Archive for the ‘Newsletter’ Category

Option Queen Letter for January 24, 2010

Sunday, January 24th, 2010

We love the way the media looks at a decline in the market and then decides, as an afterthought, that it was caused by an event. The truth of the matter is that most of us were looking for a retreat–not because Massachusetts voted in a Republican, Chairman Bernanke’s reappointment uncertainty, President Obama’s attack on banks or the possible death of the health care bill, but because the market was overbought and ripe for a decline. Remember that after Virginia and New Jersey “threw the bums out” the market continued its rally. The fact of the matter is that this market has rallied without stopping since November, and that this decline is not out of the ordinary given the huge gains seen in this market. In the previous weeks no bad news could shake the market and this past week bad news and some earnings good news did shake the market. Perhaps the market had overshot on the upside and perhaps we all have become too complacent. Notice the VIX spiked 22.63% in the Friday session reminding us that worry can return quickly. The market’s condition resembled a rock concert in an overcrowded arena– several of the concert goers suddenly decided to leave early, some others noticed the migration and decided that something was wrong then the crowd ran for the exits that could not accommodate the huge numbers and forced panic among the concert goers.

The market reflects a return to reality. As good earnings are posted, the market takes these companies down. It is truly buy the rumor and sell the fact. Now that President Obama has taken on the “greedy bankers” and “capitalism”, the security of the US Dollar will be put into question. Thus expect to see money leave the shores of the “Free and the Brave” for lands like Australia, New Zealand and, of course the precious metals markets. Do not expect the Euro to benefit from US Dollar problems so long as its problems with Greece, Portugal, Ireland, and Spain remain troublesome and distracting. Expect any bumps in the reconfirmation of Chairman Bernanke to play poorly on Wall Street and for the US Dollar. China’s policy is a little troublesome but isn’t as troublesome as President Obama’s socialist anti capitalist chatter is to Wall Street.

Monday: December existing home sales are released at 10:00.

Tuesday: January consumer confidence is released at 10:00.

Wednesday: December new home sales are released at 10:00 and the FOMC releases a statement and interest rate decision.

Thursday: December durable goods are released at 8:30.

Friday: 4th quarter GDP is released at 8:30, January Chicago PMI is released at 9:45 and January Michigan Sentiment is released at 9:45-10:00.

The US Dollar index declined in the Friday session after printing a new 4 month high in the Thursday session, leaving a high wave doji candle as a result of that session. The market looks as though it is going to take a breather. It would come as no surprise to see the market trade down to 78.132, 77.865 and 77.597 before attempting another rally. Remember, we have a worrisome confirmation of Chairman Bernanke, China tightening and an FOMC 2-day meeting this week. We are above the Ichimoku Clouds for the daily time-frame but remain below the clouds for both the weekly and the monthly time-frame. The 5-day moving average is at 77.641. The top of the Bollinger band is at 78.806 and the lower edge is seen at 76.783. All the indicators that we follow herein are curling over to the downside. We have a fresh sell-signal from the stochastic indicator, the RSI is curling over to the downside, our own indicator is curling over without a signal at this time and the Thomas DeMark is issuing a sell-signal.

The S&P 500 futures contract lost 1.8% of its value in the Friday session. This session followed an equally dismal Thursday session leaving two huge red candles on the chart, Thursday’s slightly better than Friday’s candle, although Thursday’s close was closer to the low of the day. We have a horizontal support line at 1085.17- 1082.39 which should offer some support. Below that level, we see 1069.75 as another area of support for the S&P 500. The 5-day moving average is at 1130.166. The top of the Bollinger band is at 1155.94 and the lower edge is seen at 1102.70. We closed below the lower edge of the Bollinger band and as such, we believe that either the volatility will expand to accommodate the band or the market will rally back inside the lower edge of the Bollinger band. The latter is our preference. We are inside the Ichimoku Clouds on the daily time-frame. Basically speaking when we are in the clouds, it is foggy and we can’t see well, thus it is advised that we take no position while in the clouds. We are above the Ichimoku Clouds for the weekly time-frame and below the Ichimoku Clouds for the monthly time-frame. Both the daily and the weekly indicators continue to point lower, however; the daily stochastic indicator and our own indicator are trying to curl to the upside and likely will give a buy-signal within a day or so. Both the RSI and the DeMark Expert indicator continue to point lower at oversold levels. The weekly stochastic indicator and the RSI both continue to point lower. Should we bounce we would expect to see resistance at 1106.83, 1117.13 and 1127.42. Something for the bulls; the uptrend line for August is not yet broken. This certainly should be a very interesting week, fasten your seat belts and prepare for a wild ride on Wall Street.


The NASDAQ 100 futures contract lost 2.35% of its value in the Friday session. Not only did the market continue selling off but we also now have a mechanical sell-signal on this market. That said, we are oversold as measured by all the indicators that we follow herein. The good news is that the stochastic indicator is beginning to curl to the upside; unfortunately, all of the other indicators that we follow continue to warn of lower prices. The 5-day moving average is at 1863.13. The top of the Bollinger band is at 1912.13 and the lower edge is seen at 1829.89. Notice that we closed below the lower edge of the Bollinger band which tells you that the exit doors were jammed with sellers. Naturally, we cannot stay at these levels without expanding our volatility. We would expect to see a bounce after, perhaps another drubbing at the open. Although the financials were perceived to have been the cause of much of this pain, the large cap NASDAQ issues obviously disposed of. We are above the Ichimoku Clouds for the daily and the weekly time-frames. We remain in the clouds for the monthly time-frame. When reviewing the weekly chart, you can see how far this market has come from the March lows. While the retreat was uncomfortable for many not much damage was done to the weekly chart. The daily chart was decimated, trendlines were broken and money left the field. The weekly chart indicates that we continue to see all the indicators issue continued sell-signals. We wrote last week: “If this market closes below 1852.5 then we should see a swift move to 1807.50. This should be a very interesting week.”

The winner in the Friday session for the least damage was the Russell 2000, which only closed down 1.55% on the day. Although the chart looks none too good, next to the other indices, it is the winner. Naturally, all the indicators are oversold and none are issuing a buy-signal but the stochastic indicator and our own indicator are curling to the upside and look as though they will give a buy-signal within a day or so. The 5-day moving average is at 635.76. The top of the Bollinger band is at 649.49 and the lower edge is seen at 620.77. Naturally, we closed below the lower edge of the Bollinger band. The market looked washed out at the close on Friday. It is likely, that we will go somewhat lower before turning the corner and powering to the upside. This week will feel the weight of the FOMC meeting on Tuesday and Wednesday keeping the market from really doing much in the way of a rally until the none interest rate decision is issued. We will all be looking for a change in the statement. The Russell 2000 is above the Ichimoku clouds for the daily and the weekly time-frames.