Archive for November, 2007

The Option Queen Letter for November 25, 2007

Sunday, November 25th, 2007

A relief rally appeared in the Friday shortened session. With bellies full and “Joy to the World,” playing as background music, the market enjoyed black Friday to its fullest. The stores were full of shoppers looking for those special bargains to buy. Many of the Wall Street players stayed home on Turkey Overload preferring to shop for stocks instead of gifts in the malls!

There has been much talk about buying the Euro as a speculation that it will replace the US Dollar’s reserve status. We warn you that this may not work out as you might plan. Why? Well simply put, there is a bond between the Euro zone and the USA, which kind of links the two. They rely on us and we rely on them, thus, if we slow down economically, they will as well. We continue to believe that should the US Dollar continue to recede, the rumblings from those, whose currency is pegged to the US Dollar, will become louder and lead to dissonant tones in a currency symphony. As to the status that the US Currency has enjoyed globally, that status could and likely will come under fire, not only by those who are considered radical, but also those level-headed leaders.  As to China, at the moment, they are focused on their tasks at hand and, are not likely to upset their relationship with the USA, yet, being the operative word. Their patience with the currency will also come to an end and that, could have disastrous effects.

Interest rates here in the USA have been receding like the waters in a drought. This in itself should be a sort of prop for the stock market. Money market interest, T-Bill yields and much “safe harbor” places to hide are not yielding enough to keep up with real inflation…..not the government’s view of inflation. Therefore, the investor will be forced to look for places to park or invest their free cash flows. This will bring the investors back to securities that pay reasonable dividends. We recently reviewed a list of high dividend paying non-utility stocks and found that the list was long and the projected estimated yield were high enough to take the edge off the stock price risk.

Naturally, if interested, you could buy Argentina’s bonds, or Turkey’s bonds, or if you really have a stomach for risk, why not Ecuador’s bonds. A caution here is that you have several risk factors, recently illustrated with the troubles in Turkey, sovereign risks and currency risks. Both Canada and Great Britain pay higher interest on their bonds than can be obtained from an investment in US debt.

The FOMC is truly in a mess here. If they reduce interest rates again, they trash our currency and stoke inflation. Should they hold steady, the Wall Streeters will have a hissy fit and slam the market. If they raise interest rates, they will definitely slam the market, but they will return stability to and aid in the US Dollar’s rally…when and if it ever returns… naturally it will. Why does the government want a weak dollar? Clearly it is contributing and having a positive effect on our exports and tourism. These effects are positive numbers to GDP and will help off-set some of the losses seen by the declining housing market. We would guess that the smartest thing for the FOMC to do is to sit still and see how this plays out. By not moving interest rates lower, they could stimulate some buying interest in the US Dollar and ward off some of the hissing and booing recently seen in the currency market. We believe the US Dollar Index has declined to levels, which are causing some global response to the competition that this weakened currency affords. That weakness has notably improved USA export sales which, in turn has led to improvements in the balance of trade, encouraging some to believe that we could achieve a positive trade balance. We believe that it has gotten to a point where, foreign governments might try some intervention, to prevent further losses to the US Dollar and prevent further appreciation of the their currencies against the flagging green-back. Then there is OPEC, which is concerned about the depreciation of the US Dollar and is speaking in public about that concern. Further, there are also those countries that peg their currency to the US Dollar. The annoyance voiced by various corners is becoming a crescendo of anger which will lead to a resolution of sorts.

Tuesday: November consumer confidence is released at 10:00 and Philadelphia Fed President Plosser speaks.

Wednesday: October durable goods report is released at 8:30, October existing homes sales and the beige-book is released.

Thursday: 3rd quarter GDP is released at 8:30, October new home sales are released at 10:00 and Fed Chairman Bernanke speaks in the evening.

Friday: October personal income and consumptions is released at 8:30, November Chicago PMI is released at 9:45, October construction spending is released at 10:00, Fed governor Kroszner speaks and St. Louis Fed President Poole speaks.

The US Dollar Index has enjoyed a rare three-day rally last week, however; continues to remain below any downtrend line we draw. The Friday session saw a lower open with a fresh new low which led to a reversal to the upside leaving a good sized green candle on the chart. The downtrend line for the Monday session is at 75.647. We will see some resistance at 75.50, a level which will be challenged, if we are going to see the US Dollar index rally. The stochastic indicator and our own indicator are both issuing a buy-signal. The RSI is oversold and going sideways. The Thomas DeMark Expert indicator is oversold and pointing lower. The 5-period exponential moving average is at 75.245. The top of the Bollinger band is at 81.899 and the lower edge is seen at 79.901. This past week completed a sixth consecutive week of declines for the US Dollar index. Yes, we are oversold, but continue to have a sell-signal issued from the stochastic indicator, the RSI and our own indicator. The Thomas DeMark Expert indicator is just going sideways at neutral levels. The US Dollar index remains below the clouds on the daily, weekly, monthly, and quarterly time frames! We do expect to see a bounce to at least the 75.50 level and perhaps the downtrend line.

The Euro’s assent to the 150 levels seems as sure an event as the speculation that crude oil will trade above $100 a barrel. Both events have been widely expected, and both are just so close to the appointed levels, that, they just might get there. The stochastic indicator, our own indicator and the RSI are all overbought and issuing a fresh sell-signal. The Thomas DeMark Expert indicator is overbought and going sideways. The 5-period exponential moving average is at 147.694. The top of the Bollinger band is at 148.684 and the lower edge is seen at 143.448. The weekly chart shows a clear assent with the Euro remaining above the 5-period moving average line. Perhaps, that line would make a good stop for a long position. The stochastic indicator, the RSI and our own indicator are all overbought, but all are pointing higher. The Thomas DeMark Expert indicator is at neutral and going sideways. The monthly chart continues to look exhausted. The indicators on the monthly chart are overbought and both the stochastic indicator and our own indicator are now issuing a sell-signal. Should we see the market trade above the 150 level, expect stops to become elected. We would not be afraid of selling that rally, for a quick trade.

The Dollar Pound Sterling remains above the uptrend line at 205.251 for the Monday session. We did see a solid retreat in the Friday session. The stochastic indicator is issuing a sell-signal, the RSI is slightly negative, our own indicators is going sideways to the buy-side and the Thomas DeMark Expert indicator is pointing higher. There is a very noticeable gap on this chart from 206.200 to 209.360. The 5-period exponential moving average is at 205.848. The top of the Bollinger band is at 210.353 and the lower edge is seen at 203.505. The weekly chart continues to look positive. We do have signs of exhaustion and a candle which shows that both the bottom and the top of the candle are below the previous candle’s highs and lows. The indicators are positive for this time frame.

Much to the relief of the Canadian government, the Canadian dollar has retreated since November 7th back to the congestion area where it currently trades. The bad news is that there was a doji candle on Wednesday which shows that the market is in transition. Further, Friday’s session failed to print a lower low and had a positive look to it. The stochastic indicator, the RSI and our own indicator are all issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period exponential moving average is at 101.74. The top of the Bollinger band is at 109.08 and the lower edge is seen at 99.94. The Canadian dollar’s retreat looks far more dramatic on the weekly chart. The indicators uniformly are issuing a sell signal for that time-frame. The monthly chart is also looking heavy, the indicators here also issuing a sell-signal. The daily chart is the only chart that looks as though the market will rally, the other time-frames are less optimistic and show that the par level could be revisited with a possible break of that level.

The S&P 500 rallied in the Friday session recovering most of the Wednesday losses. The downtrend line for the Monday session is at 1446.35. There seems to be a stabilizing line at 1417.20. The problem with that line is that we have tested it three times, should we test it again we will surely remove that support and probably head for the August lows. The indicators that we follow are uniformly oversold and are issuing a buy-signal. The 5-period exponential moving average is at 1433.92. The top of the Bollinger band is at 1561.31 and the lower edge is seen at 1399.10. When reviewing the weekly chart, there are some mixed messages. The indicators are diverging with the stochastic indicator and the RSI issuing a sell-signal, our own indicator still on a sell but curling to the upside and the Thomas DeMark Expert indicator issuing a buy-signal. The daily chart is below the clouds, the weekly chart in the clouds and the monthly chart definitely above the clouds and above the uptrend line. The monthly indicators are issuing a uniform sell-signal. When you look at longer time-frames it is clear that although it has been difficult for the bulls, on a daily basis, the bigger picture is still positive, marginally but positive nonetheless. We will add just a note of caution, should 1417.20 fail to support the market, you will retest and undercut the August lows of 1375.00.

The initial fall for the NASDAQ 100, began on November 7 and bottomed on November 12th. Since that time, the market has been trading in a sideways fashion without a bias in direction. All the indicators that we follow herein are issuing a buy-signal. The 5-period exponential moving average is at 2023.55. The top of the Bollinger band is at 2294.58 and the lower edge is seen at 1927.33. We see that the NASDAQ 100 is forming a wedge on the daily chart. The uptrend line is at 2005.93 and the downtrend line is at 2025.04, clearly by Wednesday, we will see a resolution to this pennant. The weekly chart shows that a pennant is in formation. Last week the high was lower and the low was higher than it was in the previous week. The indicators are all uniformly pointing lower, issuing a continued sell-signal. The monthly chart has a large red candle looming bearishly over the previous green candle. The indicators for the monthly chart are uniformly bearish.

The Russell 2000 blew to the upside in the Friday post Turkey Day euphoria. Not only were shoppers in the malls but they eyed stocks as bargains and scooped them up pushing this index a staggering 16.00 higher for the day! Despite this holiday merry spirit, we remain below the downtrend line which, is at 761.83 for the Monday session. There is a quad of lows at 736.70, if you include the Thursday session. Obviously, 736.70 is an important number to stay above. We have already removed the August lows for the Russell 2000; the next level down is at 675.00 yikes! The indicators are uniformly issuing a buy-signal. The 5-period exponential moving average is at 748.48. The top of the Bollinger band is at 833.58 and the lower edge is seen at 729.38. All of the indicators on the weekly chart, except for the Thomas DeMark Expert indicator, are issuing a continued sell-signal. The monthly chart looks as though we have put in an important top in this index. The indicators are all issuing a sell-signal for this time-frame.

The Continuous Commodity Index rallied in the Friday session taking it to within a sneeze of the life-of-contract highs. All of the indicators that we follow in this report are issuing a buy-signal. The 5-period exponential moving average is at 452.20. The top of the Bollinger band is at 459.51 and the lower edge is seen at 446.38. It is important for this index to stay above 446.46. Should we break that level, on a closing basis, we would have a downside risk to 443.11 and to 436.88. The weekly chart looks positive with a bullish engulfing candle for this past week. We do have signs of exhaustion for this time-frame. The Thomas DeMark Expert indicator is issuing a sell-signal. The stochastic indicator, the RSI and our own indicator are all issuing continued buy-signal, albeit at over bought levels. The monthly chart has a scary 16 count. The indicators are issuing a sell-signal at overbought levels.

March cocoa retreated for last two sessions. Cocoa has had a problem removing the 19.76 level. It has tried in each of the three past sessions to get above that level and failed to do so. The stochastic indicator and the RSI are issuing a sell-signal, while both our own indicator and the Thomas DeMark Expert indicator are issuing a buy-signal. The Bollinger bands are becoming narrower. The 5-period exponential moving average is at 19.41. The top of the Bollinger band is at 19.87 and the lower edge is seen at 18.97. The uptrend line is at 19.36 for the Monday session. The downtrend line is at 19.70 for the Monday session. By the first Tuesday in December, if we continue in this trading range, we will have a point of inflection which will lead to a large move. The weekly chart is painting much the same picture. The indicators for this time-frame are all positive. We also see, from this chart, that the market will run into trouble at 20.00.

March sugar is going to get the “ugly chart” award for commodities this week. The market has been slowly dissolving to the downside. The stochastic indicator, the RSI and our own indicator are all issuing a continued sell-signal from oversold levels. The Thomas DeMark Expert indicator is going sideways at neutral. The 5-period exponential moving average is at 9.78. The top of the Bollinger band is at 10.20 and the lower edge is seen at 9.70. If this market can close above 9.82, we will have a buy-set up. Actually the way the chart looks we would expect to see 9.59 before long, and possibly 9.46. The weekly chart shows sugar in a downtrend. The market needs to close above 9.81 to reignite the bulls. On the other hand, we are on the uptrend line 9.76. By Friday, the lines will converge yielding a point of inflection and a resolution to this coil.

March coffee is forming a pennant. Tuesday, we will have a point of inflection and a violent move. All the indicators that we follow herein are issuing a sell-signal, only the Thomas DeMark Expert indicator is at oversold levels. The 5-period exponential moving average is at 127.63. The top of the Bollinger band is at 129.11 and the lower edge is seen at 123.11. The weekly chart is also pointing to a violent move in the near-term future. The indicators are uniformly pointing lower nearing oversold readings. Coffee remains below the clouds on the daily chart but above the clouds on the longer time-frames.

The Friday session was a failure at the high of 141.95. So long as Frozen Concentrated Orange Juice can stay above 130.40, we will be open to further attacks to the upside. The indicators are somewhat confused. The Thomas DeMark Expert indicator is pointing higher and is approaching overbought, the stochastic indicator is overbought and going sideways, the RSI is at neutral and going sideways and our own indicator is curling over to the downside. The 5-period exponential moving average is at 132.82. The top of the Bollinger band is at 141.44 and the lower edge is seen at 129.36. The daily chart finds OJ trading in the clouds which means, don’t trade. The weekly chart looks as though Juice would like to trade higher. The indicators are pointing higher. FCOJ needs to close above the downtrend line at 139.00 for the week ending on Friday. The weekly chart looks as though FCOJ could trade up to 158.00 where some resistance will be found.

March cotton is in the clouds and further has a doji-candle showing some conflict in the direction. We also have a 9-count as of the Friday session. The down trend line for the Monday session is 66.12. The 5-period exponential moving average is at 65.68. The top of the Bollinger band is at 70.76 and the lower edge is seen at 64.96. So long as the market remains above 65.24, we believe that an upside move is in the cards. However, should that number fall, we will flip to the bearish position. The stochastic indicator, the RSI and our own indicator are all issuing a continued buy-signal. The Thomas DeMark Expert indicator is at neutral going sideways. The weekly chart has a more bearish look to it. The indicators on this time-frame are all negative.

Crude oil rallied in the Friday session but was unable to remove the previous highs during the shorted day. The indicators are again approaching overbought but continue to issue a buy-signal. The 5-period moving average is at 96.3960. The top of the Bollinger band is at 98.2191 and the lower edge is seen at 86.2709. The uptrend line for the Monday session is at 94.30. The weekly chart printed a life-of-contract high this past week. The stochastic indicator on the weekly chart is overbought but has just issued a fresh buy-signal. It appears that the market is itching to remove the $100 level which will carry it further than the $100 as buy-stop orders are elected. Once that is accomplished and on that run, we would be willing to buy a put or short the contract, for a day-trade only.

Gold rallied in the Friday session and is setting up to challenge the recent highs and print a new high. The indicators are issuing a continued buy-signal from the neutral level. The 5-period moving average is at 795.594. The top of the Bollinger band is at 840.00 and the lower edge is seen at 769.70. The weekly chart is in agreement with the daily findings. Gold looks as though it would like to run to the upside. If we do print a new high, expect a spike high and a pull-back from that level.