Option Queen Letter for August 3, 2008
The time has now come to discuss a “bull rally” in a “bear market.” Although it sounds like a moronic statement, the fact is that there are vicious bull runs within a bear market. You may well ask why?Here are some reasons: During a bear market many traders take a bearish short position.
These positions, in general, are initiated to make money on selling stocks, bonds, indices or commodities that you don’t own in an effort to capture the decline in said instruments. It is prudent for the sellers of stuff that they don’t own, to place buy orders above the area where the short was initiated, as a stop loss. In other words it is a place where the loss on that position would not be tolerated.
Another way of describing it is a place where there is reason to believe that the short was a bad idea. These levels are chosen in several ways, some are a percentage of a move, some are based on technical analysis and some are arbitrary. These resting buy orders are seen as a rally waiting to happen, just as an actor waits in the wings for his cue to enter the stage, these order wait on the books for the trigger to initiate them. So what happens when these orders become elected? Buys enter the market.
Many times these buys cause other stops to become elected and then, the activity is perceived as a rally in that market and the side-line money piles in. In many cases, that is what causes the erratic behavior seen in the market. The side-line money is just waiting for a move and will jump in and exaggerate the rally. Once the shark feeding frenzy is finished, you frequently see the market retreat back to the level of initiation.
On Tuesday, we will have another FOMC decision on interest rates. Very few, is any, expect to see a change in the key rates. We do, however; expect to see a change in the working of the statement to reflect some concern about inflation. There should also be some chatter about the slowing economy and the slowing consumer moderating expenditures thus have a slowing effect on inflation. Once that is out of the way at 2:15 on Tuesday, we will resume trading in the same old chop we have seen in recent sessions.
A few words regarding China and the Olympics: As most of the readers know, crude oil has been on a bungee jumping spree. Perhaps, some of this is due to China closing many factories to cut down on air-pollution in advance of the Olympics and reducing the use of vehicle pollution mandating driving to even and odd days according to your license plate number, some of this slow down is bleeding into the demand of both coal and crude oil. The big question is; will this slow-down be short-lived (for the Olympics) and then return to normal or, is this a slow-down that will continue. We are guessing that much of the slow-down will continue especially as the USA’s economy contracts. We believe that much of the surge in demand from China has been in an effort to ready the country for the Olympics and now that they are upon us, the urgency of construction and fixing will return to a more normal pace. That said, one can guess that their demands for raw materials will also return to a slower rate of growth. This should relax some of the demand on raw materials returning that demand to a more normal rate and thus returning some expensive commodities to more normal prices. The FOMC could see moderating prices and thus a slowing of inflation.
The S&P 500 demonstrated that there is a good deal of supply at the 1292 area. On the other hand we can return to 1244.50 and not disturb the uptrend line. The summer doldrums are in full force. Many Europeans are on vacation for the month of August. Friday we wondered why we weren’t on vacation also.
Monday: June personal income and consumption is released at 8:30, and June factory orders are released at 10:00.
Tuesday: FOMC meeting with interest rate decision and statement at 2:15.
Wednesday: Freddie Mac, and Ambac will release earnings.
Thursday: June same store sales, pending home sales are to be released at 10:00, and consumer credit to be released at 3:00.
Friday: 2nd quarter productivity is released at 8:30 and June wholesale inventories are released at 10:00.
The US Dollar index has been in rally mode for the past three weeks showing that it does have the ability to trade to 74.75, where it will find resistance. The high for the Friday session was printed at nine in the morning, after which, the market just traded in a very narrow range. We are inside the Ichimuko clouds although the early morning rallying poked above the clouds. We are overbought as measured by the stochastic indicator and our own indicator. The RSI and Thomas DeMark Expert indicator are slightly below overbought levels and going sideways. The 5-period moving average is at 73.379. The top of the Bollinger band is at 73.764 and the lower edge is seen at 72.006. If we trade below 73.015 we will open the door to 72.58. This isn’t awful because that is the longer term uptrend line. When looking at the point and figure chart, we clearly see that if we can trade above 74.75, we will have a good chance of returning to the 76 area. The Market Profile chart says the number is above 74.60 for the quick move area. The Bollinger bands remain narrow and tell us to get ready for an increase in volatility soon. Unfortunately these bands don’t say when this move will occur. All the indicators on the weekly chart are positive. We remain below the Ichimuko clouds for both the weekly and the monthly time-frame.
The Euro has a double top, on the monthly chart, at 159.88. On the daily chart there is a double bottom at 154.78 which was seen in the Friday session. We stepped into the Ichimuko clouds on the daily chart although we are above the clouds on both the weekly and the monthly charts. We have a red nine-count on the daily chart. The stochastic indicator is grossly oversold; the other indicators are not oversold. The stochastic indicator, our own indicator and the RSI are all issuing a continued sell-signal. The 5-period moving average is at 155.80. The top of the Bollinger band is at 159.33 and the lower edge is seen at 154.84. We find ourselves in a well contained downtrend. With Europeans away on vacation for the month of August, the trading desks will be lightly populated giving way to thin markets which will react on thin volume. It is important that the Euro stays above 152.55 or risk a return to 149.46 and 147. All the indicators on the weekly chart are uniformly issuing a continued sell-signal with plenty of room to the downside. Bottom line is this, if we break the 154.78 area we will test the 152.55 under that level we will break below the trading range opening the door to 149-147. On the upside, we have a double top at 159.88 above which is thin air and plenty of room to run with no supply overhead. Trade the range but keep your stops tight!
The S&P 500 needs to trade and close above 1291.25 to open the door to 1306 which is the 50 day moving average, 1322, 1337.75 and 1348. The uptrend line for the Monday session is at 1245.98. To keep this rally alive, we need to stay above 1231.50 or risk flush to the downside opening the door to the recent low of 1200.75. We remain below the Ichimuko clouds. The stochastic indicator, the RSI and our own indicator all are issuing a continued sell-signal. The Thomas De Mark Expert indicator is issuing a continued buy-signal. The 5 period moving average is at 1261.75. The top of the Bollinger band is at 1289.91 and the lower edge is seen at 1219.86. Should this market trade above 1286.50 it will surely trade at 1292 and then above that level looms some single prints at 1294.25 which tells us that either the market will have to do some work there or, the market will quickly move above the 50 day moving average and up to 1317.50 on its way to 1340. Remember, that on Tuesday, the FOMC makes its announcement and we will see some crazy moves, not so much on the interest rate noise but rather on the release and digestion of the accompanying statement. Although the indicators are all issuing a buy-signal, on the weekly chart, we seem to be forming a bear flag.
We remain below the Ichimuko clouds for the weekly time-frame but above the clouds on a monthly time frame.
The NASDAQ 100 has been range-bound since late June. The range is from 1887.25, on the upside to 1765.25, which marked the July 15th low. The stochastic indicator, the RSI and our own indicator are all issuing a continued sell-signal. The Thomas DeMark Expert indicator is going sideways near overbought levels. The 5-period moving average is at 1839.75. The top of the Bollinger band is at 1867.77 and the lower edge is seen at 1799.326, notice that these bands are very narrow. We remain below the Ichimuko clouds on the daily and the weekly charts but above the clouds for the monthly time-frame. The weekly chart continues to look like a sine wave. The Market Profile chart tells us that this market is in equilibrium, however; above 1872, we find areas of instability and a likely hood of a move to 1920 and 1950. On the downside, a break below 1784.25 could spell trouble for the NASDAQ 100. The very short-term uptrend line is at 1810.44, on the weekly chart.
The small capitalization Russell 2000 actually rallied in the Friday session and was the only one of the three that we follow to do so. We did make a lower low and a lower high on the day. The downtrend line is at 719.14 for the Monday session. The stochastic indicator is very overbought and going sideways. Our own indicator is going sideways as are the RSI and the Thomas DeMark Expert indicators. The 5-period moving average is at 712.20. The top of the Bollinger band is at 735.34 and the lower edge is seen at 649.72. We remain below the Ichimuko clouds for both the daily and the weekly chart but above the clouds on the monthly chart. This past week was the forth week that this index managed to close higher.
The Continuous Commodity Index is below the Ichimuko clouds on the daily chart. This index appears to be trying to make a rounded bottom. Should this index close below 538.86, it will open the door to 534 and 519.75. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal, albeit from oversold levels. The Thomas DeMark Expert indicator is issuing a buy-signal at overbought levels. The 5-period moving average is at 545.85. The top of the Bollinger band is at 605.55 and the lower edge is seen at 526.46. This was the first week in three that this index closed positive on the week. We are above the Ichimuko clouds for the weekly time-frame. The indicators on the weekly chart are trying to curl to the upside but so far, no buy-signal. This index closed at a very dangerous level in the Friday session. We see little support at these levels and believe that we will either rally quickly or fall quickly but that the move will be volatile. Should we trade below 533, we will have a liability to 499.38 yikes!
Crude oil is trying to make a rounding bottom. The danger here is that we are below the Ichimuko clouds on the daily chart. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal. The 5-period moving average is at 124.574. The top of the Bollinger band is at 147.35 and the lower edge is seen at 116.63. If we trade below 121.60, we will trade to 115.20 and the comfort area between 108 and 112. We do believe that 116-115 will offer some support to this market. On the upside, we have supply all the way to the highs. We remain above the Ichimuko clouds for both the weekly and monthly time-frame. This past week’s low of 120.42 needs to be held or the risk of further price erosion will be seen. This market is more manic than others with short-sellers piling into the downdrafts and short covering seen on rallies. We have a very choppy emotional market. If you are going to trade this market, keep your stops tight.
The August Gold contract expired this past week which served to distort the trade. All the indicators that we follow herein are issuing a continued sell-signal. Only the stochastic indicator is at an oversold level. The 5-period moving average is at 923.40. The top of the Bollinger band is at 995.50 and the lower edge is seen at 902.40. We are above the Ichimuko clouds on the daily, weekly and monthly charts. The Market Profile chart shows overhead supply and support all the way down. Until or unless we retreat below 902 or break above 940 we will be stuck. The weekly chart shows that we have been retreating for three weeks. There should be support in the 850 to 860 area. On the upside, should we trade above 989.60 we will make a run for the old highs.