

To remove the current series of puts, I will look for a move down to and below the SPX 2100 level.

I will be adding the next series of FEB puts this week.

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.