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Do you know any trading coaches who publish the results of their trades daily, as the trade progresses? Dr. Duke analyzes the market and reviews the progress of his iron condor spreads in the Flying With The Condor™ service each day in this blog. If you have questions about any of the trades, Ask Dr. Duke.

The November 2014 position in the Flying With The Condor™ account survived the downturn in October very nicely and was closed with a 13% gain. We also dodged the flash crash on August 24th by going to cash the previous week. The Flying With The Condor™ service ended 2015 up 40%, handily beating the S&P 500 Index. Check the Track Record in the Downloads section for details.


 
Dr. Duke practices what he preaches! You are entering the "No Hype Zone"!

 

The British vote took the bookies and the market pundits by surprise. The bookies lost a bundle and now it's our turn. SPX lost $76 Friday and then gapped open lower this morning and dove to $2001, down $37 on the day. On Friday SPX broke down through the 50 dma and then broke a strong support level at $2040. Today SPX broke the 200 dma.

What about the small caps? The Russell 2000 (RUT) has fared even more poorly than SPX. That fact alone is a bearish signal. Small caps always lead, whether in a bullish trend or a bearish trend. RUT broke its 50 dma Friday and broke down through the 200 dma today, closing at $1090, down $38. But today's price action on RUT broke the August flash crash low. By contrast, SPX remains about $130 above its flash crash lows.

The question on many traders' minds is simple. Is there hard economic justification for this sudden plummet? My answer is no. The bulk of the analysis I am reading addresses the huge uncertainties and uncertain time frames for the effects to be known, much less work through the global markets. Certainly, financial stocks are taking it on the chin because of their currency exchange positions and the huge moves in the Euro and the dollar. But are all of the S&P 500 stocks suddenly worth 5% less? I don't think so. When traders are unsure of the risk and are hearing talk of the sky falling, their first reaction is to sell, watch and wait.

So how should we handle this situation? Even though I don't see the justification, I can't ignore price action. Many trailing stops are being hit. I closed the put spreads in my July and August iron condors today. When I see signs of stabilization, I will replace those spreads. Some have suggested selling call spreads above this market, but I think that is risky. Go back and study the corrections of October 2014, August 2015 and during the first quarter this year. In all three cases, the snap back rally was quick and steep. You don't want to find yourself in front of that train.

One of the things I watch is the long lower shadow on the candlesticks. That suggests many traders are buying the lows of the day and driving the price higher. But don't jump too quickly. Look back at January 20th. That was tempting, but it was a fake out. February 11th was the low. Then March was a strong month. You want to be a little late to this party. Today's lower shadow on SPX was pretty anemic. We may be in for an extended period of pain before the market calms.

In my last blog, I outlined the trade that I had developed over the past week, the iron condor on SPX with the weekly options that expired today, the 2030/2040 put spreads and the 2130/2140 call spreads. I sold the 2030/2040 put spreads on Thursday of last week, based on the strong bounce off of $2050 that day. Earlier this week, that position looked very solid and I added the 2130/2140 call spreads. I was patting myself on the back. I was confident my put spreads were "money in the bank" and the 2130/2140 calls were far enough OTM to be quite safe.

But then the Brits surprised us and the markets went crazy. When I checked the S&P futures early this morning, they were around $2025. This was after a close at $2113 yesterday - wow! SPX opened this morning and traded down to $2056 in the first ten minutes of trading and the VIX spiked as high as 26% intraday and closed at 25.8%. But intraday trading in SPX was pretty steady and calm throughout the day. This was even more surprising when considering the huge volume spike, up over 100% on the NYSE and NASDAQ. If today had been a normal trading day, I could have easily closed those 2030/2040 put spreads this afternoon for a modest debit. But not today, the market makers didn't want to let me out for a reasonable debit. I would have closed at a loss.

My credit was $325 per contract, so breakeven for the entire position was $2036.75. At that price, my 2040 calls would lose $325 per contract and the position would break-even. About 2-3 minutes before the close of trading today, SPX was above $2040 and I was poised to achieve my maximum gain. I felt like Charlie Brown as Lucy pulled the ball away, and SPX traded down to $2037.41. My 2040 puts expired ITM by $2.59, thus leaving me with a gain of $66 per contract or +10%. That was frustrating, but on a day like today, a 10% gain is blissful.

The iron condor positions in my Flying With The Condor™ service were actually helped by today's pullback; both the July and August positions are up several percent. There is a lot to be said for trading far OTM iron condor positions with 60+ days to expiration.

Where do we go from here? I don't claim to be a global economist, but I don't see what substantially changed today. By Euro Zone rules, this British exit will take many months if not a couple of years. Maybe I am missing something, but I think it was the surprise that spooked the markets. If I'm right, we will see some buying opportunities over the next few weeks. But then, maybe the sky is indeed falling...

The markets have appeared to be preoccupied with the BREXIT vote all week. The conventional wisdom has the BREXIT vote failing and markets trading higher as a result. I doubt that assessment, but I saw a trading opportunity that didn't really depend on my "knowing" the answer to BREXIT's ultimate effect on the British and world economies. 
 
Last Thursday, I was prompted to sell the SPX JanWk4 spread at 2030/2040 when I observed the large lower shadow on the SPX candlestick. SPX had traded as low as $2050 intraday, but then bounced strongly to close at $2078. I interpreted this as evidence that support had been reached. So I sold the SPX JanWk4 2030/2040 put spread for $1.30.
 
Today I looked at the position, thinking I would close today or tomorrow before the BREXIT event. We were profitable, but only by 5-7%. VIX had moved much higher since I entered the trade, closing at 21.2% today. That left me with a choice: 1) take my modest gain and close, or 2) play the BREXIT event.
 
When I was looking at this trade this afternoon, SPX had traded up by $13 to $2091 since I sold the 2030/2040 put spread. At that price, the JanWk4 2040 put had a 96% probability of expiring worthless Friday. SPX closed at $2119 on June 8th; SPX's all-time high close was 5/21/15 at $2131. Breaking that all-time high at $2131 on Friday seems highly unlikely.
 
From all of the market commentary and trade action this week, I would expect a bullish market reaction if BREXIT fails. Therefore, assuming we get a negative BREXIT vote Thursday and the market trades higher, how high may it go? The probabilities of the 2130, 2140, and 2150 calls expiring worthless Friday were 90%, 95%, and 97%, respectively at about 1:30 pm CT this afternoon when I was evaluating this trade. A prediction of SPX below $2130 at Friday's close seems pretty safe to me. So I sold the SPX JanWk4 2130/2140 call spread for $1.30 this afternoon with SPX at $2091. SPX pulled back a bit into the close at $2085. VIX also moved higher this afternoon, closing at 21.2%. Updating both SPX and VIX, the probability of the $2130 call expiring worthless is now a touch higher at 91%.
 
This should be a solid position. The JanWk4 options expire Friday at the close. SPX is now $45 below the short strike at $2130. A move of that magnitude in two days would be extraordinary. In addition, IV will most likely drop Friday morning after the BREXIT news, pulling much of the value out of both of my JanWk4 SPX spreads.
 
Now, for the rest of the story...

 

After SPX bounced so strongly last Thursday, the markets appear to have stabilized. SPX has been gaining while RUT and the NASDAQ Composite have been more flat lined. SPX closed today up $6 at $2089 and RUT lost $4 to $1154. Volatility was essentially unchanged today with the VIX rising a tenth of a point to 18.5%. This is a relatively light economic data week, but any economic data is being eclipsed by the vote in Britain about continued Euro Zone membership. We should hear the results here before the market opens Friday morning. I regularly read many financial blogs and web sites, and listen to as much of the financial cable news as I can stomach (too much politics in all of them). My general impression is that everyone is freaked about the possibility of Britain leaving the EU. Of course, both sides have their horror stories if they lose - it isn't obvious to me who is correct. But I'm just a trader, not a macro-economist. What does concern me is whether this is just another "tempest in a teapot" or if the U.S. markets are likely to make a big move either way on Friday.

When the market bounced so strongly last Thursday, I sold the weekly SPX 2030/2040 put spreads, now up 6%. I will close that position tomorrow or Thursday at the latest. SPX at $2040 is strong line of support, but Brexit may test support. At a minimum, it all makes great theater.

A short time ago, it seemed that the bullish mood of the market was being held in check by the prospect of another interest rate hike at this week's FOMC meeting. But the bears are taking control even in advance of the Fed announcement. SPX lost $17 or 0.8% today to close at $2079. Today's close was in the neighborhood of SPX's December high and just above the 50 dma at $2077. RUT closed down even more than SPX, down 1.1% at $1151. This breaks RUT's late December high and is just above the 50 dma at $1132.

Market volatility tells the story. The implied volatility on SPX, the VIX, closed today at 21%, up four points today alone. VIX opened last Thursday at 14%. From 14% to 21% in only three days is a big move. VIX rose last week as the SPX was still trading higher - a classic VIX divergence. This was the sign that weakness was imminent. Several of my iron condor positions were pressured on the top side last week, but I felt confident in not hedging those positions based on the VIX divergence.

Today's continued market weakness triggered IBD's Big Picture (Investors Business Daily) to move from Confirmed Uptrend to Uptrend Under Pressure.

No significant economic data were reported today. The big kahuna of economic data is the FOMC announcement Wednesday afternoon. Analysts are betting on the Fed delaying the next rate hike until later this year.

Let the Fed watch begin.

The prospect of the markets making new highs seems to be elusive. SPX closed at $2099, up $2, after a trading day that was mostly underwater. RUT gained $8 to close at $1163. Volatility was flat with the VIX unchanged at 14.2%. The high for SPX from last November was just above $2110, and SPX touched that level intraday in mid-April, but fell back. This latest run higher now seems to have stalled. Trading volume remains below average at 2.0 billion shares of the S&P 500 stocks; the 50 dma is 2.2 billion shares. The markets hit their lows for the day right after the open this morning and then slowly improved throughout the day. Some analysts attributed the improvement to prospects of an oil production deal from tomorrow's OPEC meeting, but it is anyone's guess what will come out of that meeting.

Economic data remain mediocre at best, even though the President began a pep rally tour on the economy in Indiana today. Yesterday, the Chicago PMI dropped from 50.4 to 49.3 for May. Today's ISM manufacturing index continues to flirt with that 50 level - the dividing line between economic expansion and contraction, coming in at 51.3 for May, up from 50.8. Over the past ten months, we have had five reports over 50 and five under fifty. Construction spending declined 1.8% in May after a 1.5% gain in April. This is the largest decline in construction spending in five years. The minutes from the last FOMC meeting, the Beige book, gave the economy faint praise as "showing moderate economic growth". The decline in construction spending has prompted several analysts to reduce their second quarter GDP estimates.

If we turn to a review of historical price data from the Stock Traders Almanac, we see that we are entering the weakest three months of the year for the markets, July through September. From 1971 through 2016, the NASDAQ Composite declines in June and hits negative numbers in September, before beginning to recover in October. Based on historical data alone, we might be well served to limit our involvement in the markets for the next couple of months. I think the uncertainties of the presidential election will add even more price volatility for the next few months. It will be hard for the bulls or the bears to take control of this market.

The S&P 500 index (SPX) closed at $2099 today, up 2.3% this week alone. The Russell 2000 Index (RUT) closed at $1150, up $11. This strong bullish week has a lot of people seeing only blue skies - is that appropriate? Today's close on SPX at $2099 is approaching the high set last month, so some traders are talking about a break-out. When we expand the SPX chart, the picture is much less bullish. The end of the dot com era ended with SPX around $1525 in March 2000. SPX beat that by a few points in October 2007 before the financial meltdown. In May of last year, SPX hit another all-time high around $2135. The bulls unsuccessfully attempted to break that high in June and July last year, but then the flash crash hit in August. But those persistent bulls, led by the Fed, pushed the SPX back to roughly $2115 last November. Should we be excited SPX is on the doorstep of that $2115 mark? My answer is no. Looking at the big picture, we see that the S&P 500 has been flat or declining since those highs in May 2015. I will want to see a couple of closes above $2135 before breaking out the champagne.

Consider the small caps in the Russell 2000 Index (RUT) and we see an even weaker picture. RUT hit its all-time high in June of last year around $1295, and it only made it back to $1205 last November, shy by 7%. RUT closed today at $1150; it would have to rally 13% to reach the 2015 high. Again, we see a similar picture to SPX in that RUT remains far off of its 2015 highs. But that deficit is much larger in the case of RUT.

Now add in today's weak GDP number for the first quarter (+0.8% growth) and the less than stellar earnings announcements of the past few weeks. And the FOMC appears to be doing its best to telegraph another interest rate hike at the June meeting. This doesn't look like the setup for the equity markets breaking out to new all-time highs.

In this environment, I think it prudent to take profits when they are available and be cautious. Consequently, I closed the June RUT iron condor from the Flying With The Condor™ advisory service this week for a 13% gain. That freed up capital to roll out and establish a new position in the August expiration. I feel safer when I have more time to hedge and adjust positions, especially in this market.

Enjoy your holiday with family and friends. But remember the true meaning of this Memorial Day. We have a lot to be thankful for due to some incredible sacrifices.

The equity markets took off higher today with SPX gaining $28 to close at $2076, near the December 2015 high just above $2080. RUT traded even more strongly, up $24 to $1135. Volatility dropped about 1.4 points to 14.4% on the VIX. Trading volume popped up as well with 2.1 billion shares of the S&P 500 trading, but remains below the 50 dma at 2.3B. Trading rose 11% on the NYSE and was up 3.5% on NASDAQ. The strength of today's move prompted IBD to shift to an assessment of "Market In Confirmed Uptrend".

New home sales may have had a role in today's strong market, as they reported an annualized rate of 619 thousand homes for April, up from March's 531 thousand. This is the highest new home sales number since January of 2008.

We closed the volatility trade we entered on ULTA in the trading group on May 6th for a 23% gain. This trade began as a diagonal call spread and was predicated on the June options rising in implied volatility as the earnings announcement approaches. Join us in our next trading group meeting June 2nd.

We have two positions open in the Flying With The Condor™ service; the Jun RUT iron condor at 1010/1020 and 1220/1230 stands at a net gain of 14% and the July SPX condor at 1860/1870 and 2170/2180 is up 10%.

The second estimate of first quarter GDP will be reported Friday. Will that pull the market back into the sideways channel? Or will that report be revised upward and energize the bulls? SPX is close to resistance around $2080, the high from last December. The next resistance level is $2110, the high from November of last year.

The markets were trading higher until the release of the FOMC minutes from the last meeting. SPX traded up to $2061 before the release, plummeted to $2034 after the release and then recovered to close at $2048, within a few cents of being unchanged for the day. RUT gained $5 to close at $1103. Trading volume on the S&P 500 was up a bit to 2.5 billion shares, above the 50 dma at 2.3 billion shares.

The minutes from the last FOMC meeting were released this afternoon and the market turned sharply lower. The minutes revealed a general discussion of the prospect of raising the interest rates at the June meeting. This surprised traders who had been expecting the next rate hike later this year. The concern is that the economy is too weak to absorb higher interest rates. However, some economists believe higher interest rates would stimulate the housing market by encouraging banks to lend. But higher rates make capital investment more expensive for business. Capital investment has remained low in spite of low interest rates. Why? Is that because of weak economic forecasts or burdensome regulations? Now fast food businesses are starting to roll out automated order entry systems to lower labor costs after minimum wage law increases. Politicians need to refresh their understanding of the Law Of Unintended Consequences.

Our June condor position on RUT in the Flying With The Condor™ service is up 6% and the July position on SPX is up 7%. The markets continue to trade sideways. RUT is trading very close to its August flash crash levels from last year. SPX seems to be trading in the channel of $2040 to $2110.

The retail sales numbers that were released today appeared to put a damper on the market, but the market has really been lackluster for the last three days. We seem to be in a "three days up and then three days down" pattern - not really, but you get the point. The market is going nowhere. SPX closed down $18 to $2047 and RUT closed down $6 to $1102. Volatility inched up almost one point on the VIX to 15.1%. Trading volume declined with 2.1 billion shares of the S&P 500 trading. Trading volume declined 8% on the NYSE and declined 13% on NASDAQ. So we have declining prices on declining volume - not very inspiring for the bulls or the bears.

Retail sales came in at a modest +1.3% for April, up from -0.3% for March. FactSet reported that internet sales were up in the first quarter (year over year) 143%. Next best was home improvement at +12%. Department stores were down 48%. The Producers price Index (PPI) reported +0.2% for April, up from last month's -0.3%. The University of Michigan's consumer sentiment survey increased from 89.7 to 95.8 in May.

The bulls have just enough strength to hold support (so far), but not enough strength to push to new highs. On the other hand, the bears can't seem to take control to break major support levels. We may be stuck in this sideways channel until after the election.

Have a great weekend.