January 31st, 2016

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT

Friday, the last trading day for the month, hosted an aggressive rally which added 50.50 handles (points) to the March 2016 S&P futures contract. For market chartists, this was a classic breakout from a sideways 12-day pattern. The energy of the market was condensed in the previous 12-days showing us that it could neither move higher nor significantly lower. This type of action shows us that both bull and bear camps were pushing their direction and finally, on Friday, the bulls won, taking the trade and running to the upside. This release of energy resulted in a stunning upside trading day. We must keep in mind, there were two extraordinary forces as work on Friday; this was the last day to cover any short positions ahead of the weekend and this was also the last trading day for January. The last day of the month frequently is volatile as portfolio managers’ dress and undress their portfolios. Then, there are the trend-following algorithmic traders and ETFs which have to adjust their positions daily to reflect an appropriate weighting which clearly had a hand in the leg higher seen in the last hour of trading. All of this equates to: “One of these days Alice….Bang! Zoom! Straight to the Moon,” as was so eloquently stated by Ralph Kramden of the Honeymooners.

Before you get your hopes up, we are still in a trading range and all of this noise, both to the downside in the beginning of the week and the upside at the end of the week, is trading range behavior.

The central banks all over the globe are trying to control the business cycle. They are tinkering with cycles and should simply allow booms and busts to cleanse and repair themselves naturally. It is much like trying to control the tides in the ocean, while it might work on a short-term basis, it will cause an over-reaction in the long run, as was seen in the high tech bubble and the financial crisis. These were the results of tinkering, with Chairman Greenspan trying to avoid a recession; look what happened. Clearly the Federal Reserve hasn’t learned anything from these prior bubbles. We find it difficult to believe that the Fed does not understand the economy and fear that it is perhaps the politicizing of this institution that is the culprit. Each and every governor should have to go “undercover” and learn what that average workers plight is. The Fed’s accommodations have helped the rich, financial institutions and corporations to the exclusion of the average wage earner. Our system of measurement of the economy is not accurate and seems to be politically driven. It is our belief that both the Internal Revenue Service (IRS) and Federal Reserve should undergo change.

The S&P gained 50.50 handles in the Friday session and managed to break above the horizontal resistance line of about 1907. The next upside resistance line is at 1946.60. The upward trending channel lines are 1866.25 and 1932. Although it is likely that the market will continue the rally in the Monday session, there is more than a one-day mega rally needed to repair some of the chart damage done. All the indicators continue to point higher with plenty of room to the upside. It is interesting to note that the Bollinger Bands are beginning to contract. The most frequently traded price, in the Friday session, was 1896. There was a spike in the volume at 1906 and again at 1931.25. The volume for the session was average. There was a spike in volume at 2:50, when the second half of the upside sprint began. Volume trailed off into the close, with a push higher on the close itself. The 1% by 3-box point and figure chart shows us that there was a successful test of the internal upside trend line. The 60 minute 0.2% by 3-box chart is more telling and shows a clear punch through the downtrend line.

The NASDAQ 100 gained 116 handles on Friday ending the day near the top of the session. All the indicators that we follow herein continue to point higher with room to the upside. The upward trending channel lines are 4110.95 and 4278.70. These uptrend lines are somewhat flatter than those of the S&P 500. The Bollinger Bands are beginning to contract and yes, we are still in a trading range. The most frequently traded price in the Friday session was 4179. The volume spike in the NASDAQ was the same as seen in the S&P 500. The highest volume was seen at 4214 and 4238 in the Friday session. The daily 1% by 3-box point and figure chart continues to look like a chart in consolidation. The 60 minute 0.2% by 3-box chart clearly shows a breakout to the upside.

The Russell 2000 sprinted 37.90 handles higher in the Friday session, ending the session very close to the high for the day. We did break above the trading range of recent days and pushed toward the horizontal resistance line at 1047.70 which remains overhead. Both the stochastic indicator and the RSI clearly point to the upside. Our own indicator is flat and hasn’t given us a signal. We see a tri-modal curve on the Market Profile chart. The most frequently traded price was 1002.75 but the highest volume price was 1018.50 where 9.6% of the day’s volume traded. The real push higher began at 2:40, then a volume spike at 2:50 was seen and then the market went sideways into the close with the volume falling off at the end. The 11 by 3-box point and figure chart shows a clear push to the upside.

Crude oil looks as though it made a V bottom. We would expect to see the 31.71 horizontal support line tested and, perhaps, another push to test the recent lows. All of the indicators that we follow herein continue to point higher, but they are definitely losing momentum to the upside. The Bollinger Bands are beginning to contract which would indicate to us that we likely will see some backing and filling along with another retreat. The upward trending channel lines are 36.075 and 31.545. The most frequently traded price was 33.50. The daily 1% by 3-box chart shows us that crude is challenging the internal downtrend lines. The Market Profile chart shows an inside day and a normal bell shaped trading curve. This past week, Brent began to reignite its premium to WTI. So much for the Iraq fear!

Gold rallied in the Friday session trying to regain some of the losses seen in the Thursday session. Unfortunately, it did print a lower low and only regained about half of what it lost on Thursday. The stochastic indicator is clearly issuing a sell-0signal. The only good news for the gold bull was that the volume fell in both the Thursday and Friday sessions. The daily 1% by 3-box point and figure chart remains contained below the downtrend line. The 60 minute 0.25% by 3-box chart has broken above the downtrend line and looks okay. There were two most frequently traded prices in fold, 1116.50 and 1113. The chart looks as though there is a rounding bottom and a retreat might just yield a tea-cup formation. We have to see how this pans out.

The US Dollar Index closed the Friday session at 99.56, having just about recovered all that was lost during the week’s pull back. The index is currently above the 5 period exponential moving average (99.17) and the 20 period simple moving average (99.03). The Upper Bollinger band is 99.53, the lower is 98.54 and both bands are starting to expand from a period of contraction. Both the RSI and our own indicator are issuing buy signals. The index is currently bound by both an upward channel going back to May and horizontal support and resistances lines with 100.25 at the top and 97 flat as the bottom. These horizontal lines have historically been violated with resistance becoming support and vice versa. The 0.2% Daily OHLC Point and Figure Chart shows the index to currently be in an uptrend, complete with the formation of multiple internal uptrend lines. There is a clustering of upside targets at 103.89, 105.36 and 103.27. On the bear front there is a counter-trend internal trend line and a downside target of 92.34. Although this is a longer term chart, much can be gleamed from the detail. All together we expect the index to continue to move to the upside, making its way to the 100/101 mark.

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.
Past performance is not necessarily indicative of future results.
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