There will be no letter until the first week in September…… but here is a recently written article on Technical Analysis use with options.
Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, CFTe, M.S. and Jordan Young, CMT
August 7, 2016
The business cycle, the rhythmic periods of expansion and recession, is among the earliest concepts learned by those pursing the study of markets. What happened here in the US? The late 1990s were characterized by incredible growth and innovation. As the internet finally became a public phenomenon, the dot com boom led to the proliferation of an entire new industry. In like “business cycle fashion,” this growth quickly outpaced itself and, in 2000, we here in the states were faced with a potential recession. In much the same way that an athlete finds himself somewhat weaker following an intense workout, and in need of rest, the US economy needed to cool off. Alas, this did not happen. Chairman Greenspan, in an attempt to skip past the not so fun “bust” that follows the boom, lowered interest rates and kept them at an unreasonably low level for years. You probably know the rest of the story, low rates meant increased borrowing power which led to a new bubble in real estate which, in turn, finally led to the financial meltdown of 2007-2008. Oh but what about those oh so evil banks?…
The Fed stepped in to stabilize a financial system that was at risk of causing a global illiquidity crisis. This much was reasonable as the Fed had a duty to guard against financial instability. What was not reasonable was the continued practice of the same flawed policies, discussed above, that led to the crisis in the first place. The same recession adverse behavior was quickly adopted by Chairman Bernanke and today is upheld by Chairman Yellen as interest rates have been held near zero for nearly a decade. What has the result been? Sure, rates are low but corporations are not spending, not on new equipment, not on upgrades and not on new employees. Rather, corporations are leveraging cheap money to buy back shares and acquire competitors. While great for the corporate balance sheet, it doesn’t do a whole lot for the average worker.
The business cycle is important for many reasons. First, it cleans out the weak companies; they fail. After the recession caused by the business cycle low, cost efficient companies regroup and rebuild pushing the economy into a position where expansion is likely. We haven’t seen the lows of the business cycle, thus we have not seen poor businesses fail. At the same time we have not seen economic expansion because we never purged out the companies that should have failed. The US economy is an athlete in training. An athlete needs time to heal and rest in order to become stronger. The Fed has essentially fed the US economy steroids and now, facing the adverse side effects, does not know how to quit the drugs. The fact that our central bankers keep pursuing the same flawed policy, seemingly incapable of learning from their own mistakes, spells out one single word…. Arrogance. We are like a manic patient on Lithium……flat, grey and dull. With a patient we try to avoid the highs and the lows, with the economy we need the highs and the lows. The answer to part of our economic woes is to stop tinkering with the normal business cycle.
The S&P 500 rallied 18.25 handles (points) in the “Jobs” report Friday session closing the session just one handle short of the day’s high, which was a life-of-contract high. The market closed above the horizontal resistance line of 2169.75. Should we stay above that level in the Monday session we will have an upside target of 2218.75. The Bollinger Bands are contracting and warning us that there will be a violent reaction in the not too distant future. The volume was nothing to write home about, which was a bit disappointing. All the indicators that we follow herein are pointing higher with room to the upside. The most frequently traded price was 2176.50 for the day-session. The high for the session was printed at 3:15. There are two things that make us cautious; one is the lack of volume and the second is the very narrow Bollinger Bands.
The NASDAQ 100 rallied 40 handles (points) in the Friday session. It did not print a life-of-contract high in this session. All the indicators that we follow herein continue to point higher. Both the RSI and stochastic indicator are at overbought levels still pointing upward. The Bollinger Bands for this index are not contracting. The volume is somewhat disappointing. The most frequently traded price for the day-session was 4790 to 4794. The high for this index was seen at 11:05. From that point to the close, the index drifted slightly lower. This chart is in better shape than is that of the S&P 500 and we would expect that there could be more upside left.
The Russell 2000 rallied 18 handles (points) in the Friday session. The Bollinger Bands are contracting and narrow which alerts us that volatility is going to return to this index in the very near future. Both the stochastic indicator and the RSI continue to point higher. Our own indicator is pointing lower. The most frequently traded price was 1229.25 but the highest volume was seen at 1228.50 where 13.1% of the day’s volume traded. The 12 by 3-box point and figure chart continues to look positive. The day’s high was seen at 1:15 and the index drifted lower until 4:15. Stay alert and be careful. This market could change direction at any time in the next few days.
The US Dollar Index rallied 0.45 handles (points) in the Friday session. All the indicators that we follow herein continue to point higher with plenty of room to the upside. The strong “Jobs” report indicated to the FOMC that perhaps a rate increase would been called for. That said, we do not believe that the FOMC will hike rates in September insomuch as they would like to remain neutral prior to the upcoming presidential election in November. Therefore, we believe that the next hike will likely be, at the earliest, in December. We are not entirely convinced that the economy is strong enough to survive a rate hike. We continue to believe that a hike will not only strengthen the already strong US Dollar but also halt the meager economic expansion. The most frequently traded price was 96.150 and the heaviest volume was seen at 96.25 where 11.6% of the day’s volume was traded. The 10 by 3-box point and figure chart is positive.
Crude oil rallied 0.05 handles in the Friday session. On Tuesday and Wednesday, crude touched 39.19 and rejected the decline. Wednesday, Thursday and Friday were rally days although Friday session did expand the upside but only by two cents. The uptrend line is 41.06. We are still below the downtrend line at 44.97 and until that resistance level is removed, the rally will continue to look suspect. All the indicators that we follow herein continue to point to the upside with plenty of room to run. The question becomes can it run. The most frequently traded price was 41.50, all sessions.
Gold fell 24.30 in the Friday session. The Bollinger Bands are contracting which indicates to us that volatility will be returning to this market. The downward trending channel lines are 1360.05 and 1334.17. The volume picked up on the Friday downdraft. Both the stochastic indicator and the RSI are pointing lower, our own indicator is flat. The longer term uptrend line is at 1335.16. The most frequently traded price was 1342.50. If the US Dollar continues to rally, this product will retreat. Remember a strong US Dollar is deflationary and that is being reflected by gold which today is acting not as a currency but rather as an inflation hedge.
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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