November 24th, 2014

The Option Queen Letter
By the Option Royals

New US immigration policy, get prego get a visa to the USA and stay there to have your baby…voila, instant citizenship……so, besides the cost of caring for the mother and child, what is the benefit to the USA? Okay not as easy as that you have to have been here for at least five years but we are setting up a precedent which says that we will do it again. It comes down to either we open our boarders and take in everybody leveling the field for the globe, not just the American continent, or we become serious about our immigration policy. At this time, we are sitting on both sides of the fence and failing in both endeavors. Not too smart.

What we really need and never seem to get correct is welfare reform. We remember when Bill Clinton tried to get workfare passed. Hey he had the right idea. To obtain money or support from any agency one should have to produce some sort of service. Welfare services could be baby-sitting, sign painting, sweeping the sidewalks etc. This isn’t rocket science. We need to re-establish the idea that to get paid you must do something of value. Right now, there is no need to work if you are going to get a check each month for doing nothing. We have to stop this multigenerational behavior and no, it generally is not the aliens and illegals that populate that group but the home-grown sort that have learned to “work the system.”

As to Russia’s central bank’s purchases of gold: these guys are really slick, they knew that once they started encroaching on the Ukraine that they would be hit with sanctions and that their currency would be trashed. So what did they do, they began buying up gold, clever hedge. For more than seven months now, the Russian central bank has been buying gold achieving the status of the fifth largest gold hoard among central banks. Additional support for the yellow metal was seen this week as the Swiss vote to restore and repatriate their hoard of gold so that they can peg it to their currency. This vote will take place on November 30, 2014 on repatriating its gold and backing the Swiss franc with 20% of their gold reserves. A stronger Swiss franc is bad for their commerce because it will make their exports more expensive and not competitive. It is unknown how the Swiss will vote on this one but we understand that it just might not pass.

The S&P 500 played catch-up in the option’s expiration Friday session and gained 0.48% or 0.75 handles (points) on the day. The rounding consolidative top resolved itself to the upside with a spike to new highs on lousy volume. We clearly have signs of exhaustion but we caution you that this is a seasonally strong period of time for the markets. Santa generally rides in with his borrowed magic wand making all people feel generous, calm and enjoy a sense of well-being. Unfortunately, for humanity, this is a seasonal occurrence and quickly leaves as we approach and enter the New Year. The 5-period exponential moving average is 2050.89. The top of the Bollinger Band is 2076.40 and the lower edge is seen at 1965.77. All the indicators that we follow herein are overbought. That said, both the Thomas DeMark Expert indicator and the stochastic indicator are issuing a sell signal and both our own indicator and the RSI continue to point to higher levels. We see that the Bollinger Bands are contracting and this would indicate to us that volatility is abating, for now. If you had stayed long for all periods where the market closed above the 5-period exponential moving average you would have been long from October 20, 2014 and would continue to be long. That is a very simplistic way of looking at the trade for a short-term trader and a way of respecting and staying with the prevailing trend. Sounds too simple to work, but alas it does. The weekly chart is bullish as is the monthly chart. We are above the Ichimoku Clouds for all time-frames. Christmas parties, eggnog and good will to all mankind is the December mantra. The most frequently traded price for this index in the Friday session was 2059.46. The daily 1% by 3-box point and figure chart continues to point higher with an upside target of 2371.33. The 60 minute 0.1% by 3-box chart has an upside target of 2143.44 and a more recent target of 2022.71. This chart tells us that the caution flag is flying…. This week is a very short week for the markets and it generally, historically is an upside week. That said, we are long in the tooth in this rally and likely will need to back and fill. Remember we are still likely to see corrections which, although shallow, could be scary. We continue to advise keeping your trailing stops tight and don’t chase the market. Further advise is do not try to tell the market what you want but rather behave as an observer and let the market tell you what it is going to do. Remember, the market doesn’t care.

The NASDAQ 100 December future’s contract left a doji-like candlestick on the chart as a result of the Friday trading session. A new high for the year was printed during the session but the close added only 0.10% to the day gaining 4.25 handles (points) on lack-luster volume. We have a 9-count issued on Thursday. The stochastic indicator and our own indicator have just issued a sell-signal, but the RSI continues to point higher. The Thomas DeMark Expert indicator is flat at neutral. We are overbought for all time-frames and are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is 4233.88. The top of the narrowing Bollinger Band is 4282.70 and the lower edge is seen at 4052.06. The upward trending channel lines are 4286.00 and 4209.75. The most frequently traded prices in the Friday session were 4251.06 and 4253.04. The Market Profile chart tells us that the highs for the session were seen early in the trading day. The daily 1% by 3-box point and figure chart continues to look bullish. The 60 minute 0.1% by 3-box chart has an upside target of 4437.30 and a more recent downside target of 4154.03. Although seasonality is bullish we continue to advise that stops be kept tight and that caution be exercised.

The Russell 2000 advanced 1.50 points or almost 0.13% on the day. We did not print a new high and saw an absolute failure at the high. The bulls had the trade and pushed the market to 1188.50 and could not hold on to that advance closing the day at 1170.90. The volume was slightly higher than seen in the Thursday session. The indicators, although bullish are losing momentum. The 5-period exponential moving average is 1168.28. The top of the narrowing Bollinger Band is 1193.70 and the lower edge is seen at 1133.66. So long as this market stays above 1157.70 and 1148.20, we will have limited risk to the downside. Clearly a breach of the aforementioned levels will open the door to 1131 and 1120 at a minimum. Right now we are in a trading range of 1148.20 to 1191.70. We are above the Ichimoku Clouds for all time-frames. The most frequently traded price in the Friday session was 1169.64 but the highest volume for the day, 10.8%, was seen at 1180.44. The 110 by 3-box point and figure chart is not bullish. We are cautious on this index and believe that there will be better days for this index as we approach the end of the year and the beginning of next year.

Crude oil rallied for three of the five trading days last week and closed up in the Friday session in spite of a huge rally in the US Dollar index. This rally was seen on good volume the only fly in the ointment was that the candlestick left on the chart had a small real body and told us that when the bulls had the rally in control, they could not hold on to their advance, yet, the market did close above its opening price. We remain below the Ichimoku Clouds for all time-frames. We have a higher high and a higher low, which is the definition of an uptrend. The problem here is that one day does not make a trend. The 5-period exponential moving average is 75.91. The top of the Bollinger Band is 82.52 and the lower edge is seen at 73.08. All of the indicators that we follow herein continue to issue a buy-signal. The downward sloping channel lines are 76.93 and 71.53. The uptrend line is 74.23 and if this line fails to hold the market, you can expect a retest of the recent low. The weekly chart is actually looking a bit better (better does not equal bullish) and looks as though crude is trying to find a bottom. The monthly chart continues to show us that crude oil is at the lower edge of a trading range that has been in effect since 2009. Actually the Heikin-Ashi daily chart is improving and getting positive. The daily 0.9% by 3-box point and figure chart looks as though the prices are consolidating and has an internal uptrend line. The 60 minute 0.2% by 3-box chart looks okay, not great but getting better.

Gold rallied in the Friday session and gained 10.60 handles (points). The 5-period exponential moving average is 1191.48. The top of the narrowing Bollinger Band is 1229.94 and the lower edge is seen at 1131.96. All the indicators that we follow herein continue to issue a buy-signal and have plenty of room to the upside. Both the weekly and monthly indicators are positive. The up trending channel lines are 1211.35 and 1159.30. The most frequently traded price in the Friday session was 1192.50. The 60 minute 0.2% by 3-box chart has an upside target of 1306.14 and an overhead downtrend line, but looks positive. The daily 1% by 3-box point and figure chart shows a downside target of 987.9 and multiple downtrend lines. We are not out of trouble here in gold we continue to bounce but need to break to the upside in a meaningful way trading at levels above 1228-32 or so.

The US Dollar Index closed the Friday session at 88.40, just a smidge above our resistance line. Over the past two weeks this index has formed a trading range and seems to be bound by 88.40 on the upside and 87.47 on the downside. The upper Bollinger Band is 88.97 and the lower band is 85.68. The 5-period exponential moving average is 87.94, the 20-period simple moving average is 86.33 and the index is above both. Our indicator is currently issuing a sell signal, however; the RSI is pointing up. Below the 87.47 support level, further support can be seen at 87 flat. On the upside, should the index break above the 88.40 level, the next resistance point is 89.5. The 30 minute .05 x 3 point and figure chart has taken out the counter trend down trend line and formed a new internal uptrend line. We have activated upside targets at 88.60, 89.40 and 89.20 in a market that has been achieving its upside targets. The index may back and fill a little bit but will likely break out of the trading range and make its way to the 89.50 mark.

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.