Archive for January, 2008

The Option Queen Newsletter for January 28, 2008

Sunday, January 27th, 2008

As global bottom seekers proclaim that a “good bottom to the market” has been formed, we are amazed by how many people refuse to believe that this past month could have been the beginning of a bear market. We do agree that lowering the cost of borrowing is definitely good for business, and that a lowered borrowing cost can support a higher price to earnings ratio–we do not agree that this has to be the bottom of the market. Let us remind you that even in the worst of bear markets there are remarkable rallies that convince the bulls to go back on a buying spree. It is far too early to declare the bear dead or in hibernation. The damage done to most charts is severe enough to enjoy a rest, rally and consolidation. Will that lead to the expected return to the bull market….only time will tell, but it is truly our feelings that bad things can’t be solved that quickly? It is like the overweight patient telling the doctor that s/he has to loose weight quickly. The doctor usually advises the patient that it took years to get fat, thus, it will take time and effort to get thin. The market is that patient today, overweight and looking for the quick fix.

The pundits of the market are declaring that the FOMC will reduce interest rates another quarter on Wednesday afternoon, some are even looking for a 50 basis point cut. We believe that, although the market would indeed like to see this cut, that the conservative move would be to allow the rate cut seen last week, to settle in before using that machete again. Frankly, why not go to zero on interest rates? Do you believe that will force the banks to lend and loosen lending standards? We think not. Banks would be in a position to rake in free money, inflation would take off like a punctured balloon, the US Dollar would swoon and gold would go to the moon! Crude oil, priced in US Dollars would cost more. So, does that put more money in your pocket? No, that encourages STAGFLATION.

Expect to see continued wild swings in the markets. Upon reflection, it was totally amazing to see the market, as measured by the S&P 500, rally 300 points from 3:00PM EST to 4:00PM EST on Wednesday. It sure looked like the alleged “plunge protection team” entered the market with a vengeance. We have contended many times that if there were a PPT in fact, that they would use their bullets in the last hour of trading and not before. Actually, all they needed to do was to inspire a rally and watch all the portfolio managers jump on board, not to miss the rally…..after all, that was the bottom wasn’t it? Ya sure!

Don’t spend your tax refund, pay down your debt! That should be the message of this past week. Further, look into yield, taking advantage of the many preferred issues available, rather than investing in growth at least until the all clear siren sounds. It took years of excess to arrive at these levels, so don’t expect to see the purging of excesses to be over this quickly. Refinances are in again. Take that ARM and get a fixed rate. Many of us are refinancing today at a lower interest rate. Those who really need to refinance, probably can’t because the value of the property may be lower than the outstanding loan. In that case, you could refinance but will have to plunk down real money to bring the value of the home into line. Actually, the refinancing will help the banks earn money and the conservative consumers reduce costs on their loans. This action will not help those in trouble because the assets at risk remain at risk and the values will remain below the loan value.

Monday: December new homes sales are released at 10:00.

Tuesday: December durable goods are released at 8:30, S&P/Case-Shiller home price index is released at 9:00, and January consumer confidence is released at 10:00.

Wednesday: 4th quarter GDP is released at 8:30 and at 2:15 the FOMC will announce its interest rate decision with a supporting statement.

Thursday: December personal income and consumption is released at 8:30, January Chicago PMI is released at 9:45 and mutual fund sales and redemptions for December are released.

Friday: January “Jobs” report including unemployment rate and nonfarm payrolls, December construction spending is released at 10:00, January ISM index is released at 10:00 and January Michigan confidence is released at 10:00.

The US Dollar index rallied early in the week on the back of the global equity melt-down. All the gains seen early in the week were lost by the end of the week. The stochastic indicator is curling to the upside and looks as though it could, within a day or so, issue a buy-signal. The RSI and our own indicators are both in agreement with that finding. The chart of the stochastic indicator, the RSI and our own indicator are showing rising lows. Were it not an FOMC week, we would be inclined to believe that a rally is on the way. However, given the uncertainty of what the FOMC will do and its repercussions in the currency market, we will stand down on that opinion. The 5-period moving average is at 76.413. The top of the Bollinger band is at 76.882 and the lower edge is seen at 75.526. The weekly chart does not agree with the daily chart. This time-frame shows that we could and probably will go lower. All the indicators that we follow are issuing fresh sell-signal. The US Dollar is forming a wedge on the weekly chart. The upper line is at 76.799 and the lower line is at 75.539 both for this coming Friday’s session. The monthly chart is also of concern and supports the findings of the weekly chart.

Everybody wants the Euro to take out the 150 number! The Euro zone is slowing down. The chart shows us that the Friday session was an inside day. The stochastic indicator, our own indicator and the RSI are all issuing a fresh sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal. The 5-period moving average is at 146.368. The top of the Bollinger band is at 148.621 and the lower edge is seen at 145.434. The uptrend line for this Friday’s session is at 145.306; should we close below that line, expect to see a liability to 143.270. The stochastic indicator, our own indicator and the RSI are all curling to the upside but only the RSI is issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a continued buy-signal at overbought levels. The monthly chart is overbought and exhausted. If the Euro can close above 147.610, we believe that it will make a run to the recent high of 149.16 and perhaps finally look to remove 150, where the market expects to find buy-stops.

The British Pound Sterling has a spinning top doji candle as a result of the Friday trading session. This type of formation, when at the top of the chart, can lead to a steep drop on the following day. Fortunately, for the Pound, this star is seen at the bottom of the trading range and therefore does not have the downside implications. Also, this chart is a very gappy chart. We can say from this formation that the market gapped higher rallied and settled very close to where it opened. Thus, both bulls and bears were frustrated by the session, without a clear winner found. All the indicators that we follow herein are pointing higher, although we find that our own indicator is curling over to the downside. The 5-period moving average is at 195.95. The top of the Bollinger band is at 198.96 and the lower edge is seen at 194.04. We have a 9-count on the weekly chart. All the indicators that we follow for the weekly chart are issuing a uniform continued buy-signal. The buy-set-up is at 197.95. The downtrend line for the Friday session is at 199.30. Last week’s candle was a bullish engulfing candle; this is on the weekly chart.

The Canadian Dollar closed above the downtrend line, this past week. All the indicators that we follow herein are issuing a continued buy-signal. The 5-period moving average is at 98.03. The top of the Bollinger band is at 102.29 and the lower edge is seen at 96.08. If we do a simple Fibonacci retracement from the high of November to the recent lows we see that the 25% level is at 99.84, the 38% level is at 101.64 and the 50% level is at 103.26. The weekly chart shows that we have a bullish engulfing candle as a result of last week’s trading. All the indicators that we follow for the weekly time-frame are positive. The monthly chart has signs of exhaustion and shows that all the indicators that we follow are pointing lower. We continue to remain positive on the Canadian Dollar.

Eeks! The daily chart of the S&P 500 has a bearish engulfing candle. The very steep downtrend line on the daily chart is at 1366.62 for the Monday session. The stochastic indicator is issuing a fresh sell-signal. Our own indicator is curling over to the downside but has not issued a signal. The Thomas DeMark Expert indicator is pointing higher and the RSI is pointing lower, confused yet! The 5-period moving average is at 1332.48. The top of the Bollinger band is at 1509.94 and the lower edge is seen at 1293.84. We do expect to see the market rally to 1385 on the next attempt to the upside. The weekly chart demonstrates just how steep this retreat has been. It also demonstrates clearly, that weekly close seen on Friday was positive for the week. The weekly indicators are uniformly issuing a buy-signal. The Fibonacci numbers tell us that resistance will be seen at 1337.16, 1380.43, 1419.11 and 1457.79. The monthly chart shows a huge red candle. Further, the monthly chart’s indicators are uniformly negative. Tread carefully; you never know where the next bear is hiding.

The NASDAQ 100 has a bearish engulfing candle made in the Friday session. The stochastic indicator, our own indicator and the RSI are all issuing a fresh sell-signal. We do have an 8-count. The 5-period moving average is at 1817.70. The top of the Bollinger band is at 2159.00 and the lower edge is seen at 1734.14. The NASDAQ 100 poked its nose above the short-term downtrend line in the Friday session. That line is at 1842.89 for the Monday session. The weekly chart is too steep to the downside and appears to need to consolidate or rally some to remove the steepness of the decline. The stochastic indicator and the Thomas DeMark Expert indicator are issuing a buy-signal however; both the RSI and our own indicator continue to point lower. When looking at the monthly chart, it is very clear how dramatic this decline has been. We have a huge red candle on the chart. All the indicators on the monthly chart are pointing lower.

The Russell 2000, behaved better than the larger capitalization indices did. Perhaps, the good luck can be attributed to the margin clerks of the world who, aggressively sold stock in larger capitalization securities to meet the calls when issued. This index declined only very modestly in the Friday session. Apparently, it is believed that lower interest rates will benefit the small companies more than the larger companies. The stochastic indicator and our own indicator are both curling over to the downside and will issue a sell-signal within a day or so. The RSI is pointing lower and the Thomas DeMark Expert indicator is pointing higher. The 5-period moving average is at 684.50. The top of the Bollinger band is at 782.57 and the lower edge is seen at 653.32. All the indicators that we follow herein are issuing buy-signal on the weekly chart. However; on the monthly chart, all the indicator are issuing a continued sell-signal. So long as the two lows of 648.40 and 637.50 hold, we could see a return to the 720 congestion area. Keep your stops tight and don’t ignore this market.

The Continuous Commodity Index has had a manic week of rallies and declines. It is important for this index to stay above the twin lows of 475.91 and 475.95 seen on Wednesday and Thursday. All the indicators that we follow herein are issuing a continued buy-signal with plenty of room to the upside. The 5-period moving average is at 485.85. The top of the Bollinger band is at 498.51 and the lower edge is seen at 475.33. The weekly chart shows a 10-count and signs of exhaustion. We remain overbought as measured by the indicators that we follow but without a sell-signal. This past week’s decline was the steepest decline seen in a very long time. Perhaps, commodities were used as a source of funds to answer margin calls or perhaps it was something else. On the monthly chart, we have an 18-count along with signs of exhaustion. Yes we are overbought as measured by the indicators that we follow. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are issuing hesitant sell-signals. The RSI, although overbought, continues to point higher.

March cocoa enjoyed a four-day rally taking it to within a cat’s whisker of the recent highs seen on January 14, of 22.37. We seem to be positioning to remove that high. The indicators that we follow, although loosing momentum on the upside, are all pointing higher. The 5-period moving average is at 21.62. The top of the Bollinger band is at 22.31 and the lower edge is seen at 20.44. If we fail to remove that high of 22.37 and decline and close below 20.88, we can project a return to 20.22 and lower to 19.99. The weekly chart is exhausted and overbought as measured by our indicators. We continue to see a buy-signal even at these overbought levels. We continue to believe that we will see a run to the upside, perhaps looking for buy-stops that rest overhead.

March sugar gets the neurotic award for the week. We do understand that there was a liquidation that took the options and futures markets to these extremes. We have a 10-count on the bottom. Friday’s session left a huge green candle on the chart. Sugar is making higher lows and higher highs. The stochastic indicator, our own indicator and the RSI all continue to issue a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period moving average is at 11.66. The top of the Bollinger band is at 12.20 and the lower edge is seen at 10.62. The weekly chart has a doji candle with a 7-count. All the indicators that we follow herein are issuing a solid sell-signal. The monthly chart shows that sugar has made a rounding bottom and is in a congestion area.

March coffee did not have a good week. The good news is that we will have a point of inflection on Tuesday pivoting around 131.85. We will see a violent move so long as we remain between 132.69 on the upside, and 131.31 on the downside. The stochastic indicator, our own indicator and the RSI are all issuing a uniform continued sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal. The 5-period moving average is at 132.55. The top of the Bollinger band is at 138.20 and the lower edge is seen at 130.27. The indicators on the weekly chart are uniformly issuing a continued sell-signal. We believe that this market could move lower and will resolve to the downside in the Tuesday session. Coffee is a tricky market. So long as we do not remove 129.70 we will continue to consolidate. On the other side, so long as we stay below 135.30 we will continue to consolidate. A violation of either of these numbers could trigger stops and erratic movements.

May Frozen Concentrated Orange Juice gave us a mechanical sell signal in the Tuesday session. That signal is not confirmed by the indicators that we follow which are all pointing to higher levels. The market is forming a wedge or coil which will resolve into a violent move. That move could be seen as early as the Monday session. The 5-period moving average is at 137.14. The top of the Bollinger band is at 148.16 and the lower edge is seen at 131.17. The weekly chart is a bit more confusing. The stochastic indicator is issuing a buy-signal, our own indicator is going sideways, the RSI is going sideways and the Thomas DeMark Expert indicator is pointing lower at oversold levels. The chart indicates that if we remove 130.50, there could be more pain for the bulls in this market.

The wild days in March cotton continued this past week. We did get a mechanical sell-signal on Tuesday in March cotton. That said, we must tell you that the lows have been deeper lows each day for the rest of the week. We also admit that the highs have been lower also indicating that we are coiling or getting ready to really move. All the indicators that we follow herein are uniformly issuing a continued sell-signal. The 5-period moving average is at 68.73. The 50 day moving average is at 67.01, which seems to be an important level. The top of the Bollinger band is at 72.17 and the lower edge is seen at 66.22. All the indicators that we follow herein are pointing lower on the weekly chart. We do have signs of exhaustion and the chart looks as though we are rolling over to the downside. The monthly chart has a doji candle indicating that we need to be cautious.

March crude oil remained below the downtrend line of 91.38 in the Friday session. At the moment, we are in the Ichimuko clouds. The stochastic indicator is issuing a buy-signal and the RSI is in agreement with that finding. The 5-period moving average is at 89.226. The top of the Bollinger band is at 100.276 and the lower edge is seen at 86.425. The downtrend line for the Monday session is at 90.82. The uptrend line is at 88.51. The weekly chart has a doji candle as a result of last week’s trading. The indicators are going sideways for the weekly chart. So long as we don’t remove 85.82 the bulls will be in control. However, should that number fail to support the market, we will return to 78.50 and then open the door for a trip to 68.83. The point and figure chart tells us that it is important for this market to stay above 89.80 or risk a return to 88.60, 87.40, and 86.80. On the upside, should we remove 91.20, we could return to 94 and higher.

April gold closed near the tail on the market profile chart. The single prints are at 924.0 and 929.6. As you know, the market becomes unstable at those single print areas. On the downside we have single prints at 845.60 and 840.00. The point and figure chart tells us that we probably will test the 912.00 and 908 levels. However should we break the 908 level, we will have a risk to 900 and 894 levels. The candle chart illustrates the probe to new highs with the retreat that followed. The 5-period moving average is at 900.30. The top of the Bollinger band is at 928.50 and the lower edge is seen at 840.70. Notice how many of these numbers repeat. The indicators are pointing higher but loosing momentum. The weekly chart remains overbought but positive. We certainly expanded the trading range this past week. Even the monthly chart is positive.