Archive for March, 2008

The Option Queen NewsLetter for March 30, 2008

Sunday, March 30th, 2008

The Fed wants the banks to lend yet…….the problem of the sub-prime mess was that they made too many poor loans which were packaged into trading vehicles for the security firms to sell.  Now, the Fed is saying lend money…. Don’t worry, we will bail you out…..well, maybe!

Let us rethink the bail-outs on Wall Street vs. the bail out for the home owners.  Where do the funds come from for the bail-outs?  Well, obviously, the government can print the money, and they do, but the funds come from tax receipts from….you.  So, realistically, your tax dollars are bailing out the aggressive gun-slingers on Wall Street.  The people that packaged the sub-prime mess with other debt obligations and sold them as “safe” securities.  These packagers of products make their money as the product is sold…end of report.  Then, they move on to the next project.  It is as simple as that, once the deal is done and sold, they are paid and out of the picture entirely.  Thus, when the government bails out the likes of Bear Stearns et al, they are using your money to support the group that thought up the idea, packaged the idea and encouraged the abuses in the industry.  Should they be bailed out……NO!  However, in an effort to keep the markets from imploding on them, these criminals need to be rescued.  The mess is not over.  We haven’t heard from other loans that are in danger of defaulting such as: transportation vehicles (cars, trucks, planes, trains, boats and the like), office building, commercial real-estate, shopping malls, etc.   

As to the poor home-owner who, at the closing of the mortgage did not read the scads of papers placed in front of him and just signed where he was told to sign, we feel that they were duped.  Think about it, how long would it take for you to read the mortgage papers at a closing?  Try doing that at your next closing and watch the response of all concerned.  Actually, you should read and reread those documents but they are written in legalese and not easily read, even by the attorney.  And now, a flourishing undermarket of scavengers like the repo-man and the attorney farm where foreclosures are planted and sewn, flooding the court with paperwork charged to the failing homeowner…..yikes!   

Commodities are the “new age” winners for floating free cash looking for a trend to follow.   There is value in an investment in this asset class which does provide diversification in a portfolio.  Unfortunately, as one asset class becomes “hot” the fast money chasing a quick return runs to that asset class to take the ride to the top.  This generally bloats and distorts the value of that asset class.  Take a look at any of the recent bubbles for evidence of that practice.  Remember the “dot-com” bubble, the recent “housing” bubble and let us not forget the “hedge fund” bubble?  These very recent bubbles should stand as a model of what happens when fast money runs after an asset class and, the spill-over effect of that run-up to other markets.   Today’s run into commodities is two-fold.  First, there really is a need to feed the world thus, with an ever growing population, the need for food and food stuff is real.   That is some of the demand factor.  Add to that the expansion and growth in developing areas of the globe.  This is putting demand on the stuff that you need to build and grow an economy, another demand for commodities.  We do see funds chasing prices higher looking for that quick rally to new highs.  This naturally is not demand, but rather greed and avarice.   All of this plays into the price of commodities.  The way it can be measured is thus:  when the stock or equity markets decline, how much is withdrawn from the commodities funds to answer margin calls?  The rest of the demand in the product should be steady as that is the real demand for the product without the speculation part.  That actually would be an interesting study.

Monday will be the last day of the first quarter of 2008.  Lots of people will be happy to see this quarter over and in the history books.  We also will see the end of the fiscal year in
Japan and the repatriation of funds that flows at this time of year.  April fool’s day brings with it new cash flowing into the market as funds put money to work.

Monday:  March Chicago purchasing managers report will be released at 9:45, at 10:00 Treasury Secretary Paulson speaks about issues arising from the financial markets, and San Francisco Fed President Yellen speaks. 

Tuesday:  April fools day will bring with it ISM’s March index to be released at 10:00, February construction spending will be released at 10:00, March car sales…..(yikes!) and ICSC chain store sales. 

Wednesday:  Challenger Gray & Christmas issues March report on job-cuts, February factory orders are released at 10:00 and Chairman Bernanke testifies on the “Hill.” 

Thursday:  Fed Chairman Bernanke on the “Hill” again (Senate Banking Committee), and San Francisco Fed President Yellen speaks. 

Friday:  March’s “jobs report” is released at 8:30, ECRI future inflation gauge is released at 9:40 and ECRI weekly leading index is released at 10:30. 

Although it seems quite unlikely, we have a mechanical buy-signal on the US Dollar index at 71.54.  This signal was given in the Friday session.  As we said, it was mechanical, we did nothing to interpret it we are just noting it.  The uptrend line for the Monday session is at 71.97.  The downtrend line is at 73.08.  The Thomas DeMark Expert indicator is pointing lower.  The stochastic indicator and our own indicator are on the oversold side of neutral, but really not issuing a signal.  The RSI is also flattish just above oversold readings.  The 5-period moving average is at 72.414.  The top of the Bollinger band is at 74.232 and the lower edge is seen at 71.529 (close to the mechanical buy-signal number).  Don’t get us wrong, the US Dollar index remains in a downtrend however, the downside momentum has stopped.  We are beginning to see some buyers appear near the previous day’s lows and snatch up existing lots that are offered.  Then again, we aren’t seeing any real appetite for the US Dollar just basically watching it tread water.  The weekly chart supports the observations seen on the daily chart.  The indicators are oversold, all of them, yet not a bend to the upside can be seen.  The monthly chart sows the waterfall-like formation typical for steep declines.  The indicators on the monthly chart are all, oversold.

The chart of the Euro continues positive however, it is forming a pennant.   Unless the Euro can remove the high of 159.04, seen on March 17, 2008, we seem to be setting up for a possible “M” formation.   While it is really too early for this to be said we will remain alert to that possibility.  For a sell-signal to occur for this “M” formation, we need to see a close below 152.73.  Should that occur, we will see a return to 149.77!  The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal from overbought levels, only the Thomas DeMark Expert indicator continues to issue a buy-signal, albeit at overbought levels.  The 5-period moving average is at 156.12.   The top of the Bollinger band is at 158.163 and the lower edge is seen at 150.65.  We continue to see signs of exhaustion on the weekly chart.  All the indicators that we follow herein are at overbought levels on the weekly chart, however; only the Thomas DeMark Expert indicator is issuing a sell-signal the others, continue to issue a buy-signal.  The monthly chart agrees with the overbought exhausted condition seen in all the other time-frames.  While there is only slight overhead supply on the daily chart, we would proceed with caution in this market.

The Canadian Dollar looks like it is floundering.  We are seeing a higher high for the lows and lower highs for the highs which indicates that this market is contracting.  The indicators seem to be floundering as well.  The stochastic indicator is issuing a sell-signal near or at oversold levels, the RSI is flattish but with a bend to the downside, our own indicator is going sideways and the Thomas DeMark Expert indicator is pointing higher.  We do have a well defined uptrend line at 98.17, for the Monday session.  We need to see a close above 98.71 to convince us that we will make a run to the upside or at lease a run to 100 or so.  The 5-period moving average is at 98.08.  The top of the Bollinger band is at 102.70 and the lower edge is seen at 96.97.  When we draw a downtrend line on the weekly chart, we see that 100.00 to 100.50 will be an area of resistance.  When numbers such as 100 appear in two different unrelated studies, the number takes on more importance.  The weekly indicators seem to be curling to the upside but have not given any buy-signal.  The indicators on the monthly chart are all pointing lower. 

Take caution when trading the British Pound Sterling, it is in the Ichimuko clouds.  The stochastic indicator, the RSI and our own indicator all are issuing a sell-signal.  The Thomas DeMark Expert indicator is issuing a buy-signal at, overbought levels.  The 5-period moving average is at 198.39.  The top of the Bollinger band is at 201.58 and the lower edge is seen at 196.52.  We should have a point of inflection on Thursday.  The downtrend line is at 199.90 and the uptrend line is at 197.74 for the Monday session.  These two lines collide on Thursday at 198.71.   The 5-period moving average is at 198.39.  The top of the Bollinger band is at 201.58 and the lower edge is seen at 196.52.  The weekly chart is either forming a tea-cup formation or it will fail at 193.55.  These are two very different outcomes that this chart is telling us to look for.   The tea-cup formation is very bullish while the possible failure at 193.55 will cause us to have a very negative signal.  There it is watch both levels and go with the trade.  The indicators seem to be favoring the tea-cup scenario.  Perhaps, we will get the uncertainty out of the way on Thursday when the lines collide.  The indicators on the monthly chart remain negative.

For the past three days, the S&P 500 has opened higher and closed lower with lower highs and lower lows.  The very short downtrend line is at 1336.81, and the longer downtrend line is at 1349.37 both, for the Monday session.  We are below the Ichimuko clouds.  All the indicators that we follow herein are pointing to the downside and are on the overbought side of neutral.  That is telling us that there is more room to the downside insomuch as we aren’t even at neutral levels.  Monday’s end-of-the-month window dressing and portfolio dressing and undressing should add to some volatility and gyrations.  On Tuesday, naturally, we will see some inflows from plans that have to be put to work.  The 5-period moving average is at 1337.42.  The top of the Bollinger band is at 1360.49 and the lower edge is seen at 1276.34.  We touched the 50 day moving average in the Friday session that number is 1339.69.  The good news is that the stochastic indicator, the RSI and the Thomas DeMark Expert indicator are all issuing a buy-signal on the weekly chart. Further, this week’s low was higher than last week’s low and we saw the S&P make a higher high than was seen in last week’s trading.  We continue to believe that the low will again be tested so, we are not out of the woods by a long shot! 

The NASDAQ 100 had a steeper drop when looking at the decline from the end of December to mid March, than did the S&P 500.  The NASDAQ 100 has, since mid March been trading in lock step with the S&P 500.  We see that there have been volume spikes on the declines with less volume on the rally days.  Friday was the third day in five that this index retreated.  All the indicators that we follow herein continue to issue a uniform sell-signal.  We are below the Ichimuko clouds.  The NASDAQ 100 has lost more than ¾ of the gain seen in the Monday-Tuesday rally.  The 5-period moving average is at 1805.50.  The top of the Bollinger band is at 1829.58 and the lower edge is seen at 1673.21.  The weekly chart points a more bullish view with all of the indicators that we follow herein issuing a uniform buy-signal from, oversold levels.  We look like we are trying to form a base.  The monthly chart supports this bullish view.

The Russell 2000 declined in the Friday session.  All the indicators that we follow herein are issuing a sell-signal.  We closed the session below the Ichimuko clouds.  The 5-period moving average is at 696.14.  The 50 day moving average is at 692.66.  The top of the Bollinger band is at 708.27 and the lower edge is seen at 645.94.  We remain below the clouds on the weekly chart however; the indicators are issuing a buy-signal for that time-frame.  The point and figure chart indicates that there is a rather stiff resistance level at 704-706.   We would feel better about this market if it can close above the 706 resistance level.  The monthly chart does not support the findings of the weekly chart.  We advise to proceed with caution, whether bear or bull, just be careful.

It certainly looks as though the continuous commodity index is in for some further gyrations.  All the indicators that we follow herein are issuing a solid sell-signal.  It would not surprise us to see this index test its recent lows at 505.50.  The 5-period moving average is at 526.76.  The top of the Bollinger band is at 589.89 and the lower edge is seen at 507.06.   For the bull to return, we need to see a close above 534.00.  The weekly chart shows that last week was a positive week.  The indicators for this time-frame are trying to turn positive but have not yet done so.   The monthly chart is negative showing a failure at the top.  Further, all the indicators on the monthly chart are issuing a uniform sell-signal.  Advise, proceed with caution.

May sugar continued lower in the Friday session closing near the lows of the day.  All the indicators that we follow herein are issuing a sell-signal.  The 5-period moving average is at 12.02.  The top of the Bollinger band is at 1509 and the lower edge is seen at 10.95.  We closed the session at the lower edge of the Ichimuko cloud.  We need to see a close above 12.55 to turn this negative chart positive.  The weekly chart is also negative with all the indicators pointing lower.  The monthly chart is also negative.

May cocoa rallied for three of the five sessions last week, ending the week on a down note.  The indicators that we follow are uniformly issuing a sell-signal.  We need to see a close above 24.60 to turn this chart positive.   When we apply Fibonacci numbers taking the recent high and the even more recent low we see that resistance will be seen at 25.27, 26.12, 26.96 and naturally the recent high of 29.71.  Above that level we will have resistance at 32.45.  Both the weekly and the monthly charts look negative. 

May coffee is trying to stabilize at these levels.  All the indicators that we follow herein are issuing a sell-signal some from oversold levels.  The 5-period moving average is at 131.25.  The top of the Bollinger band is at 173.50 and the lower edge is seen at 119.46.   We need to see a close above 135.35 to turn this chart positive.  We are below the Ichimuko clouds for the daily time-frame, but above the clouds for the weekly and monthly time-frames.  The chart indicators are negative for both the weekly and the monthly charts.  We believe that the recent low of 125.85 will be tested and probably will be violated. 

May Frozen Concentrated Orange Juice left a 9-count on the chart in the Wednesday session.  The stochastic indicator, the RSI and our own indicator are all issuing a fresh buy-signal.  The Thomas DeMark Expert indicator is pointing lower at oversold levels.  The 5-period moving average is at 111.43.  The top of the Bollinger band is at 135.32 and the lower edge is seen at 105.43.  We see some bullish divergences in the monthly chart.  As we made lower lows the indicators made higher lows.  Still, on the weekly and monthly charts we remain below the Ichimuko clouds.  We are still above the clouds on the daily chart.  We need to see FCOJ close above 117.95 to feel more comfortable as a bull. 

May cotton needs to close above 75.38 to turn the chart from negative to positive.  All the indicators that we follow herein are issuing a continued sell-signal.  The 5-day moving average is at 73.11.  The top of the Bollinger band is at 89.74 and the lower edge is seen at 67.36.  It looks as though we will test the recent low of 69.02.  The weekly chart has a doji-like candle.  For the week, the trading range narrowed.  Still the indicators on the weekly chart are negative.  The indicators on the monthly chart are negative.   Monday is a crop report which could move this market.  We shall see.

Crude oil gave up some of the gains of the week in the Friday session.  We did see a lower high and a lower low giving the bears a glimmer of hope for a retreat.  The 5-period moving average is at 104.236.  The top of the Bollinger band is at 111.99 and the lower edge is seen at 98.87.  We did some Fibonacci retracements from the recent lows to the recent highs, 98.95 was the 50% retracement number.  Should we fail to hold 98.65, we could see this market fall to 94.72 and 92.71, without much prodding.  The indicators that we follow are all issuing a sell-signal.   The downtrend line for the Monday session is at 107.27.  The indicators on the weekly chart remain positive.  The monthly chart’s indicators have turned negative.  We expect to see a retreat in crude oil.  We will have to monitor the action on the downdraft for further insights as to the behavior of crude oil.

June gold looks as though it just might test its recent low of 904.70.  All the indicators that we follow herein are issuing a sell-signal.  The 5-period moving average is at 936.46.  The top of the Bollinger band is at 1019.42 and the lower edge is seen at 914.71.   We are trading above the Ichimuko clouds on the daily chart, the weekly chart and the monthly chart.  The indicators for all time-frames are negative.   We believe that the market has room to the downside but that the expected retreat will not be very deep.