May 28th, 2017

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
May 28, 2017

The markets closed the preholiday session on a high near the previous day’s record high. There was one thing missing, volume. Clearly, the buy the dips crowd is still trying to catch up to the market which, although doom and gloom had been predicted, keeps on its rally track, just like the EverReady bunny. Just as the bunny will run out of power so will the market. The important thing to remember is that, insomuch are our crystal ball is out for repair, we cannot predict when the downdraft will happen. What we can tell you is that it will be a surprise and the event will catch the market unprepared for the occurrence. The result should be a big enough drop to scare investors away from buying the dips. When this does occur, cash will be king, margin clerks will earn their pay-checks and the media will declare a major Bear Raid in the markets. Remember, you cannot predict the unpredictable but what you can do, is to understand that this will happen.

We believe in buying what you would like to own, we do not advise using margin in your account because if there is a downdraft, you will not be phased in a cash account while those on margin are scrambling to find fund to send to the margin clerk. Unfortunately, the proliferation of exchange traded funds will intensify the retreat when it does appear. The bottom line is, play defensive ball, keep the wallet on the hip and only buy value when you find it. Don’t chase the market. We believe that the market can go much further to the upside than you might ever believe and that the same market can plunge much further that you would believe. Our markets are bi-polar, either too happy or too sad. Learn from the past, this is not a new era, it is the same as in prior years.

The FOMC is tightening which, is generally done to fight inflation. We do not have inflation. Tightening of interest rates is also done to slow down an overheated economy……we certainly are not over heated. The FOMC has kept interest rates artificially low for far too long and their efforts to tighten at this time, might hurt any possible expansion in the near future.

We remember writing this letter advising our readers not to use their homes as ATM machines. Yes, we were a few months early but the warning was rewarded with the financial crisis. Are you ready for the next one?

The S&P 500 futures contract closed the Friday session with a gain of 1.25. The candlestick left on the chart is a small bodied candlestick with a narrow range. All the indicators that we follow herein continue to point to higher levels. This is the seventh day of the rally which indicates to us that we will see a retreat within a day or so. The Bollinger Bands are again beginning to expand which is another harbinger of increased volatility. Remember as we trade into the highs, there is no overhead resistance and upward movement should be easy. The question is how high can this market go? The answer is the next target is 2482.00. The most frequently traded price was 2412.5 but the highest volume was seen at 2413.50 where 25% of the volume traded. When looking at the 10 minute TradeFlow chart, clearly there was short covering at the close of the Thursday session. The Friday session opened lower rallied on average volume until about 10:40, when the upside push lost steam. There was another upside push at 3:50 on Friday but that push was not strong enough to match the Thursday’s highs.

The NASDAQ 100 closed the Friday session up 13.50 on the day, printing a new life-of-contract high for this index. All the indicators that we follow herein continue to point higher. The Bollinger Bands are beginning to expand which warns us that volatility will be returning. This is the seventh day up and we believe that we are within a day or so of a retreat. The most frequently traded price was 5782.50 but the highest volume was traded at 5785.50 where 16.9% of the volume was traded. The 10 minute trade Flow chart looks like there were buy orders on the close because the market spiked high on good volume at the close of trading. Those who were short left for the beach without positions to carry over the three-day holiday weekend. The projected high for this index is 5983.

The Russell 2000 lost 1 handles (point) in the Friday session. Although both the S&P 500 and the NASDAQ 100 set new highs and closed higher in the Friday session, this harbinger of economic expansion did not even attempt to rally to the high. This tells us that the growth stocks are stalling which is a real warning sign. The stochastic indicator is curling over and looks as though it could issue a sell-signal within a day or so. The RSI has turned and our own indicator, although still on a buy, is beginning to curl to the downside. This index is clearly in a well-defined trading range. The most frequently traded price was 1379.50.

The US Dollar Index gained 0.129 handles (points) in the Friday session. All the indicators that we follow herein are pointing higher. We still need to see a close above 97,455 to turn this index a bit more positive. The charts look as though the US Dollar index is trying to make a base. We shall see how this pans out in the coming days. Actually the US Dollar index should rally in the face of the FOMC rate hike and then fade when the news is released. We shall see.

Crude oil gained 0.97 handles (points) in the Friday session. The RSI has turned around and is now issuing a buy-signal and the stochastic indicator will do the same in a couple of days. That said, our own indicator is pointing lower. The door is open for crude oil to fall to about 45. The 10 minute TradeFlow chart clearly shows that there was buying into the close. Was it short covering or something else, we do not know.

Gold rallied 10.3 handles (points) in the Friday session leaving a very impressive candlestick on the chart. Both the stochastic indicator and the RSI continue to issue a buy-signal. Our own indicator is issuing a continued sell-signal. The Bollinger Bands are contracting which tells us that this market likely will be less volatile. There is a long trend line overhead which is at 1273.5. For us to get bullish, this market must close above and stay above that level for at least two consecutive trading days. Gold sold off in the last few minutes of trading in the Friday session and closed mid-range.

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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