Archive for December, 2007

The Option Queen Newsletter for December 30, 2007

Sunday, December 30th, 2007

As the New Year approaches the typical topic of discussion is to prognosticate, predict, and further espouse a view of what the future will bring. Our view is not a pretty view, well, certainly not in the short-term, but a view that becomes somewhat less gloomy as the year 2008 progresses.

In the first quarter of 2008, we will continue to feel the pangs of pain from the fall out of the sub-prime mess. This will cause banks and other lending bodies to, finally, become conservative on their lending practices. Then, as a first quarter gift, we will begin to see some of the lending excesses, in the form of “Exotic Mortgages,” begin to fail. While this event will likely only be felt in the wealthy sectors of the economy, it will nonetheless, curtail spending and further pressure home prices. The FOMC will continue to lower rates, but this will not help loosen the new tight lending practices, just learned. Many lenders have been stung by the mortgage-bee and, will be less likely to lend that aggressively again. This will slow down the consumer spending habits. A further effect of lowering interest rates, is to encourage inflation, which is already percolating at a boil. The US Dollar index will feel this pressure, and may take another leg, to the downside, destabilizing further, its reserve status. Commodities will continue to rally, gold will rally and crude oil will surpass the $100.00 mark, pushing beyond the century mark before retreating. The Chinese will enjoy the Olympic boom after which, its aggressive growth will moderate. We look to Japan, Korea, India, Turkey and Russia for growth in the year ahead. We would be long resources and short consumer extravagances. This gloomy forecast will last for, at the very least, the first quarter, and possibly the second quarter, but will lead to a rally for the summer and into the election season. Thus, the year will close just marginally above where it opened 2008 with an election campaign flooding hopes for fairy dust to get us out of our messes. The result will be to throw the bums out and “tax the rich.” We do not agree with this, however; that will be the mantra. We are capitalists at heart, and do not believe in punishing those who have been successful.

The bottom line is: where do you put money to work. Obviously, with interest rates very low, another home for free cash is needed. We encourage you to look into preferred issues of stable companies for an increase in cash flow. Further, convertible preferred and convertible bonds on good stocks are a good source of cash-flow, with an equity kicker. Also, remember that there is cap on the taxes you pay on dividends, well, so far there is…. that cap is at 15%. Dividends have the preference, not bond coupons, which are taxed as ordinary income. Naturally, this investment strategy is good for a declining interest rate environment and needs to be adjusted when that strategy changes. We continue to like gold, but will avoid industrial metals. We like commodities because even in a recession, “Man has to eat and heat.”

Monday: the last day of the year 2007 and the last day to take losses for the tax year, November existing home sales, and November semiconductor book-to-bill is released.

Tuesday: HAPPY NEW YEAR!

Wednesday: December ISM is released at 10:00, November construction spending is released at 10:00 and the minutes of the last FOMC meeting are released at 2:00.

Thursday: Challenger, Gray & Christmas issue December’s job-cuts and November factory orders are released at 10:00.

Friday: December’s nonfarm payroll and unemployment rate are released at 8:30 and Fed Vice Chairman Kohn speaks.

The US Dollar index retreated for all four, of last week’s trading days. This retreat can be attributed, in part, to very light holiday trading and book squaring into the last days of the year. The stochastic indicator, the RSI and our own indicator are all issuing a continued sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal. The 5-period exponential moving average is at 77.063. The top of the Bollinger band is at 78.088 and the lower edge is seen at 75.430. The weekly chart shows a large red candle as a result of last week’s trading. The stochastic indicator, the RSI and our own indicator are all pointing lower. The Thomas DeMark Expert indicator is overbought, and pointing higher. We notice that, this past week, the horizontal line on the chart of 77.85 was tested, but there is a line above there at 78.224, another level that will offer resistance at the next rally attempt. However, we believe that the downside is a more probable direction for the US Dollar index.

The Euro rallied last week leaving an overbought 16-count on the chart! Naturally, we have signs of exhaustion on this chart. The stochastic indicator is overbought, the RSI is getting overbought, and our own indicator is somewhat overbought, but all are issuing a continued buy-signal. The Thomas DeMark Expert indicator is curling over to the downside, at overbought levels. The 5-period exponential moving average is at 145.330. The top of the Bollinger band is at 148.508 and the lower edge is seen at 142.931. Both the daily and the weekly charts show that the Euro has broken the downtrend line. The weekly chart shows a large green candle with signs of exhaustion. The stochastic indicator, the RSI and our own indicator are all issuing a buy-signal. The Thomas DeMark Expert indicator is oversold and continues to point lower. The monthly chart shows that the Euro is overbought. We continue to see the Euro rally higher. Perhaps, the Euro will remove the old highs, but it seems to need to rest before that attempt will surface.

The British Pound Sterling printed the low for the week on Christmas Eve when it traded as low as 197.15. The market is giving us some mixed signals. The stochastic indicator is oversold and looks as though it will issue a sell-signal in the next session. The RSI is curling over to the downside and our own indicator is going sideways near neutral levels. The Thomas DeMark Expert indicator is issuing a buy-signal at overbought levels. The 5-period exponential moving average is at 198.24. The top of the Bollinger band is at 207.16 and the lower edge is seen at 195.94. The weekly chart has a more positive look to it. All the indicators that we follow herein are issuing a fresh buy-signal on the weekly chart. The monthly chart is still showing a downside liability to 196.21. This week may bring some fire-works as the New Year’s money is put to work.

The Canadian Dollar made a marginal new high in the Friday session and fail to progress further, finding resistance at the lip of the gap from 102.55 to 103.46. The market stepped into the gap and retreated from it. All the indicators that we follow are issuing a uniform sell-signal. We do have signs of exhaustion. The 5-period exponential moving average is at 101.71. The top of the Bollinger band is at 102.33 and the lower edge is seen at 97.27. Notice that the high was above the upper edge of the Bollinger band indicating that this market will have difficulty staying above that level, for the short term. The weekly chart shows us that the market can rally to the upper edge of the weekly gap which is at 104.92 and ends at 106.05. We do see further resistance at 105.35. All the indicators on the weekly chart are issuing a continued buy-signal. Any trade below 97.75 will indicate a return to the 95.00 level.

The S&P 500 will continue to feel pressure as the stocks that need to be sold for tax losses are sold in the Monday session. On Wednesday, we could see a return to the upside as some of this capital is put to work. All the indicators that we follow herein are issuing a continued sell-signal. The 5-period exponential moving average is at 1497.92. The top of the Bollinger band is at 1521.23 and the lower edge is seen at 1452.83. The market is forming a pennant. The downtrend line is at 1507.71 for the Monday session and the uptrend line is at 1466.98 for the Monday session. The weekly chart clearly shows that we are consolidation, or coiling. All the indicators that we follow are issuing a sell-signal on the weekly chart. The downtrend line for the Friday session is at 1503.36 and the uptrend line for that session is at 1471.45, remember, the “Jobs” data will be released on Friday so; we might break out of this pattern. The monthly chart shows much the same picture as does the weekly and the daily time-frames.

The NASDAQ 100 seems to making some small progress to the upside which is then followed by small retreats. All the indicators that we follow herein are issuing a continued sell-signal. The 5-period exponential moving average is at 2140.25. The top of the Bollinger band is at 2169.30 and the lower edge is seen at 2039.86. The weekly chart has been going sideways for at least seven weeks, with last week’s probe to the upside higher than the previous weeks. This past week left a doji-like candle on the chart which indicates that we could change direction, or in this case get direction. The chart has been going nowhere for a while now. All the indicator s that we follow are issuing a sell-signal for the weekly time-frame. The monthly chart has very clear signs of exhaustion, but the indicators are going sideways without direction.

The Russell 2000 is showing signs of exhaustion on the daily chart. All the indicators that we follow herein are issuing a sell-signal. We would not be surprised to see this small capitalization index trade down to 762.40. The 5-period exponential moving average is at 788.90. The top of the Bollinger band is at 804.05 and the lower edge is seen at 742.68. The good news is: we have closed above the downtrend line. The weekly chart illustrates that the small movements to the upside, are followed by retreats are slightly higher than the previous retreats. We seem to be coiling. The indicators all are issuing a sell-signal on a weekly time-frame. The monthly chart has a doji candle with a shorter range than the previous candle. The indicators are all pointing lower on the monthly chart.

The Continuous Commodity Index seems to be hitting a wall of resistance and, is having difficulty moving higher. Friday the CCI printed a new life-of-contract high then, retreated to close below where it opened, leaving a red-candle on the chart. We do have signs of exhaustion in the daily chart. All the indicators we follow herein are overbought and all, a issuing a sell-signal. The 5-period exponential moving average is at 475.60. The top of the Bollinger band is at 481.83 and the lower edge is seen at 450.23. We would not be surprised to see this index pull back a bit or, perhaps, go sideways. The weekly chart shows exhaustion and a doji candle with a 6-count. The indicators are all issuing a fresh sell-signal. The monthly chart shows a scary 17-count. The stochastic indicator, the RSI and our own indicator are issuing a fresh buy-signal at overbought levels. The Thomas DeMark Expert indicator is issuing a sell-signal.

March sugar needs to stay above 10.87 or risk a return to the 10.55 level. All the indicators that we follow are issuing a sell-signal from overbought levels. The 5-period exponential moving average is at 10.98. The top of the Bollinger band is at 11.32 and the lower edge is seen at 9.39. The very steep uptrend line is at 11.11 for the Monday session. The less steep more reasonable line is seen at 10.47 for the Monday session. The weekly chart shows that March sugar made a higher high, this past week, than the previous week, but failed, once that high was printed. The stochastic indicator, our own indicator and the RSI are all issuing a fresh sell-signal. The Thomas DeMark Expert indicator is issuing a continued buy-signal at, overbought levels. The monthly chart shows that the recent rally is the best rally seen in a very long time.

March cocoa had a rather mixed week resulting in a downside move. The downtrend line is at 20.60 for the Monday session. All the indicators that we follow herein are issuing a sell-signal. The 5-period exponential moving average is at 20.66. The top of the Bollinger band is at 21.49 and the lower edge is seen at 19.90. At the moment, the market is coming to a point of inflection which, should result in a violent move in the Monday session. The uptrend line on the weekly chart is at 20.16. The indicators for this time-frame are issuing a uniform sell-signal. We do have a 9-count and signs of exhaustion on the weekly chart.

March coffee looks as though it could make a run to the upside, so long as it remains above 132.80. All the indicators that we follow herein are issuing a buy-signal, only the Thomas DeMark Expert indicator is coming from oversold levels. The 5-period exponential moving average is at 133.32. The top of the Bollinger band is at 136.24 and the lower edge is seen at 128.48. The weekly chart shows a long tailed doji candle. The weekly chart looks as though coffee is rolling over to the downside. The indicators on the weekly chart are also issuing a sell-signal. The monthly chart continues to look fine. The daily chart looks as though March coffee is rolling over to the downside. The indicators are telling us a different story and we fell confident that this issue will be resolved in the Monday trading session. Should March coffee close above 133.25 we will feel much better about the positive side of the market however, should the market close below 132.69, we will abandon that bullish view.

May Frozen Concentrated Orange Juice enjoyed a dynamic rally in the Friday session, but failed to rally high enough to close the gap left on the chart as a result of the Wednesday-Thursday session. That gap is from 147.50 to 146.50. The stochastic indicator continues to issue a sell-signal. Our own indicator is curling to the upside; the Thomas DeMark Expert indicator is issuing a continued sell-signal and, is at oversold levels. The RSI is issuing a buy-signal at dead neutral. The 5-period exponential moving average is at 148.21. The top of the Bollinger band is at 153.93 and the lower edge is seen at 136.42. We do have a downside liability to 139.00. The weekly chart has a very large red candle as a result of last week’s trading. All the indicators that we follow herein are issuing a sell-signal for this time-frame. The uptrend line is at 142.46 for this coming Friday. We have broken above the downtrend line on the weekly chart. We see support for the weekly time-frame at 131.68 that….watch out below!

March cotton has enjoyed solid rally since the lows of December 6th. Friday session ended with a doji candle on the chart. The indicators are all issuing a sell-signal from overbought levels. The 5-period exponential moving average is at 67.07. The top of the Bollinger band is at 67.99 and the lower edge is seen at 62.50. The uptrend line for the Monday session is at 67.21. The uptrend line on the weekly chart is at 66.95. All the indicators that we follow herein are pointing higher for this time-frame. The market has had a nice four-week run to the upside and looks as though, after some consolidation of its gains, would like to move higher.

February crude oil made a higher high in the Friday session, but closed below the opening levels leaving a red-candle on the chart. The stochastic indicator and the RSI are both issuing, a sell-signal. The 5-period moving average is at 95.206. The top of the Bollinger band is at 97.0192 and the lower edge is seen at 85.6038. We closed below the upper edge of the Bollinger band, after probing above that level in both the Thursday and Friday sessions. The uptrend line for the Monday session is at 93.03. Obviously, we have rallied far above that line and could easily return to that line without changing the trend keeping it, bullish. The weekly chart looks as though we are setting up for a rally to the century mark and beyond. The indicators for this time-frame are positive. The monthly and the quarterly time-frames all point to higher levels.

February gold looks even better than does February crude oil. The indicators that we follow are pointing higher although, they are approaching overbought levels. The 5-period moving average is at 827.18. The top of the Bollinger band is at 836.036 and the lower edge is seen at 784.464. Notice that gold closed above the upper Bollinger band, a level which it can not maintain. The weekly chart looks as though we are setting up for a run to the highs and beyond. The indicators are overbought but pointing higher. The monthly chart is also positive albeit overbought. We continue to like the precious metal although, we would like to see it consolidate some of its gains before another attach to the upside.