Daily Market Newsletter
October 6, 2018Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
Bitcoin/Crypto
View Doc's New Book
October Expiration
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Market Commentary
For the past couple of weeks, the market has not “smelled right” to me, and I’ve publicly scratched my head in this space. The buyers appeared to be exhausted, which made total sense with a Weekly exhaustion signal, rallying non-stop since the July bottom when “trade wars” first became a thing. My instincts were rewarded with what has turned into a 2-day, 70 handle pullback on the S&P’s amounting to a massive 2.4% pullback.
Let’s step back from the emotion for a minute; here are the facts about today’s market as we know them:
- We just came off of a major correction from Feb-June
- Rallies out of corrections normally get pullbacks but very rarely do they spawn a follow-up correction just months later.
- Market “tops” are a process; even if this market is rolling over, it will spawn months of volatility.
- We last saw a rising rate environment from 2004-2007, and markets rallied regardless, albeit flatter.
My conclusion is that we’re overdue to see a decent pullback in the markets, which the RUT has already supplied nicely, and other markets are following. Even if this turns out to be the opening act of the market rolling over a la 2007, we’ll see larger timeframe “lower highs” first.
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.
For an embedded video player version of today’s market video, please click here.
Offensive Actions
Offensive Actions for the next trading day:
- I’ll sell SSO 16NOV puts on Monday; see “stocks” section below.
- I’ll sell RUT 16NOV put spreads for the first half of my HP Iron Condor; see “HP Condors” 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.
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 modestly weak with -160 advancers minus decliners.
SPX Market Timer : The Intermediate line fell below the Upper Reversal Zone, now showing a bearish bias. No leading signals at this time, but this chart is very close to a weak bullish cluster.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate downtrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term downtrend.
VIX: The VIX rose to 14.82 after peaking at 50.3 eight months ago, outside the bollinger bands. The RVX rose to 19.59 and is back outside the bollinger bands.
Fibonacci Retracements: The price is pulling back slightly, so we might get a chance to use Fib retracements from the latest swing. The 23.6% fib retracement of the entire bull swing on the SPX is down at 2850. The RUT has pulled down to the 38.2% fib retracement from the February lows.
Support/Resistance: For the SPX, support is at 2800 … with overhead resistance at 2941. The RUT has support at RUT 1630 with overhead resistance at 1742. 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 almost recharged again, with a reading of 50. The Weekly chart is at exhaustion with an energy reading of 36. The Daily chart is showing a level of 54 which is fully-charged again and ready to move.
Other Technicals: The SPX Stochastics indicator fell to 56, mid-scale. The RUT Stochastics indicator fell to 19, oversold. SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2877 and resistance at the upper band at 2938 and price is above the lower band. The RUT is back outside the Bollinger Bands with its boundaries at 1644 to 1747 and price is below the lower band and a squeeze is on.
Position Management – NonDirectional Trades
I have the following positions in play:
- SPY 19OCT 282/283*295/296 Long Iron Condor (9/17) entered for $.16 debit puts and $.18 debit calls for a total debit of $.34. Will look for a 200% return on each leg independently over the next month to achieve a roughly 50% return on entire trade. I am entering a $.51 closing credit GTC on each “side” until one of them “fires,” and then I’ll look to see whether it’s worth it to close the opposite side which should be just about worthless at that point.
Let’s set up a potential trade entry on the RUT that would require just a little bit more downside to fill:
RUT 16NOV 1490/1500 put spreads for $.80 credit
I’m going to keep this position SMALL and if we see the corresponding bounce off of the support test, I’ll look to complete the condor by selling above resistance.
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.
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:
- 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.
On Monday I will sell SSO 16NOV $110 puts for at least $1.10 credit, or a 1% return. If the price rallies I will find the first strike below $115 that offers a 1% return. I would be a buyer of the SSO if the price came down to the 110 level again, even if it were to set up a subsequent lower high later on.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – No current positions.
- 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 the following trades in play:
- AAPL 26OCT 220/222.5 debit put spread (9/18) entered for $1.23 debit. I will look for a 50% return on capital from this position.
The crypto market has once again peered over the edge of the abyss and survived; I would like to see a quick flush and slingshot.
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 287.82, there is a +/-4.886 EM into this coming Friday. This is significantly larger than last week’s 3.502 EM and reflects the fear/indecision in the markets over the last two days .
The EM targets for this Friday’s close are 295.60 to the upside, and 282.93 to the downside.
We can fade either marker this week; the price undercut the lower marker on Friday but it was not a good long fade.
This is a new section for this newsletter; I would like to start to carefully build some bearish positions that would be the virtual opposite of a covered call, yet I will use deep ITM long puts as the short stock substitute, and write short covered puts against those long puts.
I would like to add one additional consideration to the criteria, in that I’d like to see the price print a “lower high” first on the daily chart. Otherwise what is “high” can go “higher” as we’ve seen repeatedly over the years.
I will also publish the criteria for managing the short and long positions with this strategy. This is definitely counter-trend for now but might prove to be valuable down the road.
Right now we are seeing LOW and UNP show up on this scan. Quite honestly nothing has really faded after showing on this scan. We might need to wait for larger timeframes to exhaust themselves as it appears like 2017 is repeating again.
Previously I was seeing MRK, PFE, and LLY show up on this scan; I added the MRK 16NOV $75 puts for about $7.00/contract as a paper trade. I’ll just track this one on paper for now while we develop management rules. If the price drops I will sell short-term puts against it (on paper). We’re seeing a very bullish market right now so I would not expect this strategy to be easy to trade right now; this is why we’re getting our feet wet and looking to build inventory when things go really off the rails.
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 the following positions at this time:
- IWM 19OCT 170/172 debit call vertical (9/17) entered for $1.03 debit and will look for 50% return on this position. This one looks dead with only two weeks to go.
- NVDA 02NOV 285/287.5 debit call spread (10/1) entered for $1.22 debit, looking for 50% return on this trade. I might have missed my opportunity to make a quick 30% and get out.
No other entries at this point .
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 the following position:
- SPY 16NOV 257 Puts (8/23) entered for $1.50 debit. I would close these on a test of the 200 day moving average.
- SPY DEC 262 Puts (9/17) entered for $1.72 debit. I would close these on a test of the 200 day moving average.
No further actions.