The Option Queen Newsletter

Here we are again at options expiration week! The complacency of the market has been remarkable and seems to be setting up for a “rude awakening” when some unscheduled and unknown event hits. This will, no doubt, move the VIX out of boredom into a more fearful rally. Naturally, as the VIX decreases the market reflects less concern about impending retreats and a feeds the real ho-hum feeling towards the market, a feeling that the worst is over. It is as though, the summer is already here and the participants are at the beach taking time off. We do not agree with that and believe that something is boiling beneath the surface, something as yet undetected, like a volcano getting ready to explode.

You say crude oil is the culprit of high inflation! In part, you may be correct, but there are other commodities helping that inflationary spiral. The global appetite for commodities is, in part, spurred on by growth in countries playing catch-up moving out of the dark ages into the post-electronic age. This growth has not diminished and continues to apply pressure supporting the ever rising prices of raw materials. We seem to be in a commodity bubble, and no doubt, in some markets we are, but there is true demand for the products which keeps the supply and demand cycle strong price firm due to tightness in the market. That is not made up nor is it controlled by funds speculating. It is true demand and should be viewed as such. That said, we acknowledge that CTA’s are similar to portfolio managers and all suffer from the lemming disease. That is, they pile into anything that is trending and bail when that trend ends. This causes the market to look rather wild, especially on options expiration weeks. An example of this sort of erratic behavior was seen this past week in the coffee market, whose options expired on Friday.

We continue to caution that the world, as we knew it a year ago, has changed. Someone threw a bucket of cold water on the party and the housing bubble burst, just when we were beginning to think that we were too conservative. Ah, never doubt your own hard work. Today, we have further problems to worry about such as credit card debt, car loans that will default, commercial real-estate deals having trouble finding financing and now, the US dollar’s appreciation which, will cause some angst in the export market. True today, the export market is in fine health. Should the US Dollar continue its rally, we will not enjoy the competitive advantage that a soft currency brings to the table.

Monday: Inflation in the US stamp hits the market. It will now cost you 42 cents to mail a first class letter. Who mails bills anyway, use the internet and save 42 cents which you can add to your ever increasing food bills, tax bills, utility bills, breathing bills and so on.

Tuesday: April retail sales are released at 8:30 along with April’s import prices, March business inventories, Fed Chairman Bernanke speaks, and Dallas Fed President Fisher speaks.

Wednesday: April CPI (duck and cover for this one).

Thursday: April industrial production and capacity utilization are released at 9:15, May Philadelphia Fed survey is released at 10:00 and Fed Chairman Bernanke speaks (about credit turmoil….ya think).

Friday: April housing starts are released at 8:30 and May Michigan Sentiment is released.

The chart of the US Dollar index looks as though the market has put in a rounded bottom. That is, unless it continues to retreat at which time we will tell you that it will retest the bottom. With such pearls of wisdom, why not just flip a coin. Here it is on the upside the market must close above 74.065 or risk a return to 72.90 and then 72.69. Should 72.69 fail to support the market you will see a quick retreat to 72.45, 7206, 71.82, 71.35 and 71.05. Under the 71.05 there is no support and the market will likely seek the stops below the lows sell further and then bounce. Before you run off and short this market, remember a lot of numbers are between here and there so, use a modicum of good sense and avert the greed-monster within. All the indicators that we follow are uniformly issuing a continued sell-signal. The 5-period moving average is at 73.426. The top of the Bollinger band is at 74.106 and the lower edge is seen at 71.337. We are in the Ichimuko clouds on the daily chart, and we are below the clouds on all of the other time-frames. The weekly chart’s indicators are mixed. The stochastic indicator and the RSI have issued a sell-signal while the Thomas DeMark Expert indicator continues to issue a buy-signal at overbought levels and our own indicator is curling over to the downside but has not given a sell-signal. All the indicators that we follow are positive for the monthly chart.

The Euro rallied in the Friday session but remains in the clouds. All the indicators that we follow herein are issuing a continued buy-signal. Interestingly, the count on the Euro can and does go to 18 on rare occasions and 16 more normally. As you know, the numbers are 9 and 13 but it would appear that each product has its own foot-print or count. For the Euro it is substantially higher than some of the other commodities. All of the indicators followed herein are positive on the daily chart, only the stochastic indicator was at oversold. The uptrend line, on the weekly chart is at 150.32. This is for the week ending this coming Friday. In other words, to stay positive on the Euro, we must not spend time below the uptrend line. On the weekly chart, both the stochastic indicator and the RSI have turned positive and are issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal and our own indicator is curling to the upside. It must be noted that only the DeMark Expert indicator is oversold the other indicators are on the positive side of neutral.

The British Pound Sterling is oversold and below the Ichimuko clouds. The stochastic indicator and our own indicator are issuing a buy-signal on the daily chart, however; the RSI and Thomas DeMark Expert indicator remain neutral. The 5-period moving average is at 195.49. The top of the Bollinger band is at 199.31 and the lower edge is seen at 194.32. The downtrend line is at 197.81, a level we must remove to return this chart to the upside. The weekly chart looks very negative with a test of 193.30 probable. Should that level fall, we will see lower levels taking us to 188.40. The monthly chart is in agreement with this finding.

The Canadian Dollar enjoyed a perky rally in the Friday session. We are in the clouds and trying to make our way to the upside breaking out of the clouds. All the indicators that we follow herein are issuing a uniform buy-signal. The chart seems to be very range-bound and looks almost as though it were coiling. The 5-period moving average is at 99.04. The top of the Bollinger band is at 99.96 and the lower edge is seen at 97.60. We are in the clouds on the weekly chart. All the indicators that we follow herein are issuing a buy-signal for the weekly time-frame. We have signs of exhaustion on the daily chart. The indicators on the monthly chart are all negative, although we are above the clouds for the monthly time-frame. The chart looks as though we are forming a pennant.

The S&P 500 enjoyed a very mixed week giving both the bulls and the bears ammunition for their beliefs. The indicators are uniformly issuing a sell-signal and are not oversold but rather near neutral levels. This tells us that there is more room to the downside. We did see this index break and close below the short-term uptrend line in the Friday session. We remain above the Ichimuko clouds on the daily chart, below the clouds on a weekly chart and above the clouds on a monthly chart. The 5-period moving average is at 1401.06. The top of the Bollinger band is at 1430.78 and the lower edge is seen at 1342.86. The 200 day moving average is at 1447.46. More serious is the sell-signal that all the indicators are giving on the weekly time-frame. The weekly chart shows the index above the uptrend line, well, so far. The monthly chart is positive but not with conviction. Remember, this week is options expiration week for May and as such, we could see and probably will see more volatility.

The NASDAQ 100 has been the leader in the recent rally however; we seem to be rolling over to the downside. We have doji like candles on the chart in both the Thursday and Friday sessions. All the indicators that we follow herein are issuing a sell-signal. The 5-period moving average is at 1973.65. The top of the Bollinger band is at 1920.60 and the lower edge is seen at 1808.71. The weekly chart finds the NASDAQ 100 below the clouds. The indicators for this time-frame are turning negative. Further, we have signs of exhaustion. We remain below the clouds for this time-frame. From the low of 1669 to 2008.25, the recent high, we have seen a rally without much of a retreat. Now, it may be time to see some backing and filling or a decline to at least 1863 or so, for the most bullish view. The more bearish view would be that this market will retest the recent lows. We are not sure of that at this time.

The Russell 2000, the small capitalization index rallied in the Friday session. True, there aren’t many if any financials or insurance issues in this index which may have kept it positive for the Friday session. This index has not enjoyed the rally to the extent of the other indices. Both the stochastic indicator and the RSI are issuing a buy-signal from neutral. Our own index is curling up and will within a day or so, issue a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal at oversold levels. The 5-period moving average is at 721.34. The top of the Bollinger band is at 737.30 and the lower edge is seen at 693.58. We are above the clouds on the daily chart. All the indicators that we follow herein are issuing a solid sell-signal from overbought levels for the weekly time-frame. We are below the clouds on the weekly chart. We have plenty of fat areas of support below the market but on the upside there isn’t much in the way of resistance as we explore the 734 area. A rally beyond that area of resistance will lead to 763.20, rather quickly. The monthly chart is positive.

The Continuous Commodity Index broke above the clouds in the Friday session trying to resolve the movement to the upside. We were unable to remove the high of April 17, 2008 in that attempt. Unfortunately, the market has gotten extremely overbought in its up thrust, however; although we are overbought as measured by all the indicators that we follow, there isn’t a sign of a sell-signal anywhere to be found. Remember, that this index has an equal weight of 17 commodities so crude oil didn’t tip it higher on its own. The entire energy weight of the index is a bit more than 17% that includes gas, and heating oil. What we are seeing is price increases pretty much across the board, not just in the energies. This index has been up in six of the past seven sessions. The 5-period moving average is at 545.86. The top of the Bollinger band is at 558.30 and the lower edge is seen at 528.75. On the weekly charts, if this index can close above 556.09, we will make another run to the recent high of 577.64. The indicators on the weekly chart are uniformly issuing a buy-signal. The monthly chart is forming a pennant. All the indicators that we follow herein are issuing a buy-signal for the monthly time-frame. So, we guess the commodity rally is not dead as has been decried by most of the media talking heads.

July cocoa is trying to regain the rally closing up 4 out of 5 trading days this past week. All the indicators that we follow herein are issuing a continued buy-signal. We are above the clouds. The 5-period moving average is at 26.97. The top of the Bollinger band is at 28.49 and the lower edge is seen at 25.56. The downtrend line for the Monday session is at 27.50 and the uptrend line for the Monday session is at 26.75. These lines will collide to form a point of inflection on Thursday, or even as early as Wednesday. The weekly chart is also bullish. The indicators are all pointing higher for the weekly time-frame. Even the monthly chart looks okay. So, will we have new highs in cocoa? Time will tell.

When sugar declines, it does so in an orderly fashion. This market is trying to turn to the upside. All the indicators that we follow herein are issuing a continued buy-signal. The 5-period moving average is at 11.62. The top of the Bollinger band is at 13.68 and the lower edge is seen at 10.89. We are below the clouds on the daily chart, above the clouds on a weekly chart and below the clouds on a monthly chart. We have a mechanical sell-signal on the weekly chart. Frankly, the indicator tells us to sell short at a higher level. The weekly chart continues to look negative however it appears that it can rally to remove some of the oversold quality it has achieved. We need to see a Friday close above 11.65 to remove the downtrend line seen on the weekly chart. The indicators on the weekly chart are issuing a buy-signal.

So what is with crazy coffee? Yes options went off the board on Friday which added to the schizophrenic trading seen in this commodity. All the indicators that we follow herein are issuing a continued buy-signal and they are approaching overbought levels. We remain below the clouds and continue within the trading range. The 5-period moving average is at 1336.80. The top of the Bollinger band is at 1403.82 and the lower edge is seen at 1284.43. Strangely, we touched the 50 day moving average and ran away from that level as though it were an electrified fence. The uptrend line for the Monday session is 131.26. The indicators on the weekly chart are all positive. We are above the clouds for this time-frame. The monthly chart shows us that this is merely a blip on the coffee chart. We remain above the clouds however the indicators are negative for this time-period.

Frozen Concentrated Orange Juice continued trading in a very narrow range with higher lows and lower highs. Obviously we are coiling. The stochastic indicator, our own indicator and the RSI all are issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The daily chart shows that FCOJ is in the clouds. The 5-period moving average is at 120.81. The top of the Bollinger band is at 124.55 and the lower edge is seen at 112.04. The weekly chart has an upward tilt to it. All the indicators are pointing higher. We remain below the clouds for the weekly chart. The monthly chart seems to be forming a pennant and is oversold as measured by the indicators that we use.

The cotton market is about as crazy as the coffee market is. Both markets rallied in the Thursday and Friday sessions. Cotton is getting overbought and looks as though it will, within a day or so, give a stochastic sell-signal. We are below the clouds on the daily chart. The 5-period moving average is at 69.03. The top of the Bollinger band is at 74.63 and the lower edge is seen at 65.23. The weekly chart has a bullish engulfing candle and, is above the clouds. The indicators are all issuing a buy-signal for this time-frame. The monthly chart supports the findings of the weekly chart.

Crude oil yikes! We can make a case for crude at $135.00 but who knows. It appears that traders keep trying to find a top in crude and as such are getting punished for premature sales; this is leading to short covering rallies and thus a rally in the product. Do we believe that crude is in a speculative bubble, yes, but we wouldn’t short the product while the sharks continue to feed. The 5-period moving average is at 122.99. The top of the Bollinger band is at 125.18 and the lower edge is seen at 110.27. The indicators that we follow are grossly overbought but continue to point higher. The weekly chart is overbought and continues to issue buy-signals at these levels. The monthly chart is confirming the findings of the weekly chart. So, what do we see, we believe that this market will retreat however; we can not predict when. We know that when the retreat comes, it will be quick and sharp. We would think about buying some cheap downside puts as a gamble. Realize that we are calling it a gamble and that is exactly what it is.

June gold is below the clouds but looks as though it is putting in a bottom. The stochastic indicator and the RSI are both issuing a continued buy-signal. The 5-period moving average is at 878.18. The top of the Bollinger band is at 948.34 and the lower edge is seen at 841.56. We must close above 908 by Friday to turn the weekly chart positive. The indicators on the weekly time-frame are positive and, we are above the clouds. The monthly chart is verifying the findings of the weekly chart. What to do with gold, well, we are inclined to be positive on the yellow metal and would like to buy it in the 846 area. If that area fails to support gold, we would love to buy it at 825, 805 and at worst 777. Obviously, we like gold but will wait for the correct time to enter the market.