Option Queen Letter for June 23, 2008
We hear a lot about the cost of fuel, but very little regarding the usage of poo. No, we are not kidding. Are you aware that poop, when it decomposes produces methane gas? Think about installing a tank in your back yard to collect poo and allow that poo, you produced, to decompose into methane gas which you can use to heat the house, or whatever you little heart desires. Yes, there are farmers doing this sort of thing, of course they use animal poop rather than people poop, either way the result is the same….the production of methane gas. We can see it now, silo like building being erected in every back yard!!!! Why we might be able to sell our excess methane gas to the utilities and, who knows, we might get a credit. Then there are those old discarded eye-sores, old used tires. Those tires are a virtual farm for oil. In every old tire there is oil. The problem is in extracting that oil from the tire. There is technology to remove the oil from the tires and there is a company in California which is now doing exactly that. The company is being paid to remove old tires from dumps and other old tire depositories. They take those tires and remove oil from the tires. We don’t know if it is profitable yet, but it removes unsightly used tires and turns the product into something useful.
We are sure that you aren’t that interested in poop so, now onto the market analysis. The S&P 500 spent three of the five trading days last week in retreat. The up days were notably anemic while the down days were robust. It seems that the bulls are losing control and are finding it difficult to move the crowd to their side of the market. We are oversold, but we are also sure that you do know that by now. Can we get more oversold? Sure, and there is obviously room to the downside. We find that there should be some good support at 1309.50, 1296.75, 1286.50, 1278.75 and of course the March low of 1253.00. Before these numbers are tested, we will see a bounce. We do continue to believe that the March lows will be tested and probably will give way to the downside pressure. The downside slide will cause some sell stops to become elected and thus the waterfall action of a down draft. Naturally, once this down draft is seen, the market will rally as buyers looking for bargains appear. Thus the obvious plan is to go with the crowd to the downside and nibble for the upside bounce but bail before you become a victim of a dead-cat-bounce!
It is interesting to watch crude oil, the US Dollar index, gold and the S&P 500. When crude oil rallies, the US Dollar retreats, gold goes up and the S&P 500 declines. Many times these relationships hold. Lately, we have noticed the US Dollar in rally mode trying to break to the upside. It is interesting to see that crude oil rallied in the face of a rally in the US Dollar index. They seem to be dislocating from each other. Further, insomuch as crude oil is priced in US Dollars, a rally in US Dollars should have a negative impact on the price of crude oil, and in the past this has been the case. Lately, however; crude oil has taken a life of its own. In the past dozen days, crude oil has been going sideways or, as we technicians say it has been consolidating, while the US Dollar has been in rally mode. If we look at the US Dollar index, we note that on the daily chart, we are getting solid sell signals. As to the crude oil daily chart; we seem to find support at the 20 day moving average of 132.16. The stochastic indicator is curling to the upside and will within a few days, issue a buy-signal. The RSI is already pointing higher and we are above the Ichimuko clouds. We know that the bubble in crude will burst but it doesn’t appear to be at the blow up level as yet and, it could take a long time until we hit that level. We do not find 150 a barrel oil unreasonable given the chart formation. On the other hand we do see support for crude oil at 122.10.
We have a two-day FOMC meeting this week ending with an announcement and interest rate decision on Wednesday at 2:15. While few expect to see either an interest rate cut or and interest rate increase, we do expect to hear some hawkish words regarding the future course at the Fed regarding inflation. Thus, we opt for no change on interest rates with a warning about inflation.
Monday: we have NYSE’s quarterly rebalancing, watch out Lehman Bros and Motorola.
Tuesday: May durable goods will be released at 8:30.
Wednesday: FOMC announcement at 2:15, May durable goods will be released at 8:30 and May new home sales will be released at 10:00.
Thursday: 1st quarter GDP, May existing home sales will be released at 10:00, St Louis Fed President Bullard speaks and Fed Chairman Kohn speaks.
Friday: May personal income and consumption to be released at 8:30 and June Michigan Sentiment at 9:55.
That all for this week! Have a great trading week!