The Option Queen Newsletter

The fall-out left in the wake of the “sub-prime” mess, flows as naturally as day into night as the problems of impaired assets move into municipal governments and the property taxes they levy.  If a home is in foreclosure, the real estate taxes levied on the property will be, either lower due to its foreclosed position or not paid at all.  Additionally, as property values recede, requests for reassessments on real-estate property tax increase.  This is major problem for municipalities, whose taxing ability is reduced by the values of these properties as their assessed value declines.  So, what does that mean for you, well actually lower taxes, but also panic on the local governments side as they cut and delay projects and layoff workers.  We have seen this before, actually not so long ago during the fallout from the dot.com bubble blow-up.  The big difference between now and then is that this blow-up is based on a real-estate bubble, the very asset that is being taxed.  The fallout from this, should be much worse than the fallout seen after the last mania seen at the beginning of this century. All this will lead to some “egg on your face” for the upcoming political campaigns.

We should send a “Thank You” note to China for all the recalled items.  These recalls have ignited a flame under an almost dead manufacturing industry.  The toy recalls have boosted “Made in USA” items to the degree that manufacturers are hiring again and working their employees to the max.  Actually, we heard of accounts where factories are working 24/7 to satisfy the demand for products!  Nice shift but will it last?

Onto another problem for this economy is the rise in the cost of health insurance coverage.  As the sub-prime mess, mortgage mess, and unemployment (on the lower end of the pay-scale) continues, family costs such as health insurance costs are spiraling higher and higher.  These ballooning costs will be the first to be cut, by the struggling middle-class family, as it tries to stay afloat.  The result of this will be that the health-care systems will be forced to cover the costs of indigent users of the system.  This of course, always filters down to those who pay the bills, have insurance and pay taxes. 

Insurance companies have operated uncontrolled in the past and now must be reined-in.  We should make an effort to cap the costs of insurance, so that it remains within reach of those who need the coverage.  We are at that point in time, when people are allowing these insurance policies to lapse because they can’t afford to pay the premiums.  In many families, the premiums are so high that paying for the premium or starving seems to be the choice du jour, which one you think will be cut? 
This is a huge problem, bubbling just under the surface. We need to address this now when some damage control might limit the stresses on the system.   This financially explosive problem needs to be remedied before the crisis occurs.  Will anybody fix it, probably not!  Get ready for the next problem to hit… along about the same time as the Exotic Mortgages problems occur.

Monday:  both the NYSE US 100 index is rebalanced and the NASDAQ 100 is rebalanced. 

Wednesday:  S&P Case-Shiller home price index for October released and the minutes from the Bank of Japan’s interest rate meeting are released. 

Thursday:  November durable goods are released at 8:30, and December consumer confidence is released at 10:00. 

Friday:  December Chicago PMI is released at 9:45 and November new homes sales are released at 10:00. 

The US Dollar index enjoyed another week of buying bringing this index to 77.85 in the Thursday session, before retreating slightly closing the week at 77.74.  It seems as though this index, which looked as thought it could rally to 78.21, is stalling.  All the indicators that we follow herein are issuing a uniform sell-signal.  The 5-period exponential moving average is at 77.602.  The top of the Bollinger band is at 78.191 and the lower edge is seen at 74.646.  The uptrend line for the Monday session is at 76.814, which illustrates how steep the advance has been.  We would not be surprised to see the market retreat to that uptrend line which will be at 76.995 by Wednesday and 77.227 by the Friday session.  The weekly chart looks good, although we remain far below the downtrend line of 79.64, for this coming Friday.  The indicators, for this time frame, are all pointing higher and have plenty of room to the upside.  We continue to see resistance at 78.21, give or take a tick or two.  On the monthly chart, the downtrend line is at 80.242.  The indicators for the monthly time frame are all positive.

The chart of the Euro looks as though the market is trying to stabilize and defend the Thursday low of 143.270 although; we see a better support ledge at 142.980.  Most of the markets will be quiet this Christmas week with trading desks with skeleton crews watching the markets. The 5-period exponential moving average is at 143.854.  The top of the Bollinger band is at 149.607 and the lower edge is seen at 142.883.   All the indicators that we follow are uniformly issuing a fresh buy-signal on the Euro.  We did have an 8-count in the Thursday session.  The downtrend line is at 145.665 for the Monday session.  By the Friday session, that downtrend line will be at 145.392.  The weekly chart is not at all bullish but rather shows a slow a steady decline in the Euro with signs of continued exhaustion.  We do note that a rally to 146.184 will be possible by the Friday session.  This is a downtrend line on the weekly chart, one that will put pressure on this market.  The indicators, for the weekly time frame, are all; negative.  The indicators on the monthly chart are all negative. 

Here is a quote from last week’s letter on the British Pound Sterling: “We should return to the 197.55 to 196.21 area.” Hate to be a told ya so but… we told you so!  The chart continues to look depressed and like a waterfall falling lower.  The chart is very gappy; however, we do see some hope for the British Pound Sterling.  Friday’s session was a narrowly traded session resulting in an inside day.  All the indicators that we follow herein are issuing a fresh buy-signal from very oversold levels.  The 5-period exponential moving average is at 199.43.   The top of the Bollinger band is at 209.15 and the lower edge is seen at 197.41.  The downtrend line is at 204.09, for the Monday session.  The downtrend line on the weekly chart is at 203.86.  The market has dropped below the uptrend line and looks as though there is a liability to 196.21, 194.17, and 191.92.  All the indicators are pointing lower and all are at oversold levels.  The monthly chart agrees with the weekly chart with the exception that the indicators are not oversold for that time frame and have plenty of room to the downside.  We really don’t expect to see much activity during this coming week and expect the flow into the end of the year to be quiet.

The Canadian dollar is forming a rounding bottom and is gently slopping higher.  All the indicators that we follow herein are issuing a continued buy-signal however; the stochastic indicator and the Thomas DeMark Expert indicator are both at overbought levels.  The 5-period exponential moving average is at 99.93.  The top of the Bollinger band is at 101.53 and the lower edge is seen at 97.65.  The weekly chart has a large green candle as a result of this past week’s trading.  The indicators are all issuing a fresh buy-signal from oversold levels.  At a very minimum, we expect to see a rally to 103.90 and 104.92 which is the lip of a gap on the chart.  Resistance should be seen at 105.35.  On the downside, use 97.65 as a stop if, you are long.

The S&P 500 enjoyed a robust rally in the Friday session bring relief to some as the December expiration moved into history.   We have an 8-count indicating that although we could go higher in the Monday shortened session we are nearing a level at which we will either explode to the upside (not likely) or retreat as we approach the downtrend line at 1503.03 for the Monday session.  The indicators are all pointing higher with plenty of room to the upside.   The 5-period exponential moving average is at 1472.18.  The top of the Bollinger band is at 1527.10 and the lower edge is seen at 1425.57.  The uptrend line is at 1460.92 for the Monday session.  The weekly chart looks positive.   The indicators are all issuing a continued buy-signal.  We are cautious on this market and unless and until the market closes above 1526.50, we will remain cautious and somewhat bearish.  The monthly chart verifies this finding.  We could enjoy a continuation of the recent rally into mid-week but then we would be cautious.

The NASDAQ 100 closed the Friday session above the downtrend line.  The downtrend line for the Monday session is at 2125.22.  All the indicators that we follow herein are issuing a continued buy-signal although, they are approaching overbought levels.  The 5-period exponential moving average is at 2078.55.  The top of the Bollinger band is at 2159.23 and the lower edge is seen at 2016.38.  We need to close above 2152.00 to confirm a bullish breakout.  The downtrend line on the weekly chart is at 2129.83.  The indicators for the weekly chart are all positive with room to the upside.  The monthly chart is mixed with indicators issuing both buy and sell-signals.  The monthly chart looks as though we are making a rounding top with signs of exhaustion. 

The Russell 2000 is the target for a “January Effect” as we enter into a new year.  Many of the issues in this index are sold to capture losses before the end of the year, 30 days later, these issues are repurchased.   This index of small capitalization stocks ended this past week with an outstanding rally.  The indicators are all pointing higher but some are at or near overbought levels.   The 5-period exponential moving average is at 766.44.  The top of the Bollinger band is at 797.69 and the lower edge is seen at 735.21.  We need to see a close above 800.30 to really get the bulls into action.   Friday’s trading session left signs of exhaustion on the chart.  The weekly chart continues to look positive.  All the indicators followed herein are issuing a continued buy-signal.  The downtrend line for this Friday is 786.35. 

The Continuous Commodity Index rallied to “Life of Contract” highs in this past week’s session.  More importantly, the prices of commodities rose in the face of an appreciating US Dollar index!  Thus, we can not blame the increasing costs in commodities on the weak US Dollar, but rather we must look to pure supply and demand.  We do believe that the weakened currency has played a large part in the appreciation of this commodity index however, this past weeks rally was in conjunction with a rally in the US Dollar index.  All the indicators that we follow herein are issuing a continued buy-signal, albeit at overbought levels.  The 5-period exponential moving average is at 470.71.  The top of the Bollinger band is at 476.17 and the lower edge is seen at 447.34.  We do have signs of exhaustion on the daily chart.  The weekly chart is as overbought as is the daily chart and yes; the indicators continue to point higher.  We also see signs of exhaustion for this index.  The monthly chart has a 17-count!  The indicators are mixed with three of the four that we follow issuing a buy-signal and the Thomas DeMark Exert indicator issuing a sell-signal. 

Wow, sugar ripped to the upside trading as high as 11.14 closing the Friday session at 11.12.  The stochastic indicator and the RSI are both at overbought levels yet continue to issue a buy-signal.  Our own indicator is issuing a fresh sell-signal and the Thomas DeMark Expert indicator is going flat at neutral.  The 5-period exponential moving average is at 10.86.  The top of the Bollinger band is at 11.10 and the lower edge is seen at 9.27.  The month long rally in March sugar has left something that looks like a pole on the chart.  We do have signs of exhaustion.  The weekly chart shows that we have broken above our resistance levels at 10.79 and 10.85.  It is likely that those previous resistance levels will now become support as we plow to the 11.91 level.  We are overbought in all the indicators that we follow, all still issuing a continued buy-signal.  The most dramatic visual for March sugar is seen on the monthly chart which, has broken above the downtrend line.

March cocoa left a doji candle on the chart as a result of the Friday trading session.  All the indicators that we follow are uniformly issuing a sell-signal.  The 5-period exponential moving average is at 21.02.  The top of the Bollinger band is at 21.77 and the lower edge is seen at 19.28.  We will become concerned if March cocoa closes below 20.48.  The weekly chart shows that March cocoa is exhausted.  The stochastic indicator, RSI and our own indicator are all issuing a continued buy-signal however; the Thomas DeMark Expert indicator is issuing a sell-signal.  The daily chart of March cocoa looks as though it is having trouble getting higher.  We believe that if it can get above 21.74 it could go much higher.  Although the rally has been an aggressive one, we believe that this market needs to back and fill before any meaningful moves to the upside will be seen.

March coffee looks like much ado about nothing.  This market is consolidating and going sideways.  All the indicators that we follow herein are issuing a sell-signal.  The 5-period exponential moving average is at 134.01.  The top of the Bollinger band is at 137.01 and the lower edge is seen at 125.82.  Should this market break below 132.20 we believe that a return to 129.78 will be likely.  When we draw trend lines on the indicators we notice that the highs are getting lower and the lows are getting lower.  The weekly chart shows a doji candle as a result of this past week’s trip to nowhere.  All the indicators that we follow are issuing a uniform sell-signal.  Unless and until March coffee closes above 136.00, we believe that the trend will be sideways to down.

January Frozen Concentrated Orange Juice has been trying to move higher and has made very little progress with lots of effort.  On the other hand, FCOJ has made no progress to the downside either.  FJOC is very carefully trading with support seen at the uptrend line.  That uptrend line is at 146.62 for the Monday session.  The stochastic indictor, the RSI and our own indicator are all issuing a sell-signal.  The Thomas DeMark Expert indicator is issuing a continued buy-signal at grossly overbought levels.  The 5-period exponential moving average is at 147.71.  The top of the Bollinger band is at 151.24 and the lower edge is seen at 134.62.  The weekly chart continues to look positive.  All the indicators that we follow are pointing higher.  The monthly indicators are in agreement with the findings of the weekly indicators. 

March cotton rallied in the Friday session.  The market has stayed above the uptrend line since December 6th without violating that line.  The uptrend line for the Monday session is at 66.14.   The stochastic indicator, the RSI and our own indicator all continue to issue a buy-signal at grossly overbought levels.  The Thomas DeMark Expert indicator is issuing a sell-signal.  The 5-period exponential moving average is at 66.09.  The top of the Bollinger band is at 66.91 and the lower edge is seen at 62.85.  We would pay close attention to the uptrend line and any violation of that line will bring some sellers out of the woodwork.  It seems that when a line is this strong and firm, that a violation of that line has more impact on the market than a violation of a frequently violated line. The uptrend line on the weekly chart is at 66.39.  All the indicators that we follow herein are issuing a buy-signal on the weekly chart. 

February crude oil traded higher in the Friday session.  The uptrend line for the Monday session is at 91.20.  The indicators, although becoming overbought, continue to point higher.  If this market can close above 94.72, we will see a run to the highs a perhaps a removal of the century mark.  The 5-period moving average is at 91.34.  The top of the Bollinger band is at 95.48 and the lower edge is seen at 85.94.  The weekly chart highlights the importance of 85.82.  Should the market close below that level, we will open the door to the 81.66 area.  The stochastic indicator on the weekly chart is indecisive and not giving any valid signals.  The monthly chart looks as though we are in position to either make a top or, more likely, going to remove the old highs and make a lunge to the 100-plus level.   Time will tell. 

February gold has been consolidating for several weeks.  The Friday session left a large green candle on the chart.  The stochastic indicator is issuing a continued buy-signal.  The 5-period moving average is at 806.14.  The top of the Bollinger band is at 827.36 and the lower edge is seen at 787.54.  It should be noted that although we have been consolidating, the lows have been higher.  The weekly chart looks as though we are forming a pennant.  The stochastic indicator has just issued a buy-signal.   The downtrend line is at 819-820, should we close above that line, we will make a run for the old highs.  The stochastic indicator on the weekly chart is issuing a solid buy-signal, even the monthly chart is in agreement with this finding.  We continue to like gold!