If you thought monthly options were a lot of excitement, welcome to the world of daily and weekly options! No, we are not kidding you.
Here is an options trading idea for the gamblers out there! On the floor we used to take both sides of an option at the stock’s strike price a day or two before earnings were to be released. One of our favorite companies was Google. Why Google, because either it would be a huge win or a huge loss. Trying to guess the correct side of the trade is too risky better to take the position that reflects the truth; that you don’t know the future and don’t have ESP. We would buy the closest options that we could at the strike price closest to where the stock was trading. Say GOOG traded at 690, you would then buy the 690 put and the 690 call. The bottom line was that one side of the trade you would make enough money to pay for the failed side and some profits. Oh the good old days!
We are entering the last full week of January and it is likely that we will begin to see some portfolio adjustment. We are curious to see if the trend to large capitalizations stocks continues or if the portfolio managers are willing to risk some capital on growth. Right now, we do not see the advantage of risking cash on a possible growth bet. We would remain invested in stocks that not only pay decent dividends but enjoy a long record of having done so for years. It does appear that money is sneaking out of some safety and moving into risk. The Russell 2000 is approaching levels seen in June of 2011 the only concern here is that the volume is much lighter than seen in June. We did say sneaking in! We are grossly overbought on both the daily and the weekly charts of the Russell 2000 and would not be surprised to see this market retreat somewhat.
Bottom line is this: until the government changes the Bush policy on dividends, we would recommend staying invested in those companies. We would further advise selling options on the underlying shares to increase your returns on the investment. That said, remember premiums received on options trades do not have the tax advantage of dividends and the income will likely be treated as a short-term gain.
We frequently hear that investors are loath to sell options on their stocks because they are concerned that they will not earn the maximum amount on that security….basically, they are worried that should the stock rally beyond the sold option they will not be rewarded with that additional gain. They are, of course correct, but how much of the anticipated appreciation is wishful dreams and how much is real cash Usually, it is a hope. For those who are scared to lose the possible mother lode of cash should the stock rally skyward, we advise that after you sell your covered write, that you purchase a wing (out of the money call) above the sold strike. Voilà, you now won’t miss the mother lode! Time and time again we have seen the expectations dashed and the anticipated gain evaporate. But for those who want to play, this is one way. This isn’t rocket science!
Monday: The only interesting perhaps market moving event will be seen today when Italy explains the economic measures it intends to take to the finance ministers of the European Union.
Tuesday: The International Monetary Fund issues its outlook on the world economy, could be another piece of creative writing….humm.
Wednesday: FOMC ends its two-day meeting with an interest rate decision (I mean you really cannot go below zero) and a statement regarding policy this will occur at 2:15.
Thursday: December durable goods orders are released at 8:30 and December leading indicators and December new home sales are both released at 10:00.
Friday: 4th quarter GDP is released at 8:30 and January Michigan Sentiment is released between 9:45 and 10:00.
The US Dollar index declined in four of the five trading sessions last week. It did manage to close higher than it opened in the Friday session. We shouldn’t be surprised as this retreat in the US Dollar index. This is a rest from the rally that began in late October. There is a slight footnote, the US Dollar index did and has closed below the uptrend line for three days now. All the indicators that we follow herein continue to point lower, however; the stochastic indicator is curling to the upside as is our own indicator. Does that mean a rally is around the corner, no, it does tell us that the sell-off is losing speed and will likely reverse somewhat. The 5-period moving average is at 80.97. The top of the Bollinger band is at 82.038 and the lower edge is seen at 79.757. Further weakness is seen by the US Dollar index closing below the 20 day moving average. It seems to be headed for the lower edge of the Bollinger band. It did this once before in December of 2011 but quickly return back above that moving average line. It is possible that we will see a repeat of that but not terribly likely. We are above the Ichimoku Clouds for the daily and the weekly time-frames but are below the clouds for the monthly time-frame. The market profile chart clearly shows that as we approach 81.90 we should see a melt to the upside. Any trouble in the Euro zone should add support to this index. Trade with care and use tight stops.
The S&P 500 closed higher in the Friday session but only by the narrowest margins. Yes, Friday was an options expiration day and that did push the market around a bit. We have a doji-like candlestick on the chart which tells us that this market may be in transition and might change direction. Here is the logic, when the bears had the upper hand they were unable to press the advantage and lost ground to the bulls. The bulls did manage to recover the day’s loses but were not strong enough to make a huge impact on the market. Thus, we have a doji. We are grossly overbought and the stochastic indicator looks as though it has given us a fresh sell-signal. Our own indicator has given us a sell-signal. The RSI is overbought but going sideways and the Thomas DeMark Expert indicator flat near overbought levels. The 5-day moving average is at 1300.85. The top of the Bollinger band is at 1315.68 and the lower edge is seen at 1239.41. We are above the Ichimoku Clouds for all time-frames. We just climbed out of the clouds on the weekly chart. When looking at the market profile chart we can see some overhead supply. We changed the time-frame to a weekly chart, and that really shows us what is resting overhead. The supply ends at 1345. Above that level, very little in the way of anything is there to hold down this market.
The NASDAQ 100 is like the bunny that keeps running. Since the gap opening on the first trading day in January, this index has been positive for all but two trading days. Yes, this market is tired and exhausted but it keeps on going. The stochastic indicator has been overbought since January and has remained above 84 for the entire time. Our own indicator is issuing a fresh sell-signal. The Thomas DeMark Expert indicator is sitting on the overbought line and is flat. The RSI is overbought but continues to point higher. The 5-day moving average is at 2410.90. The top of the Bollinger band is at 2451.97 and the lower edge is seen at 2233.54. This market has been riding the upper edge of the Bollinger band for most of this rally. We are above the Ichimoku Clouds for all the time-frames. There is no overhead supply. Clear sailing to the upside once 2440 is removed.
The Russell 2000 is lagging the NASDAQ 100. The Friday session was positive and we are seeing signs of exhaustion. The stochastic indicator, RSI, Thomas DeMark Expert indicator and our own indicator are all overbought. Only the stochastic indicator is issuing a sell-signal the others are near giving a sell-signal but at this time have not done so. The 5-day moving average is at 772.96. The top of the Bollinger band is at 783.55 and the lower edge is seen at 727.68. We are above the Ichimoku Clouds for the daily time-frame but are in the clouds for the weekly time-frame. So long as this market stays above the uptrend line, we will give it to the bulls. The daily uptrend line is at 761.56 and the weekly line is at 756.30. The Russell 2000 has lots of overhead supply all the way up to 855.50. We must point out that the point and figure chart looks very positive for the Russell 2000.
Crude oil is right up against some tough resistance levels at 103.40 or so. It closed below the 100 dollar mark which was not exactly positive especially given the weakness in the US Dollar index this past week. We find the price of crude oil slightly below the uptrend line and below the downtrend line. These lines will meet in two weeks unless the market sells off or rallies. The uptrend line is at 99.35 and the downtrend line is at 101.68. We are not giving you our 5-day moving average nor are we including the Bollinger band number insomuch as we believe that the data is nor correct. For the bulls it would be important for crude oil to stay above 97.70. The point and figure chart indicates to us that we are in an area of congestion. We will soon find out which way the trade will break.
Gold traded higher in four of the past five trading days and closed the week with a rally. The 5-day moving average is at 1655.66. The top of the Bollinger band is at 1685.61 and the lower edge is seen at 1553.82. The downtrend line is at 1682.68 and the uptrend line is at 1645.20. We are below the Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and the monthly time-frame. Both the weekly and the daily indicators continue to point higher although the daily indicators are somewhat overbought with room to the upside. When looking at the monthly chart, it is clear that we remain in an uptrend. 1523.90 is the line in the sand for the bulls. It is important for this market to defend that area.
For those wishing this letter with charts, please send your requests to optnqueen@aol.com