February 16, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Those wonderful value investors stepped in on Sunday evening and Monday to bid up the S&P futures as this “dip” in price was too irresistible to pass up. The bottom appears to be in for now, for at least a week, perhaps much more than that. My concern last week was that if the right conditions came along, a perfect storm could have been seen which would quickly push the S&P down another 100-150 points to the 1700 level, which would tick off another metric for being in a Bear Market – 20% drop from the highs.
But it didn’t….in fact we’ve already seen an 85 point rally off of the lows. Keep in mind that this is only just a “lower high” on the daily chart so far, but the 78 minute chart shows strong promise of a reversal. In today’s video I’ll map out what we might see going forward. And we might start to be very busy with trades in the near term .
I did a case study on what Bernie Sanders’ “college for all” plan would do to the retail trader. I have also reviewed Hillary Clinton’s proposed “tax the traders” plan and it does not target the retail trader, only those institutions employing HFT. I am going to keep this posted here as a “sticky” for a while until everyone’s had a chance to review the plan and educate themselves on the impact. I’m not trying to tell anyone how to vote or for whom to vote for, I just want you to understand the impact of the proposed policies to active traders.
If the video above does not play or display, please use this link
Offensive Actions
Offensive Actions for the next trading day:
- The Market has shown its hand for 2016 and the path of least resistance is “down.” This will affect how we create edge going forward; we will look to focus on call spreads above the range, and then be patient enough to sell into the fear when it arrives.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and then added SPY 206/208 call spreads to somewhat “complete” the Iron Condor for the MAR cycle. Please see the HP Iron Condors tab below for more discussion.
- I added short calls to “cover” my shares on the SLV; please see the “stock” section below for more discussion.
- Please see the “Whale Trade” section below for an expected-move entry on the SPY for the MAR cycle.
Defensive Actions
Defensive actions for the next trading day:
- We have just seen the SPX and the DOW go through a second major correction separated by only three months. I will monitor the FEB DIA bull put spreads which are the only trades remaining with any realistic risk to them, but with three days left in the cycle, we can survive just about anything and remain in these positions.
- The MAR SPY spreads are a huge distance OTM, and my debit spreads are risk-managed from day one. The cash-secured put positions are doing exactly what I want them to do. We really don’t have much else at risk right now and that will change soon..
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 below average today. Breadth was very strong with 454 S&P advancing issues vs.44 declining, confirming the bullish divergence that internals were showing on Thursday.
SPX Market Timer : The Intermediate line rose inside the Lower Reversal Zone, still showing a Bearish Bias. No leading signals at this time but this chart is now close to showing a weak bearish cluster.
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 downtrend, an intermediate downtrend, and a short-term uptrend. The Dow is in an intermediate downtrend and short-term uptrend.
VIX: The VIX fell 5.08% to 25.37, inside the bollinger bands. The VIX ratio is 1.33 and still above the mean. The RVX dropped 6.10% to 28,65 and is inside the bollinger bands.
Fibonacci Retracements: We are still tracking the Fib Retracements of the main swing lower from the 2080 level down to about 1812; the last overhead target is the 61.8% Fib retracement at about SPX 1979. The 38.2 fib is at 1915, and the 50% fib is at SPX 1947 which is where resistance came in on the last swing up.
Support/Resistance: For the SPX, support is at 1810 and 1800 … with overhead resistance at about 1950, 2000 and 2080. The RUT has support at RUT 872 and 958 with overhead resistance at 1100. The RUT, SPX, and DJI charts are now all showing a “Death Cross” with the 50ma below the 200ma.
Fractal Energies: The major timeframe (Monthly) is super-charged again with a reading of 64. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 46, and is starting to recharge due to recent chop. The Daily chart is showing a level of 51 now which was fully recharged from all of the non-linear price behavior and ready to trend again, yet is starting to reflect the recent strong, linear move down off of the 1950 high. The Intraday chart is just going to follow the higher-timeframe energies at this point, however it’s completely exhausted and unlikely to continue higher before pausing. The market has the potential for another large move right now.
Other Technicals: The SPX Stochastics indicator rose to 39, mid-scale. The RUT Stochastics indicator rose to 33, above oversold. The SPX 5/34/5 MACD histograms rose above the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1828 and resistance at the upper band at 1943 and is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 954 to 1037 and price is above the lower band.
At this point index charts are one-by-one falling into a Bear Market, so it’s now much less of a mystery as to what we’ll see occur in 2016. Even if the SPX and DJI avoid becoming a true “bear,” we will still see very volatile, difficult price action for likely the remainder of 2016. The price has now re-tested the January lows on the SPX, and now looks to be playing out as expected into a rising wedge pattern, although this has not been confirmed yet. The energy is there for this to happen. We also have to consider the possibility of a very strong rally to the upside.
Position Management – NonDirectional Trades
Here are the current positions in play with 3 trading days in the FEB cycle, and 23 trading days remaining in the MAR cycle:
- SPY FEB 177/179 Bull Put Spread (12/21) entered for a $.16 credit; per my recent advisories I rolled out to MAR SPY 153/155, and was able to close this trade on a quick pullback for a $.58 debit.
- SPY FEB 218/220 Bear Call Spread (12/24) was entered for a $.19 credit; negotiated exit debit is $.01.
- DIA FEB 143/145 Bull Put Spread (1/11) was entered for a $.16 credit with a 2x-sized position; negotiated exit debit is currently $.01. It would really take a true crash to take out this position but anything can happen, as we know.
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.06.
- SPY MAR 153/155 Bull Put Spread (1/20) was entered as a rollout entry from the FEB SPY trade for a $.16 credit with a 2x sized position. This position is currently showing a negotiated exit of $.04.
- SPY MAR 206/208 Bear Call Spread (2/2) was entered for a $.15 credit with a half-sized position. The current negotiated debit exit is $05.
Defense: I will play the current positions by Static Risk Management. The SPY MAR series has a tremendous amount of room to work with, an effective 470 point wide iron condor. .
The short-term focus is still on the FEB DIA positions. I want to do everything I can to just let the position expire OTM for max profit. The DOW is holding up better than every other index at this point, so as long as the price does not “take out” the January lows just below DIA 155, then I will do nothing.
Offense: We are finished with our FEB and MAR cycle offense. There are now 42 trading days to APR expiry and we are about a week away from truly being “green light” for that cycle. I will start to look for a quick, scary “higher low” which might be the last shake-out to the downside before the expected later-winter rally.
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” which creates difficult conditions when the realized vol outraces the implied vol. I think that these are more appropriate conditions for the HP Iron Condor, however we might get a shot here soon if the price approaches the SPY 200 level; I think we would see at least a short-term consolidation under that level.
Waiting until the market character rotates back to “quiet/trending” before playing this strategy again. This is a “long vega” strategy which works best in quiet, low-IV markets. (not what we currently have) I am also working on a Diagonal Spread strategy that we can play in a Bearish market, and I hope to have that released to this newsletter shortly. My goal is to see if we can play off of the SPY 200 level with zero downside risk.
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. I sold the FEB $26 call option for $.30 on 1/6/2016.
- VXX Stock – I own 25 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 sold the SLV MAR 15.5 calls for $.23 on 2/8. I do not want to let this position be assigned, so I would roll those calls to APR if necessary.
- SSO – I added the FEB SSO 50 puts (12/22) for a $.70 credit; exit debit is currently $.5010. I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.55. I will not “defend” either of these positions since I am OK with assignment. Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric.
Nothing planned for right now; please see my comments above on the SLV position.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – Nothing in play at this time.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma. This signal was showing last week but I will not attempt to use it.
- Squeeze/60 Minute – 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.
At this point we need to find our next “edge” to trade against; this will likely not happen until we have the next “higher low” and next “higher high” set up so that we can start to identify the trading range to position again.
No setups currently in play.
I have no positions at the current time. We are looking for the price to bounce to higher levels so that we can become more aggressive with bearish spread strategies, similar to the Bear Put Spread that we closed recently:
I would like to play a potential rally up to the SPY 200 level by MAR expiration; the SPY option chain shows about an 11 point move to MAR expiration, so tomorrow I would like to add a MAR SPY 200/201 debit call spread (buying the MAR 200 call, selling the MAR 201 call) and we should be able to enter this position for somewhere between $15 to $18/contract. I usually keep the risk on these positions to be very small in relation to my account size, perhaps .1% account risk. .
I have the following positions in play:
- MAR UUP 26/27 long call spread (2/1) entered for $.17 debit, will hold seeking 100% return on capital.
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.
On 1/19 I added MAR-cycle financing trades. I will look to enter the next cycle of puts once we see a little more upside and we see the VIX drop into the sweet spot. I would be looking at MAY 2016 puts at this point and factoring in a 10% drop. .
We currently have the following positions in play with this strategy:
- MAR SPY 158/160 Bull Put Spread financing trade – I entered this position (1/19) for a $.15 credit with a 12 contract position to help finance a future long put position.