Archive for August, 2008

Option Queen Letter for August 17, 2008

Sunday, August 17th, 2008

Here in America have a group of people who have worked hard, for most of their lives, and now, in retirement, are struggling to pay for their medical needs, put food on their tables and a roof over their heads. This is the group, the seniors, really need a helping hand, they have difficulty finding jobs (they are too old and employers won’t hire them). These seniors, find that their social security checks aren’t covering their daily needs. Remember their checks are keyed to the inflation that the US Government agrees is in the system. That inflation rate is far below the real inflation rate of about 14%. It isn’t as though they wouldn’t work if they could, but they, for the most part are either not able to find employment or are too ill to find employment. Wouldn’t it be a good idea to underwrite help for this discarded group of Americans? Instead, we are hearing other ideas of “underwriting more affordable housing” for low income Americans. Is this a socialistic society or, a Democracy we all have an equal chance to advance, or is the government telling us that it is better to be low income earner. Aren’t we sending our children the wrong message? That we will reward those who fail and punish the winners? We know this sounds a bit radical, but isn’t that the message, that we are approving this sort of behavior? This society is rewarding underperformers and punishing those who work hard and achieve. There is something wrong with this picture. We guess that it might be a good idea to give the gold medal to the loser and punish the winner of, say in an Olympic competition, with nothing at all for his hard work. Same theory different circumstance same message.

The true summer slowdown is here. We are in the last throws of summer when trading desks are lightly populated and the interest of most Wall Streeters is at the beach or the golf course. Little attention is being paid on the invasion of Georgia, the lousy CPI the real effects that inflation is having on everybody’s real earnings or the real trouble still in the financial system. It is true that crude oil has retreated, but that was not the only commodity that was giving the shoppers problems. The cost of food has been out of control for a while. We notice that the price increases, in the grocery store, remain in effect, even when the underlying commodity retreats. Even the gas stations are loath to drop the price of gasoline. We have been noticing that sporadically, some stations have dropped the price of gasoline; we had the pleasure of sitting on a line waiting for that cheap gas.

From the Option Queen Letter of August 3, 2008 regarding the Euro: “Bottom line is this, if we break the 154.78 area we will test the 152.55 under that level we will break below the trading range opening the door to 149-147.” Regarding the US Dollar index: “When looking at the point and figure chart, we clearly see that if we can trade above 74.75, we will have a good chance of returning to the 76 area. The Market Profile chart says the number is above 74.60 for the quick move area.” Last week we wrote: “The US Dollar index did break above the downtrend line on the chart and this move can be viewed as a genuine advance. The US Dollar index has now opened the door to 77 and 78.” The problem with the US Dollar index now is that it looks like a pole. We are grossly overbought and expect to see a retreat which should take us to 75.96, 75.19 and 74.75. This retreat will keep us in an uptrend but will allow some of the overbought condition to be removed. The stronger US Dollar is allowing the commodities markets to retreat and is also giving the USA some price breaks in raw commodities. At the same time, the Euro is retreating making the cost of everything priced in US Dollar more expensive. While Euroland has been belly aching about inflation, the truth is that the USA has been feeling more inflation than has been seen in Euroland. Remember that commodities are priced in dollars and therefore a weak dollar has made our costs higher, while the strong Euro has kept these same costs lower for the Euroland buyers.

Monday: Housing market index for August is released. Tuesday: July housing starts and building permits re released at 8:30, July PPI is released at 8:30, the Johnson Redbook retail sales index is released and Atlanta Federal Reserve President Lockhart speaks. Wednesday: Interesting vote in Germany regarding foreign of German companies, and the Bank of England releases its interest rate decision. Thursday: July’s leading indicators are released at 10:00, August Philadelphia FRB Business outlook survey is release at 10:00, and NYSE short interest is released. Friday: Federal Reserve Chairman Bernanke speaks in Jackson Hole.

The US Dollar index closed near the best levels of the Friday session. The chart does look like a pole, as the US Dollar index has enjoyed the best run to the upside in years. We are truly overbought but as you know, we can remain in that condition for a while without much trouble. The chart looks exhausted and may need some time to back and fill or simply decline a bit to purge itself of this overbought condition. The stochastic indicator, our own indicator and the RSI are all grossly overbought but pointing higher. The Thomas DeMark Expert indicator is going sideways at neutral. We have an amazing 13 count on the chart. The 5-day moving average is at 76.641. The top of the Bollinger band is at 77.4435 and the lower edge is seen at 71.259. We are above the Ichimuko clouds for daily chart but not the weekly nor the monthly time-frames. We are overbought on the weekly time-frame, as measured by all of the indicators that we use, not one issuing a sell signal. We have entered an area where we could see some resistance at78.80 or so. We do expect to see some backing and filling before any further moves to the upside beyond the 78.80 area.

We have a 9- count on the daily chart for the Euro with a buy-set-up done at 147.300. The indicators that we follow are grossly oversold but nary is a one giving a buy-signal. The 5-day moving average is at 148.256. The top of the Bollinger band is at 160.79 and the lower edge is seen at 146.413. Naturally, we are below the Ichimuko clouds on the daily chart, although, we are above the clouds for both the weekly and monthly time-frames. The monthly chart shows the dramatic sell-off seen in the euro. The steep downtrend line shows resistance at 153.48 on the weekly chart. The chart of the euro looks as though it has fallen off a cliff. We do expect to see a rally within several days to adjust the steepness of this retreat and to remove some of the oversold condition. The ensuing rally should take the euro to the 149 + area and then, possibly to 150.50 or so.

We never fail to find amazement when the pricing of the product stays within the lines drawn on the chart. The S&P 500 has remained below the downtrend line and above the uptrend line on the daily chart. The downtrend line is at 1302.24 for the Monday session and the uptrend line is at 1276.22. All the indicators that we follow are pointing higher and all are overbought. The 5-day moving average is at 1294.94. The top of the Bollinger band is at 1311.227 and the lower edge is seen at 1237.67. The Friday session bought the trade into the overhead Ichimuko cloud. We have lots of overhead supply taking us all the way up to 1328.80. In other words, it will be hard making progress to the upside. The 5-day moving average is at 1294.94. The top of the Bollinger band is at 1311.227 and the lower edge is seen at 1237.672. We will have resistance at 1319.90. The weekly chart’s uptrend line indicates that we must stay above 1278.87 or risk a retreat to the recent lows. The indicators on the weekly chart continue to point higher and have some room to the upside. The monthly indicators have even more room to run to the upside. The monthly chart also indicates that we have not yet broke the downtrend line. Our stance is if long, keep those sell stops tight, if out of this market, stay out until it is clearer, and if short, watch the 1306 and 1319 area’s above which we could see a run to the upside. If short consider covering at 1306.

The NASDAQ 100 is above the Ichimuko clouds on the daily chart. The Friday session left a doji candle on the chart. We know from the past, that doji’s tell us that the market is in transition and could likely change direction. The stochastic indicator is about it issue a sell-signal and our own indicator; the RSI and the Thomas DeMark Expert indicator have already issued a sell signal. The 5-day moving average is at 1952.10. The top of the Bollinger band is at 1979.758 and the lower edge is seen at 1770.89. The sell-set-up is done on this chart and we have a 9-count. The 9-count doesn’t mean that we can’t go higher but that there will be difficulty making upside progress. The weekly chart looks like a sine wave. Although the indicators are pointing higher, some are getting overbought. We have stepped into the Ichimuko clouds for the weekly time-frame. Although the chart looks as though this market could go higher, we feel that some backing and filling is needed to remove some of the overbought condition. The uptrend line on the weekly chart is at 1823.73. In other words, we could retreat all the way to 1823.73 and not disturb the uptrend line. We are not saying that we will see such a severe retreat but that even if there were a severe retreat we will continue the uptrend until and unless the market closes below that line.

The Russell 2000 left a doji candle on the daily chart as a result of the Friday trading session. This index has been the leader on the upside with six weeks of higher highs nearing the highs of June. We do have signs of exhaustion. All the indicators that we follow herein are uniformly issuing a sell-signal. The 5-day moving average is at 750.86. The top of the Bollinger band is at 759.133 and the lower edge is seen at 687.23. This index is above the 50 day and 200 day moving averages, way above them. We have seen this index take off to the upside and remain the leader in the rallies. Perhaps this rally is an indication that the small capitalization stocks, which generally don’t have many financials in this index, are doing well in a slowing economy. The Market Profile chart tells us that we are in a very comfortable level for this market. Above 759.60 we will get into the single prints at 760.50. That area of the market is highly unstable and the market generally rejects or, jumps to the next comfort zone which would take this index to 766.80 up to 799.20 where we notice a lot of supply. On the downside there is a great deal of support from 702.50 down to 656.00. On the daily, weekly, and monthly chart, we are above the Ichimuko clouds. The indicators on the weekly chart continue to point higher but are at extremely overbought levels. This index has been the leader on the upside and has had very modest retreats. We wouldn’t be surprised to see some profit taking in the Russell 2000. As a reminder, the Russell indices will trade exclusively in NYC after the September expiry. The options will also trade both electronically and in the pit. Currently, we trade the Russell indices in New York as well as Chicago. The Russell index futures will continue to trade electronically for both the full sized and the mini contract.

The Continuous Commodity index has rolled to the November expiry. This index has been on a downdraft since printing the high on July 2, 2008. We seem to be stair-stepping lower each day with an occasional few day rally that doesn’t go far. The indicators all are issuing a continuous sell signal albeit at oversold levels. We are below the Ichimuko clouds on the daily chart but above the clouds for the weekly and monthly time-frame. The 5-day moving average is at 521.60. The top of the Bollinger band is at 584.24 and the lower edge is seen at 505.81. This index needs to hold above 509.50 or risk another leg lower carrying it to 486ish. We should see a corrective rally within a day or so. It could be a time to nibble a little but only if you keep your sell-stops very tight. We would not nibble until or unless we see some buying interest re-enter this market, perhaps by Tuesday or Wednesday.

Ugh, crude oil’s chart looks like a very organized downtrend. We are below the Ichimuko clouds on the daily chart, however; we are above the clouds for both the weekly and the monthly time-frames. The 5-day moving average is at 114.448. The top of the Bollinger band is at 1313.29 and the lower edge is seen at 1108.38. Under Friday’s low of 111.34 we enter an unstable area of the market taking us quickly to 104.00 where stability should be seen. The market feels as though it would like to rally. We see some indications on our indicators that warn of a change of direction, from down to up, for both the daily and the weekly time-frames.

Gold’s chart is oversold and looks like a waterfall rather than a chart. The spill to the downside has been very steep and can not continue at this rate of decline. We are grossly oversold. Naturally we are below the Ichimuko clouds. The 5-day moving average is at 809.78. The top of the Bollinger band is at 984.15 and the lower edge is seen at 784.42. We are inside the Ichimuko clouds for the weekly time-frame and grossly oversold as measured by the indicators that we follow herein. There is no reason to feel compelled to buy gold at these levels. We do have a downside liability to 769 and below that level, 747. We could see a dead-cat- bounce on gold as early as the Tuesday session but it is likely that the bounce will stall at 828.15 and 845. The uptrend line on the monthly chart is at 744 and 749 on the weekly chart. Just incase you are long gold, be happy you weren’t long silver which took a bigger beating in the recent downdraft. If gold can hold above the lows of the Friday session, you can look to buy for a snap-back trade, but don’t wait for more than a snap-back. The chart looks pretty awful and gives little reason to believe that there will be more than a dead-cat-bounce in the metal.