Daily Market Newsletter
November 27, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
December Expiration
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Market Commentary
Markets went through quite a battle today to close higher and approach the upper EM for the week. When I look at this market I don’t see a Bull nor a Bear market, but rather one that is on the verge of a massive move that no one is really prepared for. When everyone sees the same thing, the “move” usually materializes in a way so as to harm the majority of investors.
We had the same thing in 2007; prices had just printed an all-time high and the Fed signaled that it would start to pause the rate hikes. All good, right? The market peaked in early October (sound familiar?) at all-time highs and began to plunge, piece by piece, leg by leg. In similar fashion, the monthly energy at that point was at “max.” None expected the subsequent market crash.
We also saw a similar amount of energy at the end of 2012, where doom and gloom prevailed about the Sequester as well as the “fiscal cliff” taxes kicking in. No one expected a 30% rise in the S&P over the following year.
We have a similar situation energy-wise, and sentiment-wise to 2007. In the late fall, everything was going perfectly with the economy with a zero percent chance of recession and rate hikes on the way. No one was expecting a SECOND correction in the same year…and this correction has done exactly what it needed to do, which is to finish recharging that monthly chart to epic proportions.
Based on the evidence, perhaps this will turn into a mirror of the 2007/2008 Bear. Certainly all of the linear logic available to us as well as Jim Cramer’s gut tells us to expect that. But what if the opposite occurs? What if we rally to SPX 3000 by year’s end? There is a lot of investor cash on the sideline and no one is expecting the rally.
I, for one, am glad to be out of the 7DEC and 21DEC SPX positions with a profit. The next opportunity for us appears to be a test of the upper EM for the week, which coincides with a gap fill.
There are two huge events on the horizon that will cause markets to re-price assets:
- G20 Summit – This meeting starts officially on Friday this week and will carry through the weekend. Expect lots of volatility due to posturing prior to the meeting. Can the US work out a trade deal without cratering the markets?
- FOMC – The next Fed meeting is 19 December. Chairman Powell wants to continue raising rates and there is a 79% chance of that happening next month.
Here is the current scorecard:
- S&P is down ~337 points or 11.46%
- Dow is down 2830 points or 10.5%
- /NQ is down 1279 points or 16.55%
- RUT is down 283 points or 16.3%
What is our approach to trading this market, which has once again moved into a “Sideways/Volatile” character?
- Sell credit spreads/create iron condors on the SPX into relative extremes, beyond the current range of movement.
- Establish long iron condors when the price shows potential of moving a great distance in the near future.
- Exercise caution with long stocks/short puts as we see the 50/200 death cross hit each index
- Look to establish debit spread-based swing trades against sentiment extremes, and/or EM boundaries
Markets are at a very important tipping point going forward; be mentally nimble enough to allow the price to go either way from here.
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.
Please sign up for our free daily crypto report here.
An embedded flash video is available here.
Offensive Actions
Offensive Actions for the next trading day:
- I will look to enter the SSO (stock) long on a wash-out low based on a single-digit number of advancing stocks in the S&P. (see “Swing” section below)
- A gap fill/upper weekly EM test would cause me to add a bearish swing trade, detailed in the “swing trade” 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.
- Closing orders have been entered for all new spreads.
- I will look to close both the 7DEC SPX put spread as well as the 21DEC SPY Iron Condor tomorrow; see HP Condors 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 average today and breadth ended the day mixed at +22 advancers minus decliners.
SPX Market Timer : The Intermediate line reversed above the Lower Reversal Zone, now showing a neutral bias. No leading signals at this time .
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term uptrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate downtrend and short-term downtrend.
VIX: The VIX rose to 19.02 after peaking at 50.3 ten months ago, inside the bollinger bands. The RVX fell to 22.66 and is back inside the bollinger bands.
Fibonacci Retracements: The price broke the 61.8% fibs on the bounce back up showing that a re-test of the bottom is likely; NQ has undercut the October lows and the SPX is close.
Support/Resistance: For the SPX, support is at 2600 … with overhead resistance at 2816 and 2941. The RUT has support at RUT 1436 with overhead resistance at 1742. Three major index charts that we follow are now showing a Golden Cross with the 50 day moving average above the 200 day average (SPX/DJI/NQ). The Russell has printed a Death Cross with the 50ma crossing below the 200ma; this can be a leading signal for a true Bearish move.
Fractal Energies: The major timeframe (Monthly) is super-charged again, with a reading of 64. The Weekly chart has an energy reading of 48. The Daily chart is showing a level of 45 which is just below fully charged again. With the bounce back up, all SPX timeframes could be in position to support a massive move, regardless of direction. It’s very important that we get “on” the next trend when it shows, regardless which way that it goes.
Other Technicals: The SPX Stochastics indicator fell to 24, almost oversold. The RUT Stochastics indicator fell to 23, almost oversold. SPX MACD histogram rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2620 and resistance at the upper band at 2814 and price is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 1462 to 1583 and price is above the lower band.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPX 7DEC 2490/2500 Short Put Spreads (10/22) entered for $.80 credit, and closed for a $.35 debit (11/27).
- SPX 21DEC 2490/2500*2950/2960* Iron Condor (11/7- 11/12) entered for $1.60 credit total, and closed (11/27) for $1.00 debit.
- SPY 21DEC 251/252*277/278 Long Iron Condor (11/26) entered for $.16 debit on the puts and $.18 debit on the call spreads. I will look for a 200% return on either side and only close one side at a time.
We closed the short SPX trades today because we were under our time limit to hold them; normally we want to be out of these positions when less than 30 days are showing. We stayed in them for a few more days as they temporarily went underwater due to the pullback.
I’ll wait until the price probes the edge of the current range before I set up the next credit spread.
I have no positions at this time. We’ll park this strategy until the next high-probability condition shows. We’ll want to see daily exhaustion on the SPX or RUT after a strong move, at the very least. This strategy works best with a quiet/trending market, and not with a sideways/volatile one.
I have no remaining positions. Calendar spreads are good for markets in quiet/trending character, so we’ll want to wait for that type of price action to show 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 a 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:
- SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level. I sold the 31DEC $15 SLV calls (10/3) for $.16.
- SSO – I sold SSO 21DEC $95 puts (11/14) for $1.02 credit. I will look to close this position for $.05 – $.10 on the next bounce up.
- CSCO – I sold CSCO 21DEC $40 puts (10/22) for $.40 credit. Looking to close this for $.05
- HPE – I sold 21DEC $14 puts (11/12) for $.23 credit and looking to close for $.05.
- BAC – I sold 18JAN $24 puts (11/19) for a $.25 credit and looking to close for $.05.
The recent trades were relatively small positions that would create a discount entry should I be assigned. I have entered $.05 GTC exit debits to close out CSCO early should we get the opportunity. If we see a death cross on the S&P, then I will cease selling puts on an ongoing basis until that signal clears.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – No setups at this point; the recent 8/21EMA cross failed, and has crossed to the downside again.
- RSI(2) CounterTrend – Looking for the next setup. Lots of these showing now, best to play these during primary uptrend.
- 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 – I have no trades in play at this time. If the price of the S&P fills the upper gap around the price level of this week’s upper EM, then I would add a 7DEC bearish debit put spread $1-wide ATM and look for a 50% return.
The crypto market continues to get hit pretty hard recently as it finally broke below support. This could be part of the final capitulation that we’ve been waiting on.
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 263.25, there is a +/-6.196 EM into this coming Friday. This is larger than last week’s 4.762 EM and reflects that this is a full week with jockeying expected into the G20 meeting. The EM targets for this Friday’s close are 269.45 to the upside, and 257.05 to the downside.
I will look to fade either EM this week; we could see one or both of them tagged this week as we approach the G20.
We did get some recent experience with this style of trading and quite frankly it’s not as easy as it sounds. Strong bull trends do not give way easily. My conclusion is that this strategy is best reserved for stocks experiencing a snap-back rally in a primary bear trend. If the market starts to print a lower high on the weekly chart then I will become more serious about this strategy.
The scan that I discussed in the 8/4/2018 video is available to download for thinkorswim here: http://tos.mx/OvdVnz I will also be adding a second Larry Connors scan to this section as well; here is the Connors Crash scan: http://tos.mx/BhHuKL
I have no positions at this time.
No other entries at this point. I would prefer to see the market stabilize first before looking long again. We will see big volatility over the next two+ months. If we are able to secure a “higher low” off of the S&P in the short run, this might be a good environment for a couple of weeks.
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. We have no positions at the current time. I have no positions at this time. I cleared out the current puts on the drop to the 200ma. I will “reload” again on the next bounce up.
I passed on the recent entry; I’m going to hold off for a little longer to see if a more complex top is created off of a higher high. Recent entries were expensive due to elevated vol.