Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
October 16, 2016
With just a few more weeks of this campaign torture left, we finally see a light at the end of the election tunnel. No matter who emerges the victor, it will be a win for all, as we will no longer have to listen to the daily dirty laundry “leaked” by whoever. Meanwhile the market is truly range-bound and remains in a wide but clear trading range. The US Dollar, on the other hand, has broken out to the upside; the next targets are 98.59, 99.70 and then 100.6. With that, we see a retreat in commodity prices, which, is deflationary. Crude oil has been in rally mode ignoring the strength of the US Dollar which tells us to pay attention as it challenges the first resistance level of 51.67. Should that level fall, the next resistance level is 60.23.
The FOMC will meet again just a few days before the Presidential election. It is highly unlikely that the fed will do anything ahead of the crucial November 4th date; however, come December, be prepared for them to ratchet rates up. Is the economy strong enough to absorb this? We hope so. What we do know is that there will be a rush to lock in the lower interest rates by consumers on mortgages and by companies on debt before a change to the upside is made. Historically, interest rates have been raised in a strong economy with high inflation. This economy is hardly expanding and we are beginning to see some signs of deflation. So, what’s up?
The financial indices gave the market players absolutely no confirmation in the Friday session. The S&P 500 was unchanged on the day, the NASDAQ 100 was up 6 handles on the day and the Russell 2000 was down 3.60 on the day. Apparently the NASDAQ 100 was the best performing while the Russell 2000 came in last spot.
The S&P 500 December future’s contract closed the Friday session unchanged leaving a true doji candlestick on the chart. Closing at unchanged is very unusual, so unusual that when the Russell pit was open, there were side bets made by a fellow trader, FLAP, on unchanged. He would offer $500 to $1 on unchanged for the day session. He also held large short options positions and naturally desired an unchanged market. FLAP was a very successful trader and a very clever man. The Thursday trade left a doji like candlestick with a long tail indicating that the bears at one point were in charge only to lose to the bulls who managed to push the index higher by the close although the day was slightly negative. Friday, on the other hand shows a very long wick telling us that the bulls had control but by the end of the trading session lost that advantage. That is not a bullish signal. The stochastic indicator and RSI have gone flattish. It is interesting to note that the stochastic almost gave a buy-signal but then rolled over. Our own indicator continues to curl to the upside and looks as though it might give a buy-signal in the next session. The Bollinger Bands have narrowed and just might be beginning to start to expand again. The trading range is 2100.25 to 2184.25. The most frequently traded price in the Friday session was 2126.00. If the market fails to hold the 2100 area….1981, 1929.75 and 1802.50….yikes.
The NASDAQ 100 December futures contract closed up 6 handles (points) on the day. This index is in a trading range from 4629 to 4901.50. This index appears to be stronger than the S&P 500. The RSI is curling up slowly at 41.45 but the stochastic indicator fell just short of a buy-signal and is curling over. Our own indicator is still issuing a sell-signal but curling over to the upside and could issue a buy-signal in a day or two. The Bollinger Bands are beginning to expand ever so slightly which indicates an increase in volatility. The most frequently traded price was 4795. Support below the current support level of 4629 is 4335.50, 4176 and 3862.25.
The Russell 2000 lost 3.60 handles (points) in the Friday session closing the day at 1210.40. This was the fourth day down, Monday was the only positive day for the week. All the indicators that we follow continue to point to lower levels. Support should be seen at 1203 and 1195.90, below those levels you will find 1125, 1076.70 and 936.20. The Bollinger Bands have begun to expand. This chart does not look very bullish and clearly appears to be the source index for end of year tax selling. The most frequently traded price was 1214.50 but the highest volume was seen at 1211.00 where 8.5% of the day’s volume was seen. If the pattern that we see is indeed a “M” pattern, we will see this market remove 1203. Should that be the case, fasten your seat-belt for a very steep retreat.
Wahoo! The US Dollar Index broke out to the upside this week removing the July 26th high of 97.62. The US Dollar closed up 0.567 closing the session just a cat’s whisker below the day’s high at 98.085. Both the stochastic indicator and the RSI are solidly issuing a buy-signal albeit at overbought levels. Our own indicator is issuing a sell-signal. The Bollinger Bands are extremely wide and continue to expand. The US Dollar has removed a medium-term downtrend line. The most frequently traded prices were 97.825 and 97.850. The highest volume for the day was at 97.80 where 13.0% of the day’s volume traded. To bring this move into focus, look at the monthly chart of the US Dollar Index and you will see that the medium-term trendline from December 2015 has been broken to the upside.
Crude oil lost 0.12 handles (points) in the Friday session. The pattern seen is that of a bull flag, which is not yet completed. The stochastic indicator continues to issue a sell-signal, the RSI is pointing lower and our own indicator looks like it will issue a buy-signal in the next session. Divergences abound in crude oil which indicates that more investigation is needed. The Bollinger Bands are beginning to contract from expanded levels. The most frequently traded price was 50.50. Should the market trade much above 51, it will open the door to a fast move area from 51.75 to about 56. Above that level you could see the market trade up to 62 or so. Above 62, the window opens wide to 80 and higher.
Gold retreated 3.40 handles (points) in the Friday session closing just one handle (point) above the low of 1250.60. Gold is in a very narrow trading range from 1265.70 to 1249.50 and for this week even narrower range of 1260.50 down to 1249.50. The very wide Bollinger Bands continue to expand. The stochastic indicator has just issued a buy-signal while the RSI is issuing a sell-signal. Our own indicator is flat issuing nothing. We are at oversold levels for both the stochastic indicator and the RSI. Although this market may bounce, it will have to do more than a bounce to establish some positive momentum. The global currencies are stable, the US Dollar is strong and there is no inflation to be found. Actually food prices are coming down at this time and only health care insurance costs and health care costs are rising. Remember a strong US Dollar is deflationary.
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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