Last Week Was 'Historical' In Options Market

Check out the video below for a full recap of this week's outlook:

Special note for a special week:

Last was a historical week where markets set near records in both directions. There are a thousand stories to cover but here are a few important points I captured:

A flash crash

on Monday. Yes, I am calling it a flash crash during which major corporations like Apple and GE lost 15 to 30% of price in seconds.

WIDE swings

where the DOW traveled 60% of its value in a week (traveled 10k points in a week). The Nasdaq dropped to a level that marked a 26% correction from the recent highs.

Major system breakdowns:

Everyday day we read heard about a serious system malfunction starting with the choppy open on Monday then NAV mutual fund calculations, etc. We will likely never know if it was the crash that caused the breakdowns OR did if the breakdowns caused the crash.

Broker failures:

I personally experienced breakdowns in my broker platforms and I wasn't alone. During the morning madness it was impossible to trade. This is an issue they need to resolve. I am now seeking a move into platforms that did not breakdown even if just to open island accounts to buy insurance during a repeat of the mayhem (if it happened once it will happen again).

The end results:

Green weekly candles in the indices. BUT not before inflicting massive and broad-based technical damage the extent of which is not yet fully clear.

Why the bounce?

Part dead cat bounce
Part China's QE announcement
Add a sprinkle of Chinese government stock market intervention including buying in the open market.
And a dash of a historic oil rip (21% off the lows) Thursday and Friday. This drags the whole complex up AND is infectious to the other sectors.

What to expect this week?

Under normal circumstances based on the open interest data from Friday, it should be boring in comparison to the week ended. BUT the wide trading ranges created price elasticity meaning that prices will find it easier to cover bigger spans in short period of time...So, What to do? Expect the unexpected!

THESE ARE UNPRECEDENTED TIMES SO NO ONE KNOWS. If we don't KNOW then we DON'T INVEST (we'd be gambling). WE MANAGE EXISTING RISK UNTIL WE GET CLARITY.
I keep the protection I bought, I fix trades that were tested and hold back from new trades until further clarity is available.
Stock replacement: If I own stock I can use stock replacement strategy to lock in profit yet still be long the stocks with a fraction of the risk.

Variables at play

in the near term:

China: No resolution yet just loose band aids at best.
Systemic uncertainty (flash crashes caused by system failures). It is hard to erase the -9% Nasdaq drop on 8/24 so traders will be once bitten twice shy and will be quick to hit the sell button at the hint of trouble next week. Traders watched a crash and recover in the span of minutes.
Rate hike: The hoopla that CNBC helped build up around Jackson Hole Fed event was much ado about nothing. I thought that the absence of Yellen was a sign that NO announcement was imminent. Indeed, Stanley Fischer said with respect to the hike "we haven't made the decision yet." I think the Fed is over thinking it. They know they need to raise rates; they know think they know most global implications; AND they should also realize that they will never know all repercussion... so they should stop thinking about it and just raise the rates - there will never be a perfect time for it.
Oil: Will the rip continue? I am skeptical that it will just based on the belief that Saudi Arabia is not yet done punishing the US oil companies. I could be wrong though.
Greece: Snap election 9/20 and now we have to deal with a new party which could jeopardize the deal in place. Grexit could come back into view.
EQE increase in speed (likely), magnitude (unlikely) or span (least likely). ECB inflation data is disappointing so if they announce a sweetened EQE then we could rally on this. BUT most experts already know that they have limited availability of bonds they can buy so the catalyst might be limited.
Technical Analysis: Technicians are expect a revisit of the lows or worse. I don't use technicals to place fundamental trades BUT I pay close attention to solid technical analysis and shore up existing open risk accordingly.
VIX still to high so uncertainty looms.

Note of caution:

The US economy catches a disease to which we have no medicine. It would take a long time to develop the cure and by then the damage would be much worse than it would've been had we had the medicine on hand. My actionable from this analogy: I have to RESPECT THIS SENTIMENT trading because even though the resulting selloff could be baseless, it can also be almost bottomless.

MY THESIS? NOTHING CHANGED IN THE FUNDAMENTALS!

Consider Apple - One of my Focus points - It dropped to 92 on 8/24. I can guaranty you that on that day, Apple didn't lose 15% worth of earning ability. Its fundamentals remain unchanged. The same goes to COST or GE and other that dropped over 20% in seconds. Here are my main thesis points which remain unchanged:

China is a mystery and a mess and likely to end badly
Europe is mired but have a EQE to try and fix it
The US recovery is ongoing and fundamentals still solid
QE ended and Fed lightening up balance sheet
Rates to rise soon
Emerging markets under pressure
Oil is depressed
Greece is an issue (been one for years)
Japan stuck in a rut
Currencies are in flux where anything can and has already happened
Geopolitics are scary (Russia & Mideast, etc.)

Ranges:

For weeks we've been cautioning against wild potential break of the ranges. Until this crash the ranges played out perfectly. The premium sellers of weekly puts got hurt the most. The risk was looming and we knew that the swings (I called it amplitude) were getting bigger which was signaling a potential violent break of the status quo. It will take a while to re-trust the ranges but we've done it before. We've gone through this before and this too shall pass. I still won't start new credit spreads until markets settle down.

2-Year Weekly Candles in SPY, QQQ and IWM:

VIX:

All time record move and now second only to the 2008 debacle.

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