Daily Newsletter

October 5, 2019

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October Expiration

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Market Commentary

In Thursday’s report I talked about the tightrope that markets were walking between maintaining momentum/growth, in concert with Fed rate policy. We pretty much saw a “Goldilocks” event on Friday with the Jobs report; it wasn’t a blow-out which would call question into keeping rates low/lower, nor was it a “miss” to increase doubt. In addition, the unemployment rate dropped to a 50 year low, and participation rate increased. Overall, a pretty balanced report.  

Interest rates continued to plummet and the ten year note is now paying about 1.5%. Say goodbye to savings. I continue to believe that the only game in town is with stocks, especially those paying a dividend over the ten-year. We have another “minor” Fed meeting in three weeks, and the probability for a rate cut at that event is now over 76%. The USA continues to be the best block in a bad global neighborhood. 

My continued belief is that this low-rate business will continue to push money into equities regardless of fundamentals, perhaps into a final upside blow-off. How far it goes, and what awaits us on the other side of that should not be our concern at this moment. Far too many have been conditioned by the mainstream press into worrying about things that are beyond the horizon, which is why the negativity and pessimism is so high right now, further increasing the odds of a large move. 

But that theory notwithstanding, THIS is the move that will tell us what’s next. By mid-month I think we’ll have much more clarity to the eventual outcome of this huge pending move that we’ve been sitting on for the better part of a year. 

Bank earnings kick off the 3Q2019 reporting season on Tuesday, October 15. We have a relatively light reporting week ahead of us other than Jerome Powell speaking three times. 

Short-Term Outlook: We’ve been in a massive consolidation pattern since early 2018, or almost another “horizontal bear market” like we had in 2015-2016. All that energy that’s been coiled up has to go somewhere, the policy and odds favor it to go higher, but we’ll know which price levels to respect to warn us if that energy’s going lower instead. 

Please sign up for our free daily crypto report here.

Offensive Actions

Offensive Actions for the next trading day:

  • I will enter a COST debit call spread 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

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Technical Analysis Section

Market Internals:  Volume was average on Friday with advancers minus decliners showing a very strong number of +398, not far from the highs of the day. 

SPX Market Timer : The Intermediate line has flattened below the Upper Reversal Zone and is now “Neutral.” The two weaker timeframes clustered in the Lower Reversal Zone mid-week, causing a Weak Bullish Cluster; this was a leading signal for a bounce. No leading signals at this time.

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

VIX: The VIX fell to 17.04, now back inside the Bollinger bands. The RVX fell to 20.35, and is back inside the Bollinger bands.

Fibonacci Retracements: The S&P has now undercut the 61.8% retracement from the recent August pullback, increasing the odds of “filling in the triangle” which it might have accomplished this week. 

Support/Resistance: For the SPX, support is at 2825 and overhead resistance at 3028. The DOW has support at 25500 and overhead resistance at 28399. The RUT has support at 1450 and resistance at 1600. 

Fractal Energies: The major timeframe (Monthly) is charged again with a reading of 52. The Weekly chart has an energy reading of 65, now fully-charged. The Daily chart is showing 42, almost at exhaustion from the downdraft . Larger timeframe energies are waiting on a very big move, which will start with the smallest timeframes.

Other Technicals: SPX Stochastics fell to 33, below mid-scale. RUT Stochastics fell to 22, above oversold. The SPX MACD rose below the signal line, showing an increase/reversal in positive momentum. The SPX is above the lower bollinger band with the range 2912 to 3041. The RUT is back inside the bollinger bands with the range 1477 and 1606. 

SPX chart

Position Management – NonDirectional Trades

I have the following positions in play at this time:

  • SPY 18OCT 289/290*308/309 Long Iron Condor (9/16) was entered for a $.16 debit on the put spreads and an $.18 debit on the call spreads. The put spreads fired at our target (10/2) of $.48 which means that we made a net profit after commissions of $28/contract on the put spreads, and still hold the call spreads. I will see if any rally higher in the near term allows us to harvest some value from the call spreads.. 
  • SPY 15NOV 281/282*310/311 Long Iron Condor (9/30) was entered for a $.16 debit on the puts and $.18 debit on the calls. I will look for a 200% return on either side. Not enough gamma to get the put side to fire on the recent downdraft. 

No additional orders at this point. 

I have no positions in play:

This is not the right character of market for this strategy at this point. 

I have no current positions:

Calendar spreads are good for markets in quiet/trending character. If the market reverts back to quiet/trending, then I’ll look to continue this method; if we see the daily chart go into exhaustion I’ll set up a back week calendar. 

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:

  • SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level.  I sold the SEP $17.50 calls (8/13) for $.18 credit and closed down this position (9/5) for a $.44 debit. I will let this price chart trend as much as it wants to in the near future before writing against it again.
  • CSCO – My cost basis is now $48.80/share prior to the latest trade. I sold the JAN20 $50 calls for $1.94/contract so our cost basis could be as low as $46.86 depending on the outcome of those JAN calls.. I don’t want to see this trade below $46/share on a closing basis

No other trades at this time.  

Position Management – Directional Trades

Thoughts on current swing strategies:

  • 8/21 EMA Crossover –  The short signal has fired; I do not take these in an overall positive market. 
  • RSI(2) CounterTrend –   Per Wednesday’s advisory I took the DIA 11OCT 261/262 debit call spread (10/3) which I entered for a $.50 debit. I sold the position (10/4) for a $.75 credit which gave me a net $21/contract profit, or a net 42% return on capital after commissions. 
  • Daily S&P Advancers – Looking for the next signal to go long with single-digit advancers to close the day.
  • Swing –   None at this time.. 

Crypto got absolutely hammered last week and is testing to see how low that it can probe; support seems to be around $8k on bitcoin and $6500 below that. 

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.”

From Friday’s close at SPY 294.35, there is a +/-5.442 EM into this coming Friday; this is about the same as last week’s 5.551 EM. The EM targets for this Friday’s close are 299.79 to the upside, and 288.91 to the downside

The price obliterated the lower Weekly EM this week. I did not pursue the fade trade on Friday due to being out for surgery. (whoever designed the knee…..) Once again I would be more interested in fading the lower EM level going forward although we might not get that opportunity. 

 

I will start playing directional bear spreads once we see upside exhaustion on more than one timeframe. 

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 in play at this time:

  • MSFT 11OCT 139/140 Debit Call Spread (9/9) entered for $.48 debit and looking for a 50% return. We have to close this trade this week on any kind of positive return that we can secure. 
  • WMT 25OCT 118/119 Debit Call Spread (9/23) entered for $.50 debit and looking for a 50% return. 

 

I will enter the 15NOV COST ATM debit call spreads on Monday. These are $5 spreads so we’ll have to back down the position size correspondingly, seeking a max $2.50 debit.  

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. 

I have no open positions at this time. Skew is making OTM puts really expensive now. 

If we see a decent bounce back up I might consider reloading.