The Option Queen Newsletter

We felt the interest rate cut on Tuesday, reacted to it-and, as a hedger; we were singed on the edges, as the market took a leap to the upper stratosphere, with only one decent retreat en route. After the announcement was made, the market leapt forward to over 33 S&P, 500 points before halting for a breath of air. The retreat from that level was to a plus 24, before another surge began, taking the market, ultimately, to over 40 S&P 500 points higher. This rally saw shorts squeezed, hedgers scrabble and investors cheer. But what does it all mean?

Initially, it meant that there was a clear direction from the FOMC that they would support this economy, whatever it would take. The scary part of the FOMC’s decision is the aggressive nature of this cut, admitting to all, that this economy is really in big trouble. The shorts were probably the first to react; they scooped up what they needed to cover their painful positions. Hedgers, always trying to be neutral, were knocked off their footing and forced into the long-side, to maintain their neutrality. The investors bought via the dart-board method of investing, recklessly throwing money at stocks. The end result was a huge rally in the Tuesday session and a decent follow-through on Wednesday.

So, what does a rate-cut of this magnitude do for the sub-prime market and, more specifically, how does it help the floundering homeowners with mortgage resets and possible foreclosures? Answer is that it does not help the homeowners and, the sub-prime market, although flooded with cash, will continue to cause problems, finding funds at reasonable rates. As to the LBO’s, the good ones will get done and the more questionable ones will fall off the radar screen.

Now, as to the US Dollar, which now is on parity with the Canadian Dollar, for the first time in decades. The US Dollar did manage a slight rally from this past week’s lows, in the Friday session. This past week, we removed the lows in the US Dollar index, last seen in 1992! Are we heading back to the Carter Era, when the US Currency was considered trash? As to exporters, this retreat in our currency, has made our goods and services more reasonable and certainly, much more competitive. Therefore, companies with an exporting bent, will do well in a weak-dollar environment. Unfortunately, those global residents, telecommuting and producing services and products to be sent to the USA, will demand more compensation because of the decline in the US currency. The Chinese apparel producer will demand a higher wage to compensate for the lowered value of the US Currency, in which s/he is paid. Another problem comes from those who are paid in the US currency, such as the oil exporters. You wonder why the price of crude is in a rally mode; look no further than the US Dollar, to see why the dollar-based commodity is rallying.

Onto commodities, whereat prices, as measured by the Continuous Commodity Index, are making new life-of-contract, highs on almost a daily basis. It is something that can not be ignored. Yes, the commodities in that index, are priced in US Dollars; so, in addition to some tightness in the market, causing appreciation of prices, the US Dollar’s weakness is adding to the rally. All this leads to inflation, well, at least from a raw-materials basis. True, so long as employment costs are contained, you have some control, but once that is gone, you will have real and painful inflation. Now, back to the mortgage market: With inflation, one finds that money costs more to borrow, and thus, even with the FOMC reducing short-term rates, long-term rates will inch their way higher. Just think about it, if you can easily lend money at a higher rate, why would you lend it at a lower rate, if the question of safety were the same……unless it is family and, although Uncle Sam seems to be related……he isn’t. Thus, those holding mortgages will have their resets at the same old, higher rates. Now, when you look back into history, you will discover, that our rates are not high, especially when compared to the Carter Era rates of what? 21% prime!!!!!!!

We can not leave this topic without further reminding you that many of our trading partners have been hoarding depreciating US Dollars. It is unlikely that these partners will continue the active pace of purchasing our US bonds, which now, are paying less that other bonds, and have a very real currency depreciation risk. As to the reserve status of the US Dollar, watch out because we have now encouraged banks to abandon our currency, in favor of other currencies and, of gold. We would go with gold.

Tuesday: September consumer confidence is released at 10:00, August existing home sales are released at 10:00, and Philadelphia Fed President Plosser speaks.

Wednesday: 2nd quarter durable goods are reported at 08:30.

Thursday: 2nd quarter GDP is released at 08:30 and August new home sales are released at 10:00.

Friday: August personal income and consumption is released at 08:30, September Chicago PMI is released at 09:45, September University of Michigan Sentiment is released at 10:00, August construction spending is released at 10:00, and Fed Governor Mishkin speaks.

Let us start out with some good news, regarding the US Dollar index: There are some divergences in the indicators; for example, the stochastic indicator made a higher-low on a lower-low, in the price of the US Dollar index. This is usually a good sign, for at least a “dead-cat-bounce.” We see that the market is grossly oversold and, when the bears had a chance to make a run on the US Dollar index, they were unable to get more than a probe to the downside. Our own indicator is curling to the upside; looks likely to issue a buy-signal, within a day or so. The Thomas DeMark Expert indicator continues to point lower. The RSI is going sideways, at oversold levels. The 5-period exponential moving average is at 78.950. The top of the Bollinger band is at 81.465 and the lower edge is seen at 78.311. So, that is where the good news ends. The weekly chart looks lower. The indicators are all issuing a continued sell-signal for the US Dollar index. The monthly chart looks awful. All the indicators on that time-frame, are pointing lower.

What we can expect to see is some stabilization in the US Dollar index, so long as the low holds, and isn’t violated by much. Another troubling factor is that the bulls were not able to rally the index very much and could not hold on to much of the feeble rally, seen in the Friday session.

The Euro tested the Thursday high in the Friday session and, just barely missed matching that high. The Euro is exhausted, overbought as measured by the stochastic indicator, our own indicator, and the RSI. The Thomas DeMark Expert indicator is going sideways, at dead-neutral levels. The 5-period exponential moving average is at 140.156. The top of the Bollinger band is at 141.297 and, the lower edge is seen at 134.990. The weekly chart is exhausted; however, we have a continuation of the up-move in place, and it seems likely that it will continue, a bit longer. The stochastic indicator, the RSI and our own indicator are all at overbought levels, and pointing higher. The RSI is near overbought, and continues to point higher. We have a scary 10-count, on the weekly chart. The monthly chart of the Euro is less overbought than other time-frames, and looks very good for the bulls.

When was the last time that the Canadian Dollar was above par? Was it really more than three decades ago that we saw parity? Wow, that is all we can say about that. Canada is a resource-rich country and, in a world where there is some drain or tightness in the markets, this currency is the beneficiary of raw-material inflation. The Canadian Dollar is exhausted. The stochastic indicator and our own indicator have both issued, a sell-signal. The Thomas DeMark Expert indicator is going sideways. The RSI is overbought, and going sideways. We have a gap on the chart from 98.74 to 99.50. We must remind you that this chart tends to be gappy. The 5-period exponential moving average is at 98.89. The top of the Bollinger band is at 99.84 and the lower edge is seen at 92.59. The chart looks like it has consolidated from June of 2007, until September 10, when this market took off to the upside. The chart looks like it is a pole. When we review the weekly chart, the large green candles, as a result of this past two-week rally, is impressive. The indicators are all overbought and continue to issue a buy-signal; however, the stochastic indicator and our own indicator; both are curling over to the downside, but they are not threatening a sell-signal, at this time. The monthly chart illustrates the range of this huge rally. The indicators are all at overbought levels, but only the Thomas DeMark Expert indicator is issuing a sell-signal.

The Dollar-Swiss contract looks as though it is reaching to find a bottom. The chart shows that this contract made a fresh low on Friday and closed on the highs for the day. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal, from over an oversold area. The Thomas DeMark expert indicator is issuing a sell-signal and is oversold. The 5-period exponential moving average is at 117.153. The top of the Bollinger band is at 121.618 and the lower edge is seen at 115.903. We have to go back to 2005 to find the Dollar-Swiss trade, at this level. The weekly chart tells us that there will be some support at 115.880, 114.620, 113.650, and 112.120. All the indicators on the weekly chart, uniformly, are issuing a continued sell-signal, from oversold levels. The monthly chart shows us the low of March 2005 which, if broken, could have some nasty consequences. That low on the monthly chart is at 112.120.

The Dollar-Pound continues to show signs of exhaustion on the daily chart. All the indicators that we follow herein, are issuing a continued buy-signal, with plenty of room to the upside. The 5-period exponential moving average is at 200.254. The top of the Bollinger band is at 203.212 and the lower edge is seen at 199.441. The downtrend line for the Monday session is at 201.679. We would like to see this market stay above 197.765 and 197. 610; or, risk a return to 196.355. The weekly chart has given us a mechanical sell-signal; however, all the indicators that we follow herein, on the weekly chart, are uniformly, issuing a fresh, buy-signal.

The Dollar-Pound continues to show signs of exhaustion on the daily chart. All the indicators that we follow herein are issuing a continued buy-signal, with plenty of room to the upside. The 5-period exponential moving average is at 200.254. The top of the Bollinger band is at 203.212 and the lower edge is seen at 199.441. The downtrend line for the Monday session is at 201.679. We would like to see this market stay above 197.765 and 197. 610m, or risk a return to 196.355. The weekly chart has given us a mechanical sell-signal; however, all the indicators that we follow herein, on the weekly chart, are uniformly, issuing a fresh, buy-signal. On the monthly chart, we seem to be forming a pennant. We are above the uptrend line; however, all the indicators that we follow herein, are issuing a uniform, sell-signal, at overbought levels.

The Australian dollar has a 7-count, on the upside. We are at the lip of a gap from 86.255 to 87.210. The stochastic indicator and our own indicator are both issuing, a sell-signal. The RSI is going sideways, near overbought levels. The Thomas DeMark Expert indicator is going sideways, at neutral. The 5-period exponential moving average is at 85.077. The top of the Bollinger band is at 86.021 and, the lower edge is seen at 80.324. The weekly chart looks fantastic. All the indicators that we follow herein, are uniformly issuing a buy-signal. The chart really looks as though we are going to make a run for the recent highs, seen on the week of July 27,th of 88.250! The monthly chart confirms that finding. Only the Thomas DeMark Expert indicator is issuing a sell-signal; the others all point to higher levels, although those indicators are overbought.
The S&P 500 shows signs of exhaustion, on the daily chart. Friday, the S&P 500 rallied above the Thursday high, only to fall back to profit-taking, by the close of the session. The range of the session expanded both the upside and the downside. The stochastic indicator is at overbought levels, but could issue a renewed, buy-signal. The indicator is not clear. Our own indicator is issuing a continued, sell-signal. The RSI is going sideways, near overbought levels. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period exponential moving average is 1520.44. The top of the Bollinger band is at 1532.30 and the lower edge is seen at 1495.50. The weekly chart looks as though this index is going to make a run for the highs, seen in July. We have a 7-count, but room to the upside. The indicators are all issuing a continued buy-signal, with room to the upside. The monthly chart looks as though it wants to expand to the upside. Only the Thomas DeMark Expert indicator is issuing a sell-signal. The other indicators are at overbought levels, and continue to issue a buy-signal. There doesn’t seem to be a lot of room to the upside, and the risk-reward is not good enough for us to recommend a long position. We would consider a short position, but would put a stop at the old July highs of 1566.30. Still, the risk is too great and we will stand aside, until it becomes clearer, which way the market is going.

The NASDAQ 100 made a new high for the year, in the Wednesday session. We dosee signs of exhaustion in this index. The stochastic indicator is issuing a continued buy-signal, at overbought levels; the RSI is going sideways, near overbought levels. Our own indicator is issuing a fresh sell-signal, and the Thomas DeMark Expert indicator is issuing a sell-signal. The NASDAQ 100 is above the uptrend line at 2031.27. The 5-period exponential moving average is at 2051.10. The top of the Bollinger band is at 2083.04 and the lower edge is seen at 1919.30. Watch the Friday high of 2078.00, as an indication of a move to the upside. The weekly chart remains positive. All the indicators that we follow herein are issuing a continued buy-signal, at or near, overbought levels. It certainly looks as though we could continue to the upside. The monthly chart shows this slight expansion to the upside. We are overbought on all the indicators that we follow; yet, only the Thomas DeMark Expert indicator is issuing a sell-signal.

The Russell 2000 stayed inside the range of the Thursday session. This chart looks like a pole with a bull-flag. It might not be a bull-flag, especially if it trades below 805.30, in the Monday session. The stochastic indicator is going sideways, at overbought levels. The RSI is also overbought and going sideways. The uptrend line is at 784.48 and the downtrend line is found at 821.90. The 5-period moving average is at 810.40. The top of the Bollinger band is at 824.44 and the lower edge is seen at 768.95. The weekly chart is bullish. All the indicators that we follow are uniformly, issuing a continued buy-signal, on the weekly chart. The monthly chart confirms the findings of the weekly chart; that is to say: bullish. We remain cautious on the market especially, on this small capitalization index. Although this chart has more room to the upside, the risk is also that 90% of the move has already been made, leaving you with lots of risk for little reward.

The Continuous Commodity Cash index made another new high, in the Friday session. We now have a 10-count, on this index. As we look at this chart, we see that the CCI has followed its upper Bollinger band higher, with support found on its 5 period exponential moving average. The stochastic indicator and our own indicator are issuing a sell-signal, at overbought levels. Frankly, this index has been bullishly overbought since the end of August. The RSI is going sideways, at overbought levels and the Thomas DeMark Expert indicator is going sideways, at neutral. The 5-period exponential moving average is at 437.44. The top of the Bollinger band is at 444.58 and the lower edge is seen at 399.72. The rally in this index has been too steep to continue at this pace without, at the very least, some backing and filling. The weekly chart shows signs of exhaustion. All the indicators, basis the weekly chart, are issuing a continued, uniform, buy-signal, at or near overbought levels. Even the monthly chart’s indicators are overbought, but none are saying sell; all continue to issue a buy-signal. Naturally, this rally in the broad- based, equally weighted, commodity index, does not bode well for raw material costs. Remember, also, that the energies do not play a huge role in this index because the index is equally weighted.

Well, December cocoa looks as though it could retreat a bit this week. We seem to be having a little problem, pushing to the upside. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator, are all issuing a sell-signal, from overbought levels. The RSI is going sideways, near overbought levels. The 5-period exponential moving average is at 19.17. The top of the Bollinger band is at 19.50 and the lower edge is seen at 17.31. The weekly chart looks fantastic for the bulls. The indicators are uniformly, issuing a buy-signal. The only problems we see is that we do have an 11-count on this time-frame. We could see December cocoa run to 20 or 21 on the next rally. We will see support at 18.72. We need to see some consolidation and backing and filling, from this level, before we challenge the 20 and 21 levels.

October sugar is trying to break out to the upside, but failed to remove the Thursday high, retreating from that level. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are all issuing a fresh, sell-signal. The 5-period exponential moving average is at 9.61. The top of the Bollinger band is at 9.77 and the lower edge is seen at 9.11. The weekly chart clearly shows us that we will probably rally to 10.56, where we will find some stiff resistance. Should we clear that level, we will have much higher prices ahead of us. The indicators on the weekly chart are all, uniformly issuing, a continued buy-signal. We would keep our eyes fixed on the US Dollar and on crude oil. Sugar has been range-bound for a while and could finally be getting ready for a run to the upside.

December coffee has been brewing an upside storm this past week, trading as high as 134.45 in the Thursday session, before taking a rest in the Friday session. We do have signs of exhaustion in coffee. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal. The Thomas DeMark Expert indicator is going sideways, near overbought levels. The 5-period exponential moving average is at 130.28. The top of the Bollinger band is at 132.24 and the lower edge is seen at 109.82. We have a 6-count on this index. The weekly chart remains very friendly, with a target of near 140.00. The indicators are all uniformly issuing a continued buy-signal, on the weekly chart. The weekly uptrend line is at 117.05. We would use this number as a sell-stop, if long of this market.

November Frozen Concentrated Orange Juice tried to break to the upside in the Friday session. We have signs of exhaustion in the Friday’s session. All the indicators we follow herein are issuing a continued buy-signal, albeit at overbought levels. The uptrend line for the Monday session is 127.32. The 5-period exponential moving average is at 125.31. The top of the Bollinger band is at 129.24 and the lower edge is seen at 112.62. We seem to be entering the congestion area, from 128.80 to 135.00; above that level we will have resistance at 142.00. The weekly chart is friendly; now, we must stay above 127.49, to keep this positive feeling about this market. The weekly indicators are uniformly positive, on this market. None of the indicators are overbought; all have plenty of room to the upside.

December cotton rallied for four out of the five days, this past week. The rally in the Friday session, left a huge, green candle, on the chart. We have an 8-count and definite signs of exhaustion. The stochastic indicator, our own indicator and the RSI are all issuing a continued, buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period exponential moving average is at 64.91. The top of the Bollinger band is at 66.80 and the lower edge is seen at 56.12. The weekly chart is equally as bullish as is the daily chart. Here, all the indicators are pointing higher and issuing a continued buy-signal. It certainly looks as though we could challenge the recent highs of 68.80. Cotton looks good, what else can we say?

Crude oil has a very bullish chart. The retreat seen in the Friday session did nothing to change the trend of this market, which continues higher. The indicators are uniformly issuing a sell-signal, from overbought levels. The 5-period moving average is at 80.77. The top of the Bollinger band is at 83.20 and the lower edge is seen at 69.22. So long as this market stays above the 5-period moving average, it will continue higher. If long; use that number, as a floating sell-stop. The weekly chart looks very bullish. The indicators on this time frame, continue to issue a buy-signal, but the stochastic indicator is curling over, and the RSI is overbought. The monthly chart is also bullish, with the indicators pointing higher.

December gold continues to venture higher; although, it did retreat in the Friday session. The stochastic indicator is issuing a sell-signal. The RSI is overbought and sloping slightly, to the downside. The 5-period moving average is at 731.11. The top of the Bollinger band is at 749.56 and the lower edge is seen at 660.40. Watch the US Dollar index for clues on gold. We would not buy at this time, but rather, will wait for some backing and filling, to step into this market. Both the weekly and the monthly charts tell a story of higher prices, yetto come. The indicators are uniformly, issuing a buy-signal, on both time-frames. Our first target is about 750, where we believe, profits will be taken.