October 26th, 2014

The Option Queen Letter
By the Option Royals

Great, Halloween falls on Friday this year! Mr. Market should have a lot of fun with that one. Besides the normal cast of witches, we have spooks and other creatures emerging. Is it going to be a trick or a treat, only time will tell? While the US economy is chugging ahead at a snail’s pace, it is far better than an economy not moving forward. As we have stated many times in the past, the US economy is the best of the bad. We would continue to focus our investments in the US markets until the Eurozone stabilize. Forget emerging markets, they will underperform in this sort of atmosphere, but when the mood changes they will play catch-up.

The market is staying on schedule, down in September with a follow through to October, rallying on the anniversary date of the 1987 crash and then onto the Christmas rally with a few stops along the way for tax selling helping us get into the January pop. The script is an annual event and for the most part, the market doesn’t deviate from that script.

Companies that rely on exports from the US to the globe will show the pain of a strong US Dollar in their end of year earnings reports. A strong US Dollar makes our products and services more expensive when compared with equal products with a weaker currency. While we are not advocating a weak currency we are suggesting that an exceptionally strong currency will bring with it problems for exporter who rely on those exports for profits. Not only is the euro weak but the European economy seems to be in trouble so where would they find the dollars to purchase our products? Perhaps that is why securities that do not rely so much on exports are doing better than those who do rely on exports.

The S&P 500 continued to rally in the Friday session adding another 14.50 points onto the average. The market continued on a steep uptrend equaling the steep downtrend leaving a “V” pattern on the chart. This rally should take us to 1968.73 where it might run into some trouble. Although the rally did begin as a short covering affair, the trend followers have jumped on board and supported this action. The indicators that we follow herein are overbought but continue to point to higher levels. The 5-period exponential moving average is 1934.70. The top of the Bollinger Band is 1997.10 and the lower edge is seen at 1844.64. We are inside the Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and the monthly time-frames. The 30 minute Market Profile chart has the most frequently traded number, not the highest volume number, at 1939.90. The highest volume number is 1954.46 which is not the TPO number. We continue to look for areas where the price is repeatedly traded in most of the brackets (30 minute period = one bracket for the purpose of this review), not necessarily the highest volume areas. We have been doing this successfully for years. The 60 minute 0.1% by 3-box point and figure chart continues to look very positive. The daily 1% by 3-box point and figure chart shows a little back peddling and a downside target of 1530.57. That said, we must remind you that the last target was generated by the most recent sell-off. We have both internal upside and an internal downside line. Although the indicators are pointing higher, we do have a concern with the declining volume. We believe that 1971.25 will offer some stiff resistance. The other thought is that the market could jump this area and avoid the resistance turning the trade to the upside where trend-following programed algorithm traders will dive into the trade. It is only a possible scenario.

The NASDAQ 100 was the best performing equity based index in the Friday session tacking on 0.82% or 32.75 handles (points) on the day. We do have signs of exhaustion and yes, we have moved right back into the upper congestion area of the chart. Another concern is the fall off in the volume in recent days. All the indicators that we follow herein continue to issue a buy-signal although most are overbought (the RSI is not overbought as yet). The 5-period exponential moving average is 3969.03. The top of the Bollinger Band is 4124.75 and the lower edge is seen at 3733.79. The bands have stopped expanding and are now flat. We have horizontal lines of resistance at 4047.75 and at the high of 4118.75, if seen will be removed as MIT (market if touched) orders are elected. We are inside the Ichimoku Clouds at the upper edge on the daily chart and above the clouds for both the weekly and monthly time-frames. The 30 minute Market Profile chart shows that the most frequently traded number was 3985.79 although another chart suggests that 3992.12 was the number. The highest volume area was 4021.66 where 9.1% of the day’s volume was seen. The daily Market Profile chart shows us that 3968.67 was the most frequently traded number on a weekly basis. The daily 1% by 3-box chart has a downside target of 3041.08 and an internal downtrend line. Yes, there are internal uptrend lines as well but it appears that at they will resolve at about 3899.97 or so. The 60 minute 0.1% by 3-box point and figure chart seems to be breaking out to the upside. The chart shows no downtrend line and looks positive. The Heikin-Ashi chart is also positive and shows a strong uptrend.

The Russell 2000 had a very modest rally in the Friday session adding 2.70 handles (points) on the day. We are below the Ichimoku Clouds for the daily time-frame in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The 5-period exponential moving average is 1105.08. The top of the Bollinger Band is 1126.56 and the lower edge is seen at 1043.72. The long term trend line is 1164.78 which is taken from the index high in June. The shorter trendline taken from the August failed high is 1116.46. The upward trending channel lines are 1129.31 and 1079.01. The horizontal resistance line is at 1126.20. All the indicators that we follow herein continue to point to higher levels and are becoming overbought. The Heikin-Ashi chart is also positive. The 30 minute Market Profile chart shows that 1110.88 was the most frequently traded price in the Friday session, but 1112.40 had the most volume for the day accounting for 14% of the day’s volume. The daily Market Profile chart shows that 1089.85-1090.60 are an important numbers to stay above. Remember we are entering the tax selling season and this index is usually the favorite spot to find a source of funds. Remember also that this index is generally the beneficiary of the January pop to the upside as many of these issues sold for tax loss are replaced 30 days later.

Crude Oil retreated in the Friday session but did not print a lower low for the day. The stochastic indicator and the RSI, although both are oversold, continue to point lower. The volume was okay not that high but then not that low either and seemed to be in the middle or average volume. We can make a case for a continued downward slope but then we can make a case for a possible upside move. The 5-period exponential moving average is 81.60. The top of the Bollinger Band is seen at 93.23 and the lower edge is seen at 77.23. The downtrend and uptrend lines meet at 80.73 on the 29th of October. That could lead to an explosive mover either to the down or the upside in crude oil. The downward trending channel lines are 80.20 and 82.48 and the upward trending channel lines are 79.74 and 83.14. There is a horizontal support line at 79.01 and a horizontal resistance line at 87.41. The 30 minute Market Profile chart tells us that the most frequently traded number in the Friday session was 81.27 but the heaviest volume was seen at 81.1. We like to draw trendlines on Market Profile charts and when we do, we noticed that there is a distinct downtrend line and an emerging uptrend line. This tells us that the market is making up its mind which way to resolve this price. It will tell us in good time, have no fear. The 60 minute 0.2% by 3-box chart shows that we are in a congestion area with a strong downtrend line immediately above us. There are two targets the first 77.92 and the second 82.9. The daily 0.9% by 3-box chart has several internal downtrend lines. It shows a previous 77.82 target and a 83.93 target. We are in a congestion area and really have no direction to clearly recommend. We will stand aside and allow the trade to tell us the next direction for crude oil. We continue to believe that OPEC isn’t unhappy with the current price of crude and believe that at these levels, fracking isn’t a viable project because the costs are too high basis the price of crude oil. Thus they believe that so long as crude oil’s price remains under pressure they will capture the trade…voila, logical thinking.

Gold rallied in the Friday session although it opened higher on the day thus leaving a negative red candlestick on the chart. The trading day was narrow and we have an inside day with a lower high and a higher low. The downtrend line drawn from the July high is 1254.49. This tells us that the bears will not become even slightly annoyed until or unless the price trades above that level. The upward trending channel lines are 1272 and 1251.76. The 5-period exponential moving average is 1236.40. The top of the Bollinger Band is 1256.34 and the lower edge is seen at 1195.59. The RSI has gone flat at almost the neutral level, but both the stochastic indicator and our own indicator are pointing lower. The 30 minute Market Profile chart tells us that 1231.20 was the most frequently traded price in the Friday session although the highest volume, 25.4% was seen at 1232.10. The daily Market Profile chart shows us that 1231.40 was the most frequently traded price for the week. The daily 1% by 3-box point and figure chart has very clear downtrend lines in place. This chart, although consolidative does not look that healthy. The 60 minute 0.2% by 3-box point and figure chart has an internal downtrend line and shows an RSI that has turned negative. Again, not exactly a clear direction to act on therefore we suggest that until a clear direction is give that you stand aside and wait.

The US Dollar index suffered a modest retreat in the Friday session losing 1.46 handles (points). The 5-period exponential moving average is 85.686. The top of the Bollinger Band is 86.516 and the lower edge is seen at 84.818. The Bollinger Bands have become somewhat narrow and are flattening. The stochastic indicator, the RSI and our own indicator are all curling over to the downside but continue to issue a buy-signal. The down trend line is at 86.021 and the uptrend line is 84.906. We are above the Ichimoku Clouds for both the daily and the weekly time-frames. We are in the clouds for the monthly time-frame. The most frequently traded price for the Friday session was 85.848 although the heaviest volume, 22.6% of the day’s volume, was seen at 85.792. The 60 minute 0.1% by 3-box chart looks as though we are stuck in an area of consolidation. There is a strong uptrend line on the chart. We are concerned with the light volume seen at these levels. The charts look as though the US Dollar index is going to back and fill or retreat slightly in the coming days. We suggest that the market will tell us where it wants to go and that will likely be slightly lower.

Risk
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment.