Option QUeen Letter for September 14,2008
Gee, do you think the Fed will bail us out of our personal bad debts? In the US Senate there are noises being made by our elected officials to suspend foreclosures for 90 days. Is this a country that rewards financial stupidity? Why not encourage every mortgage payer to default on their mortgage and get a free 90 days without cost. Then, at the end of the 90 days, pay the bill and move on to the next house to default on. We could make a real business out of this one. The idea is that you must start with several houses then, default on the first let it go into foreclosure, and get the 90 free days, pay that mortgage down and move to the next house where you do the same thing.
As to the markets, it may sound cruel to say this, but badly run companies will fail. The US Government is not in the business of bailing companies out of bad decisions. If it were, then it would have to bail all companies out of bad business decisions. Further, many of these companies with big financial problems have been paying their executives big salaries for underperformance. Tis time to cut the golden parachute and send the bums packing. Perhaps, among the common folk, a new leader will emerge to fill the executive suite?
Welcome to options expiration week. Just to make things a bit more interesting, we have an FOMC meeting on Tuesday, not that we expect to see any change in interest rates. The accompanying statement issued by the FOMC should be of more interest than the interest rate decision news.
As we write, crude oil is trading below the 100 dollar mark. Perhaps, the bears are looking for the sell-stops that have been rumored to be sitting below this level. If so, they haven’t found the stops yet! Crude oil opened today, Sunday at 10:00AM EST to allow hedgers et-al the opportunity to adjust their positions in the aftermath of Ike, the hurricane. This early opening was made possible by the CME/NYMEX so that the trade could adjust their risk without waiting until Monday. This will not be a regular opening and is the exception rather than the rule. We believe that should crude oil find support here, that it will return to the 109 area, then 111, and 119 area. On the downside we have 98, 92 and certainly 86. At this time crude oil is grossly oversold and in combination with the grossly overbought US Dollar index appears to be ready for an upside move.
Monday: August industrial production and capacity utilization is released at 9:15. Tuesday: August CPI is released at 8:30, and the FOMC releases its interest rate decision at 2:15 watch the release for changes in the statement. Wednesday: August housing starts are released at 8:30, and the Bank of England announces its interest rate decision. Thursday: August leading indicators and September Philadelphia Survey are released at 10:00. Friday:
Chicago Fed President Evans speaks.
The US Dollar index looks as though the current rally has ended, well at least for the time being. This market entered the Friday session grossly overbought on both the daily and the weekly chart. Are we feeling the weight of the Freddy and Fanny or is it Lehman that is causing the dollar some indigestion? Probably a little of both are helping this retreat. Remember, also that the US Dollar index had a terrific run to the upside and this could be the pause that refreshes. The 5-day moving average is at 79.589. The top of the Bollinger band is at 80.271 and the lower edge is seen at 75.659. The medium-term uptrend line is at 77.037 and the very steep short-term trend line is at 78.631. In other words, should the first uptrend line fail to hold the market the second uptrend line will likely do the trick. The steep uptrend line is really too steep, but could act as a point for the longs to exit their trade. All the indicators that we follow are issuing a uniform sell-signal on both the daily and the weekly time-frame. The US Dollar index continues to have signs of exhaustion. The Market Profile chart tells us that we will have good support for ht US Dollar index all the way down to 75.82. Under that level things get a bit thin and will lead to a return to the comfortable 74.585 area. We are above the Ichimuko clouds on the daily and weekly charts but below the clouds on the monthly chart. We expect to see the US Dollar index back and fill to work off some of its overbought condition. The rally has been too steep to continue at this rate.
The Euro found support at 138.850 leaving a possible morning star candle formation on the chart, which is a buy-signal. All the indicators that we follow herein are issuing a continued buy-signal on the daily chart. On the weekly chart we have a buy-signal by all with the exception of the RSI which, is going sideways at oversold levels. The 5-day moving average is at 140.20. The top of the Bollinger band is at 149.789 and the lower edge is seen at 138.696. Below 138.05, the market gets really thin and we believe could lead to either support of a whoosh to the downside. The euro is below the Ichimuko clouds on both the daily and the weekly charts, but remains above the clouds for the monthly time-frame. Should the euro test the lower unstable areas, we could return to levels not seen since August 7, 2007.
The S&P 500 tested the downtrend line of 1259.25, in the Friday session ending the week with a continuation of the rally that began on Wednesday. All the indicators that we follow herein are issuing a continued buy-signal, none of the indicators are overbought and most are near the neutral level. The 5-day moving average is at 1247.00. The top of the Bollinger band is at 1305.90 and the lower edge is seen at 1228.06. We do have a mechanical buy-signal on the S&P 500. We continue to see this index trading below the Ichimuko clouds for the daily and weekly charts but above the clouds for the monthly time-frame. Although the S&P 500 seems to want to go higher, we continue to watch the July low. Should we continue to make progress to the upside, expect to find some good resistance all the way up to 1295.50. So long as we don’t trade below 1212.25, we will hold out hope for a rally. We continue to believe that we will test the July lows, undercut them and then, perhaps be ready for a more meaningful rally. As for now, it is like ice-skating on a lake during a thaw, watch out for thin ice!
The NASDAQ 100 removed the lows of July and the lows this week in the Thursday session when it traded to 1712.75. Thursday was a key reversal day. That is to say, after printing a new low the market reversed course and traded higher than the previous session and closed near that high. Friday, we had a doji candle which could spell the end of this rally. Time will tell. The 5-day moving average is at 1755.10. The top of the Bollinger band is at 1987.90 and the lower edge is seen at 1708.94. We are below the Ichimuko clouds for both the daily and the weekly time-frame. We are above the clouds for the monthly time-frame. The monthly chart shows that we have been in a trading range and that we are currently in a downtrend. The daily and the weekly charts are showing a similar downtrend. The real problem for the NASDAQ 100 is below 1722. It looks as though it could free-fall from that level. Time will tell. The other problem with this index is that we went down on greater volume than we did on the upthrust.
The Russell 2000 continues to perform better than the other financial indices. This index has not tested nor has it come close to the lows of July. It has been above 700 since July 29, 2008. All the indicators that we follow herein are issuing a continued buy-signal. The 5-day moving average is at 721.00. The top of the Bollinger band is at 749.81 and the lower edge is seen at 709.38. We are trading above the Ichimuko clouds for the daily time-frame. The Market Profile chart indicates that so long as we stay above the 700 area, we should be fine, however; below the 700 area there will be some pain for the bulls taking us to the 692, 689, and then 661 levels. To convince the bulls that the rally is real, we need to close above 747 by this coming Friday.
The continuous commodity index has been in a steep decline since posting its highs in July. Friday’s rally was the first rally in 12 trading days. We are grossly oversold and all the indicators that we follow herein are uniformly issuing a buy-signal. We need to hold 463.76. We do see a ledge of support at 450. Naturally, we are below the Ichimuko clouds for the daily and the weekly time-frame. We remain above the clouds for the monthly time-frame. The 5-day moving average is at 472.42. The top of the Bollinger band is at 540.58 and the lower edge is seen at 462.54. This chart is the direct opposite of the US Dollar index chart. As the US Dollar index retreats, this index will rally.
Crude oil opened on Sunday in the aftermath of hurricane Ike. The bears were looking for the sell-stops and really didn’t find much in the Sunday session. We say the low of 98.46 and then a slow and sideways action back to the 99 area. The 5-day moving average is at 101.40. The top of the Bollinger band is at 122.80 and the lower edge is seen at 97.55. We are below the Ichimuko clouds for the daily time-frame but above the clouds for the weekly and monthly time-frame. The market stopped where it was supposed to stop. We continue to have a liability to 92 and 86 below. We are grossly oversold and probably will see a bounce.
Gold rallied in the Friday session. The stochastic indicator, our own indicator and the RSI are all issuing a fresh buy-signal for gold. We remain below the Ichimuko clouds for both the daily and weekly time-frames but above the clouds for the monthly time-frame. The 5-day moving average is at 769.72. The top of the Bollinger band is at 854.62 and the lower edge is seen at 754.58. We need to see a close above 800.09 in the Monday session to encourage buyers back into this commodity. If we don’t stay above 736.40, we will return to 688 and then 650. This chart tells us that we either rally now or we will have a significant downside risk.