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Sunday, February 4th, 2018

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CFTe, CMT, M.S. and Jordan Young, CMT
February 4, 2018

So let’s get this straight, the Dow dropped 666 points…… flash back to 2008, the Russell 2000’s crash day nose dive brought the index to 666. 666… the sign of the devil… well, we are sure that is exactly what it felt like being long into that drop. Tomorrow, all eyes will be on the market to see if we have a continuation of the retreat as last seen on Monday October 19, 1987. The current retreat in the markets has caused margin calls to go out. In securities the investor has a couple of days to get the funds in but in commodities, the call must be answered immediately. We remember standing in the pit and seeing Bernadette (Spear Leads) or Klein (Klein Futures) etc. come to the ring for the purpose of either collecting funds or to halt the trader’s trading until funds were brought, wired in. Now that rings no longer exist, except to a lesser degree in Chicago, the electronic margin calls will go out and will be answered; if not, the accounts will be liquidated by the margin clerk, who cares not what s/he liquidates so long as it satisfies the margin call.

Crude oil is projected to reach $80 per barrel for WTI. So is the cost of crude really going higher or is this rally the result of a weak US Dollar? The answer lies somewhere in the middle, with the rally’s strength coming from both the inflationary effects of a weaker US dollar together with stronger demand amidst more robust global growth. That said, the revision to the tax code will add income to corporate balance sheets and as seen, some of this benefit flows into the pockets of the employees. We are speaking of Walmart which announced a pay increase and bonus for its employees. Just think if that company is giving their lowest paid employees a raise and bonus, how much are they giving their executives? While it is likely this slight change will not impact the spending habits, the cost of products like gasoline, mortgage rates, borrowing costs etc. will have an impact on spending. Yes there will be more money to spend but then, things that are being purchased as necessities are also costing more so, the bottom line is, this is a “push.” In other words, no gain.

So, what do we need to see to make “America great again?” For one thing, we need corporations to upgrade their “stuff,” we are talking capital investments: machinery, computing etc. For corporations to justify these expenditures, they need to see an increase in demand for their products and services. Then and only then will they beef up the hiring and pay their workers more money, in turn, leading to increased salaries and spending. It is all about the velocity of money, not just the interest rate.

The S&P 500 lost 65.25 handles (points) in the Friday session. Several points need to be addressed. First of all we gained 204 handles in January. We ran from 2674.50 to a high of 2878.50. Friday’s close is a give back of a little more than 50% of that move. We remain above the weekly uptrend line. We could see the Bollinger Bands contract within days. Watch out for margin calls which will trigger softness in the markets. Most margin calls are completed about an hour before the market closes. In futures, those calls must be answered immediately. The bad news is that we are not oversold on the weekly chart. We are oversold on the daily chart but the indicators still point lower. Although the retreat is painful, there is a little more to be expected. As to buying the dips, clearly the advice is to be careful. The most frequently traded price during the day session was 2795.85 but the price with the highest volume was 2759.40. The point and figure chart clearly illustrates the painful retreat seen last week. Our suggestions is to stand back and look at both the weekly and the monthly charts. We have had a very fast moving rally and it is nature to expect to see some decline from over-bought conditions.

The NASDAQ 100 declined 145.25 handles (points) in the Friday session. The good news is that the Bollinger Bands seem to be contracting which indicates that the volatility could decline in the coming days. All the indicators that we follow herein continue to issue a sell-signal although at oversold levels. The most frequently traded price was 6860.10 and the price with the highest volume was 6840.60 which was 5.3% of the day’s volume. At the moment, it appears that the market will decline a bit further before bouncing. Tread lightly and keep your trailing stops alive.

The US Dollar Index rallied 0.54 handles (points) in the Friday session. Both the stochastic indicator and the RSI are issuing a continued buy-signal. Our own indicator continues to issue a sell-signal. The resistance for the US Dollar is 89.255 and support is at 88.255. At the moment, the US Dollar looks as though it is going sideways. The most frequently traded price in the day-session was 89.04. Remember a higher priced US Dollar leads to weaker commodity prices and a weaker US Dollar leads to higher commodity prices, which, is inflationary. Higher US bond prices will also strengthen the US Dollar.

Crude oil lost 0.74 handles (points) in the Friday session on very high volume. Both the RSI and the stochastic indicator are issuing a sell-signal. The Bollinger Bands are contracting and crude oil is now trading below the uptrend line established on December 14, 2018, it does look as though crude oil will return to the 62.85 level in the near future. Major support is seen at 59.05 and at 55.79. We expect to see crude oil back and fill before advancing further. The upside target remains at 80 but that is a long dated projection.

Trading futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future results.
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