Plunging oil prices are bringing out the bears in full force. Will Santa Clause bring some relief?
Global fear over the drop in crude oil prices rattled the market last week, and overall the week ended with the biggest weekly decline in years. The DOW's 300 point drop Friday caps the worst week since 2011, and SPX lost over 3.5% for the week.
Some analysts are predicting that the seasonal rally is expected to carry the market through the current oil-related turmoil, but the fly in the ointment could be the FOMC meeting announcement next week.
Our stop loss was hit on the January SPY Iron Condor; the position was closed for the pre-set max loss of 15%, the first time we have been stopped out on the downside since entering this play into the trade plan. A summary of the position is as follows:
Trade Entry December 8:
SOLD SPY January 214 Call.
BOUGHT SPY January 219 Call.
SOLD SPY January 199 Put.
BOUGHT SPY January 194 Put.
Net Credit (all four legs): $.81
Stop Loss Debit to close (all four legs): $1.44.
(Loss:) $-63, 15% of the margin/risk of $419.
The SPY chart below tells all; the 200 support level is frightening close so next week will be key to see if the Santa Claus rally comes as expected.
SPY six month chart:
The "fear gauge" volatility index (VIX) shot up last week also, closing Friday at 21.08 up another 5 points from the previous day. The week ended with a 48% increase overall in the VIX, now in the range of October when the market dropped.
VIX six month chart:
RUT is a similar chart; not a pretty picture and also shedding over 1% Friday to close at 1152.44. I see the next support level for RUT at around 1150, so will be watching carefully as we are hoping to enter a new January RUT Iron Butterfly later next week after the FOMC announcement.
RUT six month chart:
For those of you who may not be familiar with this monthly strategy, the guidelines were most recently published on October 22, 2014, and can be found here: Link to Articles
Last month we tested a new addition to the basic Iron Butterfly setup; which was to purchase an additional long call at trade entry. The strike of the long call purchased will depend on the position deltas at trade entry; the goal is to cut deltas in half. This extra long call will keep the T +0 line a bit flatter on the upside. The Iron Butterfly is negative-delta by nature so will get hurt more quickly with a move up rather than down, so the long call will help ease the pain in an up-move.
Next week's economic news is summarized below:
8:30 am Empire State Manufacturing Survey
9:15 am Industrial Production
10:00 am Housing Market Index
FOMC Meeting Begins
8:30 am Housing Starts
8:30 am Consumer Price Index
2:00 pm FOMC Meeting Announcement
2:30 pm Chair Yellen Press Conference
8:30 am Jobless Claims
10:00 am Philadelphia Fed Survey
Position updates will be posted as appropriate.
As always, stay keen on your risk management and trade carefully,