Archive for June, 2008

Option Queen Letter for June 30, 2008

Monday, June 30th, 2008

Yes, we could be nearing a point where tradeable bounce in the indices can be found.  The S&P 500 closed below the lower edge of the Bollinger band in the Friday session.  The bloodletting seen on Thursday, continued into the Friday session leaving some marketeers wondering why the VIX, a measurement of volatility in the near month options of the S&P 500, did not rally to the targeted 30 area.   Let’s be serious, we needed to see the VIX close above 24.47 to remove the high seen on June 9th,   if we are going to see some short-term capitulation in this market.  We did see the VIX trade above that number, only to give up and close at 23.44.  A close above 24.47 will open the door to 26.73, 28.09, 29.79, 31.16 and the old highs of 35.60. There is an element of complacency in this market that can be seen in the VIX measurement.   Although we are definitely oversold enough to mount a descent rally, we don’t believe that the bottom of this move has been seen.  The rally will return the VIX to the uptrend line of 21.80 or so.


Crude oil bingo continues, we watched the market trade to a new high of 142.99 in the Friday session, then watched the market plunge to 140.06 before mounting a rally closing the session at 140.21.  We witness a plunge from 142.30 to 140.06 in 7 minutes!  All this took place at the end of the day as positions were squared in front the weekend.     This tells us that the bulls are in a very dangerous spot with sellers emerging out of nowhere.  What is really being seen is that as the day wore on, the markets became thin and it didn’t take many contracts to move the direction of the market in a violent fashion.  That is the more reasonable point of view.  Where can crude oil go?  That is the hot question of the day; we continue to believe that there will be some resistance at 150 to 155.  That resistance level can be overcome but just opening above those levels.  This naturally would cause the election of buy-stops and just could be the blow-off top we are looking for.  Who knows?  The crude oil market is as overbought now as the S&P 500 is oversold.   When in a mania, it is difficult to see the end, but easy to see that we are in a mania.


As to speculation in the commodities markets:  balderdash!  If one were to remove speculation from the markets, one needs look no further than to examine equities, bonds as well as commodities.  We find ourselves as the target of blame when nobody we know looked at the NASDAQ, S&P 500 or the Dow when it was approaching idiocy during the “dot-com” bubble.  Why commodities now?  Why not stocks then and how about bonds, if you would like to see some excesses?


This coming week is the end of the month, which should offer some gyrations in prices.  We saw the Russell indices rebalanced on Friday, which didn’t seem to have its normal zeal for moving the indices around.  We did notice that the Russell 2000 was positive on the day, while the other indices were, for the most part, negative.   The Russell 2000 has a liability to 682.90, however; we have a buy-signal on all the indicators that we follow, telling us that the rally should continue into the end of the month window dressing.


IYT is the Ishare for the DJ transportation average index.  This index trades with the Transportations, which has been the leader on most rallies.  It might be interesting to watch this index as portfolios are rebalanced this week.  IYT is grossly oversold and looks as though it could rally, not as a change of direction, but rather as a “dead-cat-bounce” for a trade.  Just a thought!  We do not own or manage accounts that own these shares.


As to the US Dollar index, we are at a point where we need to see the US Dollar defend the 72.33 level or risk a return trip to the previous lows. The chart is an ugly chart, but seems to be overextended to the downside.  Yes, we can go lower, and probably will.  We believe that we will get a buy-signal in the US dollar index by Tuesday.  We would expect to see a return to 73.411, which is the downtrend line.  The 5-period moving average is at 73.233.  The top of the Bollinger band is at 74.605 and the lower edge is seen at 72.64.  Friday’s session sent this index below the Ichimuko clouds, not a good thing for the bulls.  The index has retreated in four of the past five session so, expect to see a bounce fairly soon.


Gold rallied, this past week, however is far below the highs.  We need to see a close above 940.01 to bring the bulls back into this market.  We are in the Ichimuko clouds, which we know is an area in which we should not trade.  We are grossly overbought as measured by the stochastic indicator.  When we look at the weekly chart, we see that gold is consolidation or going sideways.  This sort of action will lead to a violent move to either the upside or the downside. It actually looks as though the move will likely be to the upside.  Certainly, we are not sure!


Monday:  June Chicago PMI will be released at 9:45, today is the end of the second quarter…..tighten your seat-belts! 

Tuesday:  May construction spending is released at 10:00, June ISM index is released at 10:00, the Bank of Japan’s Tankan survey is released, car sales are to be released….yikes, and Atlanta Fed President Lockhart speaks. 

Wednesday:  Challenger Gray & Christmas releases June job-cuts…ugh, May factory orders are released at 10:00 and Fed Governor Mishkin speaks. 

Thursday:  June nonfarm payrolls and unemployment rate are released at 8:30,  the European Central Bank releases its interest rate decision, and the financial markets close at 1:00, futures at 1:15 and the bond market closes at 2:00 all in advance of the 4th of July Holiday.


The S&P 500 was unable to regain its footing in the attempted rally in the Friday session which, ended the day in a loss.  It seems as though the S&P 500 is trading tick-for-tick with the crude market, thus, good traders are watching crude as well as the action of the US Dollar and the bonds for clues about the S&P 500.  The Thomas DeMark Expert indicator has issued a buy-signal, the stochastic indicator will issue a buy-signal early on Monday, our own indicator may take a while longer to issue a buy-signal and the RSI is oversold and going sideways.  The 5-period moving average is at 1304.15.  The top of the Bollinger band is at 1407.27 and the lower edge is seen at 1282.72.  If we take out Friday’s low of 1272.75, we will test the March lows and likely we will print new lows.  The weekly chart is oversold but pointing lower.  Should we test the lows it will be the third time and thus will have a great likelihood of removing that support area.  Remember, January we traded as low as 1255.50 and in March we traded to 1253, both of those lows were intra-day lows and ushered in a good rally, well, at least for several weeks.   The monthly chart does not look any better than the weekly chart and verifies the findings of the weekly chart.


The NASDAQ 100 retreated a mere 75 cents in the Friday session.  We see a long-tailed doji-like candle as a result of that session.  The stochastic indicator and the Thomas DeMark Expert indicator are both issuing a fresh buy-signal.  Our own indicator is going to issue a buy-signal in the Monday session, however; the RSI is still pointing lower at oversold levels.  The index closed just above the lower edge of the Bollinger band.  The 5-period moving average is at 1898.80.  The top of the Bollinger band is at 2057.68 and the lower edge is seen at 1867.26.   The weekly chart tells a tale of a four-week decline with plenty of room to the downside.  The monthly chart also warns of further downside risk.


The Russell 2000 rallied on its annual rebalancing.  It was the best performing index.  All the indicators that we follow herein are issuing a buy-signal for the Russell 2000.  The 5-period moving average is at 706.70.  The top of the Bollinger band is at 760.62 and the lower edge is seen at 696.55.  We have a continued liability to the April low of 682.90, the late March low of 679.90 and the March cluster of lows at 657.50, 649.50 and the low of 640.10.  The downtrend line for Monday is at 721.16 and for Friday is at 719.80. (Yes, we know that the US markets will be closed on Friday.)  The indicators on the weekly chart continue to issue a sell-signal, and the indicators on the monthly chart are issuing a fresh sell-signal.This week, on Thursday, the European Central Bank will issue its interest rate decision.  Many are anticipating a quarter point increase at this meeting.  Naturally, this would appear to be, on the surface, positive for the Euro, however; we believe that this sort of action will be negative for the Euro Zone economies and therefore, negative for the Euro.  The chart looks as though it could go higher, although, it is overbought.  We need to see the Euro clear 157.63 on a closing basis, to open the door to the highs.  The 5-period moving average is at 155.98.  The top of the Bollinger band is at 157.208 and the lower edge is seen at 152.569.  We do see signs of exhaustion on the chart.  We seem to be forming a pennant on the weekly chart.  The downtrend line is at 157.25 and the uptrend line is at 154.224. 

We have a buy-signal for the weekly time frame.  We are extremely overbought on the monthly charts.  Just in case you hadn’t noticed, the continuous commodity index made a life-of-contract high in the Friday session.  We are extremely overbought as measured by all the indicators that we follow herein.  The stochastic indicator will issue a sell-signal by the Monday session to be followed by our own indicator.  Both the RSI and the Thomas DeMark Expert indicator are overbought and pointing higher.  The 5-period moving average is at 588.77.  The top of the Bollinger band is at 604.98 and the lower edge is seen at 537.02.  Both the weekly and the monthly charts are grossly overbought and pointing higher. 

That is all for this week!  Have a great trading week and a Happy Fourth of July