The Option Queen Letter
By the Option Royals
There was no lack of excitement and volatility this past week. The ECB has now officially begun their own style of QE which is much like the QE that the FOMC ended. This will naturally depress the euro vs. the US dollar. So what does that do to trade and deflation that appears to be on the horizon? US products, because of the strong US dollar, will become too expensive to purchase. Competitive economies, with cheaper comparable products, should perk up as demand for their goods increases, helping their economies. As a result, imports to the USA will increase.
To our multi-nationals: a strong US dollar is not going to help their bottom line. Unless corporations have a unique product, they will suffer the consequences of a currency that has priced them out of the market. While US consumers will benefit from cheap products at home, their expenditures will fuel economies abroad, the ones supplying cheap goods. Here in the USA we could begin to see some layoffs due to decreased demand for our domestically produced goods. The entire equation is supply/demand. For example, the shale industry here in the USA is downsizing to reflect the shutdown of wells and future permits. That leads to layoffs in the domestic oil industry as well as industries that have popped up to service those who work in the oil industry. This slowdown in oil production here in the USA also eventually shuts down supply. When supply becomes lean, the prices go back up. Increased demand for crude will eventually be driven by demand for cheap foreign products. This demand will stimulate demand for fuel in those countries manufacturing what we purchase and, in turn, will begin to support the price of crude and push it higher…..it is one large circle with lots of ivy growing from that circle. Notice that global economies are intertwined which again demonstrates the value of studying….”intermarket analysis.”
Our comment regarding the well-advertised rate increase by our own FOMC for the spring of this year is that we believe that a rate increase is much further away than the current beliefs voiced on the Street. There is too much at risk for the FOMC to snuff out a very weak economic expansion with very light job growth. If Chairman Yellen is really concerned about the average wage earner, she will stall any rate increase that might hamper job growth and wage growth. A rate increase, here in the USA will push the value of our US dollar even higher making our products and exports even more expensive and will affect our trade balance and cause decreased income for many of our multinationals which will spill over into the jobs market……beginning to see how this ivy grows? Remember why Denmark lowered their key rate this past week….to prevent the krone for appreciating further. Then there was Canada which also cut their key rates in a surprise move likely due to the weakness popping up in the oil industry.
The S&P 500 retreated in the Friday session ending a weeklong rally with some profit taking. The index retreat was less than half of the Thursday rally and the index managed a higher high and a higher low on the day. The index declined 0.64% on the day losing 13.25 points. As we enter this coming week we are at the end of the month and expect to see some adjustment in portfolios for the end of month statements. All of the indicators that we follow herein are curling over. The RSI is pointing lower and both the stochastic indicator and our own indicator see the faster line bending lower but without issuing a sell-signal. The volume for the Friday session was a tad higher than the volume in the Thursday session. The index pierced the 2062 level by printing 2062.50 but then couldn’t hold that level and retreated. The 5-period exponential moving average is 2030.38. The top of the Bollinger Band is 2098.82 and the lower edge is seen at 1978.30. The most frequently traded price in the Friday session was 2055 but the price with the most volume was 2053. The daily 1% by 3-box point and figure chart has an old upside target of 2619.43 and a more recent downside target of 1794.71. The chart is a very positive looking chart, at the moment. The 60 minute 0.1% by 3-box chart has a downside target of 2018.67 and looks as though it is consolidating. We are above the Ichimoku Clouds for all time-frames.
The NASDAQ 100 spent the lion’s share of the trading day in positive territory and only gave up 50 cents at the end of the day. The 5-period exponential moving average is 4217.94. The top of the Bollinger Band is 4338.40 and the lower edge is seen at 4068.09. The candlestick left on the chart, as a result of the Friday session, was a doji candlestick. This shows indecision on the part of the market players and can signal a change in direction. The stochastic indicator and our own indicator continue to looks positive; however, the faster lines are curling down and could cross the slower lines issuing a sell-signal. The RSI is flat. The volume on the day was slightly better than the Thursday session and for the most part was positive. The most frequently traded price was 4260 but the heaviest volume was seen at 4270.50. We are above the Ichimoku Clouds for all time-frames. The daily 1% by 3-box point and figure chart continues to look very positive. The 60 minute 0.1% by 3-box point and figure chart is also positive.
The Russell 2000 gave up 5.30 handles (points) in the Friday session. This market has been jagged, showing more indecision than the other indices. Only one of the sessions, Thursday, was positive. The RSI has turned lower and indicates that lower prices are on the horizon. The stochastic indicator is curling over to the downside but no change in signal has been issued. If the index were to rally we see 1199.50 as a major problem. There are two ways to handle a problem of supply; one is to simply jump above that level and the second is to hit the supply head on. We are not sure which course this index will take. The 5-period exponential moving average is 1176.69. The top of the Bollinger Band is 1218.52 and the lower edge is seen at 1144.88. We remain above the Ichimoku Clouds for all time-frames. The most frequently traded price was 1187. This index looks more range-bound than the others.
Crude Oil retreated in the Friday session continuing its movement to the downside. The recent low seen on January 13, 2015 is 44.64. It is possible and likely that this number will be removed just to see if there are further sell-stops below that low and to see what the momentum to the downside will look like. Right now, we have been trudging sideways since that low was printed. The stochastic indicator, the RSI and our own indicator all continue to point lower. The 5-period exponential moving average is 46.56. The top of the Bollinger Band is 56.67 and the lower edge is seen at 43.02. The good news at the moment seems to be that the momentum to the downside has abated; the bad news is that the low sits on the chart like a delicious chocolate just waiting to be tasted. For the bulls, these are scary times, for the bears these can be scary times should buying in a depressed market appear. We are below the Ichimoku Clouds for all time-frames. The most frequently traded price in the Friday session was 47.00. The daily 1% by 3-box point and figure chart has a downside target of 40.91. The 60 minute 0.2% by 3-box chart has a downside target of 42.96. These point and figure charts are certainly not positive but are less negative that we might have expected. So long as the US Dollar remains strong and the spickets remain fully open from the OPEC members, there is little reason to believe that the market will reverse and rally aggressively to the upside. That said, we are sold out and could stage a rally from any of these points. We just remember when a low is seen on the chart that it is almost irresistible to test and try. Trade with care and remain scared.
Gold retreated in the Friday session and left an inside day on the chart. The 5-period exponential moving average is 1287.36. The top of the Bollinger Band is 1312.74 and the lower edge is seen at 1148.74. All of the indicators that we follow herein are issuing a sell-signal. We are above the Ichimoku Clouds for the daily and monthly time-frames but are below the clouds for the weekly time-frame. The chart pattern looks like a rounding bottom. We would not be surprise to see some backing and filling from these levels. The daily 1% by 3-box point and figure chart continues to look positive. The 60 minute 0.2% by 3-box chart has a downside target of 1244.98 and there is an internal downtrend line. The most frequently traded price in the Friday session was 1295. The daily Market Profile chart clearly shows that gold has changed from a downtrend to an uptrend. We again suggest that perhaps some caution be advised. It is interesting to note that Platinum is currently trading below the price of gold. This could indicate the slowdown in refining crude oil into gasoline or it could be a warning that the economy is slowing down. Platinum does have industrial uses. When the spread between gold platinum inverts, meaning that gold is more expensive than platinum, generally an economic slowdown is in process. We hope that we are wrong.
The US Dollar Index closed the Friday session at 94.33, again making record highs. The last time the current level was seen was September 2003. The Index is above the Bollinger Bands, which are expanding. The upper band is 94.76 and the lower band is 86.74. The 5-period exponential moving average is 94.07, the 20-period simple moving average is 92.25 and the index is above both. Both indicators that we follow are currently issuing buy signals. Resistance above can be seen on the Monthly/quarterly chart at 97.38. Support levels can be found at 94.40, and 92.66 below that. The 30 minute 0.05 x 3 point and figure chart shows a counter trend internal trendline has formed. We currently have an activated upside target at 95.75 and an activated downside target at 94.15. We certainly would not be short the US Dollar Index, although the index may take some time to pause at this level before making its way higher. So far, the US Dollar Index has escaped gravity and is now free floating.
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.