February 29, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
Afternoon selling left the markets somewhat vulnerable today, printing the third straight monthly decline. What was really unusual was that Oil was up today, however most S&P sectors went in the red modestly, lead by Healthcare.
Another way to look at this, however, is that the S&P daily chart had entered the “exhaustion” zone below 38.2 that typically is near the end of a straight-up rally like we’ve seen. In this weekend’s video I made the case for a short pause this week, and that makes even more sense for the market in light of Friday’s ever-important Jobs report.
I have removed the research on Senator Sanders’ tax plan as I believe that HRC will be the presumptive nominee for the Democratic party after tomorrow’s results. I think that the Market has yet to figure out who could be at the helm for the US come next January, and this uncertainty will continue to add volatility to markets until the outcome has a better probability attached to it.
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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, and I added another cycle of short SSO puts; please see the “stock” section below for more discussion.
- We now have the SPY APR Iron Condor in play with about 380 points of width at SPY 168/170 on the downside and 208/210 strikes on the upside.
- I entered a short-term SPY Calendar Spread on Monday; see “Time Spreads” section below.
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; we need to be on guard for a long duration of heavy “realized” volatility up and down through the rest of this year.
- The MAR SPY spreads are a huge distance OTM and look good. If the SPY 200 level does not hold we’ll have to keep our eye on the call spreads but time is moving quickly.
- The cash-secured put positions are doing exactly what I want them to do.
- We got started with our APR HP Iron Condor offense last week; I do not have any defensive actions required right now.
- I will describe the defensive strategy for today’s SPY Time Spread in the “Time Spread” 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 below average today. Breadth was weak with 156 S&P advancing issues vs 294 declining.
SPX Market Timer : The Intermediate line flattened inside the Upper Reversal Zone, still showing a Bullish Bias. The recent bearish clusters were a leading signal for today’s pause. No other leading signals now.
DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term downtrend, an intermediate uptrend, and a short-term uptrend. The Dow is in an intermediate uptrend and short-term downtrend.
VIX: The VIX rose 3.74% to 20.55, inside the bollinger bands. The VIX ratio is 1.12 and still above the mean. The RVX rose 2.43% to 23.19 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 50% fib is at SPX 1947 (which was previous resistance) was briefly punched through last week but appears to have held as resistance for now.
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 65. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 47, and is starting to recharge due to recent chop. The Daily chart is showing a level of 37 and is now showing technical exhaustion after the strong, linear move off of the 1810 low. The Intraday chart is just going to follow the higher-timeframe energies at this point. The market has the potential for another large move, however we might see a pause in the short term.
Other Technicals: The SPX Stochastics indicator fell to 90, overbought. The RUT Stochastics indicator fell to 95, overbought. The SPX 5/34/5 MACD histograms fell above the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1833 and resistance at the upper band at 1976 and is below the upper band. The RUT is inside the Bollinger Bands with its boundaries at 952 to 1053 and price is below the upper 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 similar to the October 2015 moonshot.
Position Management – NonDirectional Trades
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.01.
- 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 $.01.
- 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.
- SPY APR 168/170 Bull Put Spread (2/23) was entered for a $.15 credit. The current negotiated debit exit is $.14.
- SPY APR 208/210 Bear Call Spread (2/25) was entered for a $.15 credit. The current negotiated debit exit is $.09.
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 APR position has an effective width of 380 points; we have increased the wingspan due to effective legging-in. Nothing for us to do at this point.
Offense: We are finished with MAR cycle offense and we just finished setting up APR offense. I’m expecting that volatility will “normalize” in the short run. We’ll likely see realized volatility return before long, which might coincide with our next offensive cycle
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” or “volatile/trending” 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.
I have the following position in play:
- SPY MAR2/APR2 195 Put Calendar (2/29) entered for a $2.51 debit. .
- 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 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 MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $.12. I will not “defend” this position since I am OK with assignment, but I will let the price dictate how we address it going forward . Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric. I also added the SSO APR 48 puts for a $.95 credit (2/22) and the exit debit is currently $.90.
Nothing to do with the current positions for now.
Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – This signal has crossed to the upside, however I already have a SPY swing trade in place with the SPY MAR 200/201 debit spread.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma. This signal was showing earlier in February but I will not attempt to use it.
- Squeeze/60 Minute – I’m not following this indicator/timeframe in this current market.
- 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. My target would be around the SPY 200 level on an exhausted daily chart, and perhaps also the 200ma overhead:
Waiting on the next setup….
I have the following positions in play:
- AEP APR 67.5/70 Long Call Spread (2/26) Per Thursday’s advisory I entered the AEP APR 67.5/70 long call spread for a $.30 debit.
- T APR 39 Long Calls (2/25) entered for $.12 debit; will hold seeking 100% return on capital.
- UUP MAR 26/27 long call spread (2/1) entered for $.17 debit, will hold seeking 100% return on capital.
- SPY MAR 200/201 long call spread (2/17) entered for $.20 debit, seeking 100% return at $.46 credit.
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 will likely sell call credit spreads in the APR cycle to help finance subsequent cycles of long puts; I will wait on the price to test the SPY 200 level first.
We currently have the following positions in play with this strategy:
- SPY MAR 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.
- SPY MAY 175 Long Puts – I entered this position (2/23) for a $2.54 debit per Monday’s advisory.