Archive for July, 2008

The Option Queen Letter for July 28, 2008

Sunday, July 27th, 2008

We think it is now time to recap the government intervention in the financial system of the USA. for year to date and it’s not yet a year! Interest rates have been brought down quickly to 2.25%, which in case you don’t know, is a negative yield. Bear Stearns has been bailed out by a JP Morgan buy-out, brokered and underwritten by the Fed, and now, both Freddie and Fannie have been refinanced by the Fed allowing them to offer refinancing to borrowers…a good thing…and bailing the banks out of their poor judgment loans….a bad thing. It is our money that the elected officials are throwing around; therefore, we need to object to the bail-out of the banks by the Fed. The banks and mortgage lenders made the poor greedy judgment calls, we did not, yet we have to pay for their poor banking behavior. Now, both state and local governments can buy and fix-up foreclosed properties. Guess who is going to get those contracts…..your neighborhood scam-man will, you know the ones who contributed most to the last or current campaign. The aggressive overleveraged builders and other building related corporations are rewarded and given additional tax breaks in this new legislation. And who is paying for this? You are! Anybody remember the $600 toilet seat scam? Guess what, here come some more scams.

Here is a thought, how about a tax credit for those mortgage payers that remain current and do not fall behind? Why not reward good behavior rather than rewarding bad behavior. You want a child to learn, reward the good stuff and punish the bad stuff. Of course, if we use our government’s model we will increase the allowance for the trouble makers and decrease the allowance for those who have been responsible and lawful. While we are at it, why not pay the prisoners in jail and have the victims pay that debt to their wrong doers. Isn’t that the government model?

The other danger with this model is that it bashes the value of the US Dollar once again. Should the buyers of US Debt perceive this as dilutive to the currency, they will sell this currency and hide out in gold.

There are far too many looking for the market’s bottom. We fear that we are not there yet. This past week we enjoyed a rally for three of the five trading days although the market actually did decline for the week. The passage of the bail-out bill should give an early boost to the market, however; we continue to believe that we haven’t seen “blood in the streets” sales which usually accompany a good bottom in the market. If we use the VIX as a fear index, we see that complacency is in the market and little fear of failure can be seen via the options on the S&P 500. While letter writers could be bearish, it seems that the action’s of the crowd are not bearish, but rather actions that speak to buying the “bottom,” or “bottom fishing” like the deadliest catch in the Barings Sea on the hunt for crab.

Monday: Fed Governor Mishkin speaks.

Tuesday: July consumer confidence is released at 10:00, and Case/Shiller price index for May is released.

Thursday: 2nd quarter GDP is released at 8:30 and July Chicago PMI is released at 9:45.

Friday: July nonfarm payroll and July unemployment to be released at 8:30, June construction spending is released at 10:00, July ISM index is released at 10:00, and July light vehicle sales are released.

The US Dollar index looks to be topping out with signs of exhaustion. The stochastic indicator and our own indicator are both curling over to the downside and, will within a day or so, issue a sell-signal. The Thomas DeMark Expert indicator has already issued a sell-signal. The RSI is not helpful. The 50-day moving average is at 73.113. The 5-day moving average is at 72.827. The top of the Bollinger band is at 73.398 and the lower edge is seen at 71.983. We are below the Ichimuko clouds on the daily, weekly and monthly time-frames. The danger point for the US Dollar index is found beginning at 71.85 and intensifies below 71.70. We can expect to see rapid declines below those levels. On the other side of the coin, we have good supply overhead and will run into resistance all the way up to 74.25. Above that level, there is little supply to hinder the upside progress of the market. The stochastic indicator, the RSI and our own indicator are all issuing a buy-signal on the weekly chart. The Thomas DeMark Expert indicator continues to issue a buy-signal, albeit at overbought levels. The look of the weekly chart is not remarkable and is rather flat and range-bound.

The Euro looks as though it is going to rally. Fundamentally, we do not like the Euro however the charts have a different opinion. All the indicators that we follow herein are issuing a fresh buy-signal. The 5-day moving average is at 157.14. The top of the Bollinger band is at 159.14 and the lower edge is seen at 155.669. We are above the Ichimuko clouds on the daily, weekly and monthly time-frames. Remember, above 159.50, there isn’t much in the way of resistance or supply and, this market could run to the upside as buy-stops become elected. We have good support in the Euro down to the 153 area, below that, it becomes dicey.

The S&P 500 declined in the final two days of trading this past week, removing all of the gains for the week and posting a weekly loss. We seem to be forming a rounding top and will likely return to the bottom of the range. Should the market rally, we need to see a close above 1291.25 to reignite interest on the upside. On the downside, it is likely that we will return to the 1229 level. The warning we have on a decline is; that should we remove the most recent low of 1200.75, we will see a flurry of sell-stops elected pushing the S&P below the 1200 psychological level and that could inspire some fear in the fearless market. We need to monitor volume for both scenarios, either up or down. The stochastic indicator, the Thomas DeMark Expert indicator and our own indicator all are pointing lower. The RSI is simply going sideways near neutral levels. The 50 day moving average is at 1320.09. The 5-period moving average is 1265.15. The top of the Bollinger band is at 1293.32 and the lower edge is seen at 1221.49. Notice that the Bollinger bands are becoming narrower. This usually results with an explosion of volatility when it does occur. We can remain within narrow Bollinger bands for a while therefore this reading does not tell you that a move is eminent but rather that it will come, with an unknown date of arrival. We remain below the Ichimuko clouds, on the daily and the weekly chart but above the clouds for the monthly time-frame. If the S&P 500 can get above 1291.50, it will move quickly to the 1312, 1232, and the 1353-63 areas. Remember that the 200 day moving average is at 1396.30. The weekly chart gives hope to the bulls and looks as though we could be trying to put in a bottom. The indicators are not helpful for this time-frame. The monthly chart continues to offer support for the bearish cause. We will learn a lot from the next move, be it up or down, it will tell volumes as to what we can expect for the rest of the summer.

The NASDAQ 100 was the place to put money to work. This index outperformed the S&P 500 by miles in last week’s sessions. The Friday session, was an up session, however; we did have an inside day. The junior traders were on the desks while the more senior traders left early on Friday to beat the traffic out of town. We continue to have a buy-signal issued from the stochastic indicator, our own indicator and the RSI. The Thomas DeMark Expert indicator is issuing a sell-signal. We looked at the Market Profile chart and noticed that below 1785.00 we get into big trouble. We are below the Ichimuko clouds on the daily and weekly time-frames but above the clouds on the monthly time-frame. The 5-day moving average is at 1832.10. The top of the Bollinger band is at 1868.261 and the lower edge is seen at 1796.663. The downtrend line for the Monday session is at 1849.43 and the uptrend line is at 1807.33. It is interesting to note that the 5 day moving average and the 20 day moving average are about to cross which, would give a buy-signal should the cross occur. The weekly chart looks like a sine wave or, a bear flag. We are not sure about that one. The monthly chart clearly shows that this index is stuck in a trading range.

The Russell 2000 rallied in the Friday session although not as much as the NASDAQ 100 rallied. This index has been outperforming the S&P 500 giving hope to the bulls that this rally will have legs. The Thomas DeMark Expert indicator is issuing a sell signal. The other indicators are issuing nothing of value, but do show that we are somewhat overbought. The 5-day moving average is at 710.20. The top of the Bollinger band is at 722.13 and the lower edge is seen at 644.57. The 50 day moving average is at 711.75. and the 200 day moving average is at 727.83. We remain below the Ichimuko clouds on the daily and the weekly chart and above the Ichimuko clouds on the monthly chart. Should this market retreat, we will have big troubles below 655 which, could lead to a steep retreat in this index. On the upside, there is supply all the way up. The indicators for the weekly time-frame are all positive.

The Continuous Commodity Index has had a difficult week taking this index below the Ichimuko clouds. We have a 9-count on the daily chart and a possible buy-set-up at 548.10. All the indicators that we follow herein are issuing a buy-signal for this index on a daily chart. The 5-day moving average is at 549.974. The top of the Bollinger band is at 626.643 and the lower edge is seen at 536.722. We could expect to see a rally carry this index to 578.80. This index will get into trouble below 540.96. On the upside, there is supply all the way up to the 608.16 area. Naturally, above that area, you will see buy-stops elected. The continuous commodity index is above the Ichimuko clouds on the weekly time-frame. The correction ahs been very steep and this index has gotten extremely oversold on the weekly and monthly time-frames. Remember, that the 577-578 areas are important and will likely contain the first rally attempt.

Crude oil is grossly oversold on a daily basis and is inside the Ichimuko clouds, threatening to close below the clouds. We do not have a buy-signal from our indicators just a continued sell-signal at oversold levels. The 5-period moving average is at 126.68. The top of the Bollinger band is at 151.60 and the lower edge is seen at 121.75. Should the market trade below 121.60 or so, we will find ourselves in a downdraft that could lead to 116.80 and 115.20. Under those levels we see 108. We are above the Ichimuko clouds for the weekly and monthly time-frames, although we are oversold for both time-frames. How deep with the retreat go? Good question, but we believe that there will be a strong rally within a few days and that rally will return us to 132 and then 135.

Gold is trading above the Ichimuko clouds. The 5-day moving average is at 936.82. The top of the Bollinger band is at 981.20 and the lower edge is seen at 908.78. The RSI is turning higher and issuing a buy-signal. The stochastic indicator and our own indicator will issue a buy-signal in either the Monday or Tuesday session. On the upside, there will be supply all the way to the 985 area. There is one quick move area on the downside and that is below 910.8 which would take you to support at 897.60. The indicators on the weekly chart are issuing a continued sell-signal. We are above the Ichimuko clouds for the weekly and monthly time frames. We would like to buy gold but must wait until the picture becomes clearer.