October 19th, 2014

The Option Queen Letter
By the Option Royals

Fed Chairman Yellen finally verbalizes what we the people have known for quite a while, that the gulf between the rich and the average worker is growing. She said: “By some estimates, income and wealth inequality are near their highest levels in the past hundred years.” Federal Reserve stimulation has helped the rich, ultra-rich, banks and corporations but has done little to help the average work survive. As a matter of fact, the average worker today has less discretionary income than was available to that worker in 1970. Wonder why the economy isn’t growing faster? What Chairman Yellen doesn’t say is how the actions of the Federal Reserve will help the average worker.

Again we will suggest that tinkering with the normal business cycle may help in a finical crisis, but tinkering should be short-lived and allow the system to repair itself. If that means that institutions fail, so be it. Financial institutions that are too big to fail are far more harmful to the general public then monopolistic telephone service providers. Who is there to help the average man out of bankruptcy? Nobody! It is quite normal for booms and busts in a business cycle. Because the Federal Reserve has meddled with the normal cycles we are feeling the results that tinkering with great divides between the wealthy and the average workers. The poor are better off today than before and there are many more in the ranks than ever before in our history. Government hand-outs are growing and the tax base is becoming narrower. The ultra-rich will leave our shores and divert their income off-shore. Who will pay the taxes? Who will fund the masses that live on government and state assistance?

So why isn’t OPEC alarmed at the decline in the price of oil? Could it be the production of oil from shale here in the USA and Canada will be impacted and become too expensive to use? You bet it could be. At the current price of crude oil there is little reason to expand shale oil extraction. It is too expensive to extract. Now you know why OPEC isn’t upset by the retreat in crude oil’s price. They are of the belief that at the present price of crude oil that shale oil extraction will not expand and might even shut down. This will support their incomes and export of crude oil. It is interesting to watch the games that are played.

So, what happened this past week? Yes it was the anniversary of the 1987 crash and just to make sure that we remembered the market retreated. By the end of the week, the shorts began to cover which spurred on a lively rally ending this options expiration week on a much more comfortable note. We also believe that the shorts covered and wanted to enter the weekend flat rather than short or long. Is this the end of the down-draft? Maybe yes but probably not. The S&P 500 closed below the 100 day exponential moving average, not a good thing. The Russell 2000 out-performed the other indices on the upside because this index is loaded with stocks that will not feel the impact of a strong dollar and likely don’t rely on exports. The S&P 500 on the other hand, is loaded with stocks that rely a great deal on exports…make sense to you? It does to us.

The strong US Dollar hurts the US’s ability to compete with foreign products. In a way, it can cause deflation insomuch as it depresses the cost of materials priced in US Dollars. Because the US average consumer has little or no discretionary income, they are not spending on imports; this hurts the Eurozone and others. The Eurozone is feeling the pressure of no growth thus they are not expanding or spending. If the Eurozone is failing, we here in the USA will feel that pinch. We do not live in isolation and their bad economy will affect our economy. Yes we are the best of the bad but the key word is bad. Deflation is not something anybody should wish for. It can be devastating and difficult to treat, as the Japanese have shown us over the past quarter of a century.

The S&P 500 enjoyed a two-day rally closing the week on a positive note for the day. For the week, the market closed down making it the fourth down week. Don’t be surprised to see that, it is common to have a market go in one direction for six to eight weeks at a time. All the indicators that we follow herein are positive and have plenty of room to the upside. The 5-period exponential moving average is 1873.81. We have a downside target of 1803.25 which we believe will be undercut giving the index a good opportunity to rally from that point. The top of the Bollinger Band is 2020.38 and the lower edge is seen at 1841.98. The Market Profile chart had a large area of single and double prints below the close of this market. This tells us that we may go back to that area and fill in that area. The profile seen is a bi-modal curve. The bulk of the trades for the Friday session were at 1881.25 where 12.3% of the day’s volume occurred. The most frequently traded number by brackets was seen at 1872.50 where 10.9% of the volume was seen. The daily 1% by 3-box point and figure chart has a downside target of 1530.57. The 0.1% by 3-box point and figure chart has a downside target of 1830.32. We are below the Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and monthly time-frames. We have broken the uptrend line on both the daily and the weekly charts. We are above the 200 day exponential moving average but below the 100 day exponential moving average.

The NASDAQ 100 rallied in the Friday session closing up 1.65% or 61.75 points on decent volume. All the indicators that we follow herein are issuing a buy-signal with plenty of room to the upside. The 5-period exponential moving average is 3801.52. The top of the Bollinger Band is 4162.31 and the lower edge is seen at 3733.11. We are above the 100 day exponential moving average. The down-draft in the NASDAQ 100 did not feel as awful as did the down-draft in the S&P 500 because this index never closed below the 100 exponential moving average, while the S&P remains below the 100 day exponential moving average. The 30 minute Market profile chart is a bi-modal curve. 3808 represents 11.5% of the day’s volume while the most frequently traded number, bracket wise, was 3804.50, 3797.50 and 3794. The daily 1% by 3-box point and figure chart has a downside target of 3041.08. The 0.1% by 3-box 60 minute point and figure chart has a downside target of 3702.98. We are below the Ichimoku Clouds for the daily time-frame but are below the clouds for both the weekly and the monthly time-frames. We see negative indicator readings on both the weekly and the monthly charts. The downdraft has been too steep to maintain at this acceleration and clearly needs time to adjust. We do believe that we likely will rally but that rally does not indicate to us that the down-side is over. There was a lot of damage done to the chart and at the very least some consolidation will be necessary. We remain cautious and recommend that tight stops be maintained. On the other hand some issues have become cheap enough to tweak our interest.

The Russell 2000 retreated in the Friday session losing 3.70 handles or points on the day. This index has been the beneficiary of money flowing into it rather than into the S&P 500. Some of this can be attributed to the belief that a strong US Dollar will not hurt the stocks that compose this index. On Friday as the S&P 500 and the NASDAQ 100 rose, this index retreated. Only the RSI has issued a sell-signal, both the stochastic indicator and our own indicator continue to point higher although the stochastic indicator is curling to the downside. This index closed above its 100 day exponential moving average. The 5-period exponential moving average is 1072.88. The top of the Bollinger Band is 1150.02 and the lower edge is seen at 1085.47. The Bollinger Bands are again beginning to compress. The high volume area for the Friday session was 1087.50 where 12.6% of the day’s volume was seen. The most frequently traded number was 1086. We are below the Ichimoku Clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. Keep your stops tight and no napping when trading this index.

Crude oil retreated in the Friday session and looks a lot like the chart of the S&P 500 with a waterfall retreat and some stabilization in the Thursday and Friday sessions. So, what’s next? Well, clearly 80 didn’t hold in the Thursday session. We really were not surprised to see the market undercut the 80 level and trading down to 79.78 was expected. Here is the problem. Should the support fail to come in and hold up this market, we do have a liability to 74.95, again which likely will be undercut as MIT(market if touched) orders are elected. This market is so far below its 100 day exponential moving average it funny. The 5-period exponential moving average is 83.28. The top of the expanding Bollinger Band is 96.63 and the lower edge is seen at 80.36. The only good thing we can see on this chart is that the volume fell off a cliff in the Friday session. We are below the Ichimoku Clouds for all time-frames. The stochastic indicator
Continues to look positive although it is flattening out a bit, our own indicator is issuing a buy-signal and the RSI is flat. The 60 minute 0.2% by 3-box point and figure chart has a downside target of 79.97 which has been achieved. There are internal uptrend and downtrend lines on this chart and the chart looks as though the price is consolidating. The daily 1% by 3-box point and figure chart is negative with a downside target of 78.9. We look as though we are consolidating but there is an overhead downtrend line that appears miles away. 30% of the Friday volume was seen at 82.25 and that was the most frequently traded number, by bracket, for the day. The downward trending channel lines are 86.00 and 78.93. We remain concerned about crude oil and believe that because the 75ish number is there, that the market could undercut that number just to probe for any stops. It is difficult to catch a falling knife, so, we don’t and recommend that sometimes watching is better than trading.

Gold seems to be holding its own although it retreated in the last two sessions. The indicators are mixed. The 5-period exponential moving average is 1235.00. The top of the Bollinger Band is 1244.26 and the lower edge is seen at 1195.83. The upward trending channel lines are 1255.88 and 1232.60. The long term downtrend line is 1263.62. We are below the Ichimoku Clouds for all time-frames. The Friday session left a doji candlestick on the chart. This is generally a sign of transition. The market has rallied for the last two weeks but before you become a gold bull, there is an important downtrend line on the weekly chart at 1304 plus or minus two points. Those who are short this product, will not worry until or unless that downtrend line is removed. The 60 minute 0.2% by 3-box point and figure chart looks positive. The daily 1% by 3-box point and figure chart looks as though this market consolidating. The 30 minute Market Profile chart shows us that the most frequently traded number is 1238.50. This number is the same level for the most frequently traded number in the Thursday session as well. We conclude that this number must be important and is considered fair value by the marketeers.

It’s lonely at the top and we think the US Dollar Index can’t handle the pressure. After an incredible 4-month rally, we think it’s the US Dollar index may be looking to retrace. The index closed the Friday session at 85.22 having retreated with the general market during the week. The Bollinger Bands are contracting; the lower band is 84.60 and the upper band is 86.38. The 20-period simple moving average is 85.47, the 5 period exponential moving average is 85.22 and the index is below both. The RSI is in a down trend though starting to turn up and our own indicator is continuing to issue a sell signal. Support can be seen on the daily chart at 84.32. The weekly chart shows a number of week support lines on the downside. Beyond 84.32, 84.10 follows. Ultimately, we could see a pullback to 82.75-83. The 30 minute .05 x 3 point and figure chart supports our near term view. Although the index is still in a long term uptrend, an internal down trend line has formed and we have multiple activated downside targets at 84.55, 84, 83.95 and 83.30. This is the technical story we are looking at. How will Ebola affect the US Dollar? Yes it is chaos but it is our chaos, wouldn’t that hurt the dollar? What do you think?

Risk
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.