The Option Queen Newsletter

The Olympics in China stole the news spot light on Friday while the Russians, not so quietly invaded Georgia, and the US stock market rallied along with the US Dollar. Crude oil and gold fell as the strength of the US Dollar applied additional pressures as speculators gambled that the global slow-down will take its toll on the demand side of the energy equation. China will certainly take a few deep breaths and slow its push into the modern world. Yes, its people, now a bit richer, have an increased appetite for things and staples of American life, that we have long taken for granted, but the anticipated extreme growth of wealth and buying power will not equal the recent push China made bringing the country into the modern world and Olympic glory globally viewed in awe by all.

For those interest rate starved investors, we suggest looking at high yielding stocks like Pfizer. Buy the stock sell the call and buy the put. This will lock both the upside and downside while paying you a better dividend, than the anemic money market returns or the dreadful returns seen on the Treasury securities. There are many stocks from which to pick to increase your income. Don’t forget to place the options so that you will collect the dividend. No, we do not own Pfizer at this time. Please, check the financial security of these issues before investing.

This week, August options will expire in the financial sector. We could see some gyrations as positions are adjusted to that expiration. The summer doldrums are in full force especially with eyes fixed on the Olympics and not the tape. The market rallied in the Friday session on very low volume, why even the VIX really didn’t move that much. We did see a very aggressive move in the US Dollar index, perhaps as a result of the expiration of their options this past Friday, or perhaps a migration of shorts covering their positions. 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 US Dollar index is overbought and exhausted and will likely retreat for a short while before the next rally.

Many cheer the rally in the US Dollar, but there are some negatives that will come as the currency appreciates. Tourism has become a big business here in the USA. Much of the increase in tourism is because our dollar is cheap and the visitors view the USA as a bargain. Last year, we saw advertised trips from London and Europe to shop at Tiffany in NYC. The currency was so cheap, that the savings from the purchases in NYC, when compared with the prices in London, paid for the hotel, airfare and meals without spending extra money. Meals here in the USA are cheap when compared to the cost of meals say in Europe. As to exports, as the US currency appreciates, our products will become less competitive with other imported products. We are not there yet, but this will eventually work its way thru the system. Remember, that US exports have been adding to GDP and exports have been expanding. As the currency appreciates, our labor force becomes more expensive and our products more expensive. On the good news side of the equation, commodities that are priced in US Dollars become cheaper for Americans, but more expensive for many of our trading partners as their currency retreats in value. Their currency is worth less therefore it takes more of that currency to buy the raw materials. They now will feel the inflation that we have been battling for a while. Speaking of inflation, it seems as though the retreat in raw materials has not translated into cheaper products. Go take a trip to your local grocery store and discover that alas, prices are still rising. So much for the retreat in commodities.

Let’s look at crude oil which enjoyed a rather steep hair-cut in the Friday session bringing the product to a low of 114.62 closing the session at 115.20. Crude oil is oversold, about as much as the US Dollar index is overbought. Neither crude oil nor the US Dollar index is changing direction right now and many need a day or two for a reverse in movement to be seen. We can see crude oil going to 109.50 and even 101 on a wash-out liquidation. Crude oil must close and remain above 122-123 to change direction from down to up. The US Dollar index must stay above 74.35 to remain in an uptrend.

Monday: US trade deficit is released. Tuesday: June international trade is released at 8:30, and weekly chain store sales are released at 7:45. Wednesday: July import/export prices are released at 8:30, July retail sales are released at 8:30, and June business inventories are released at 10:00. Thursday: July CPI is released at 8:30 and Minneapolis Fed President Stern speaks. Friday: July industrial production and capacity utilization are released at 9:15, August Michigan sentiment is released at about 9:55, and Chicago Fed President Evans speaks.

The US Dollar index looks as though it could move a touch higher, early in the Monday session however; we are getting a sell-signal from the daily stochastic and the Thomas DeMark Expert indicator. The RSI is the most overbought it has been in a half a dozen months and continues to point higher. Our own indicator remains overbought and continues to point higher. The 5-day moving average is at 74.56. The top of the Bollinger band is at 75.185 and the lower edge is seen at 71.354. We closed above the upper Bollinger band and we can not remain there for too long. The Market Profile chart shows that we are in single print areas. Going to the weekly Market Profile chart, we find that equilibrium will be found at 76.08 to 77.04. On the daily chart, we are above the Ichimuko clouds, but under the clouds on the weekly and the monthly chart. The weekly chart is overbought and continues to point higher. We seem to have broken to the upside from a five month base. We are above the Bollinger bands on the weekly chart which again indicates that we are pushing the envelope and will either retreat a bit or blow out the volatility. If long the US Dollar index, keep your sell stops tight. Although we can continue higher, we believe that we will see a pause in this advance. Here is a quote from last week’s Option Queen Letter: “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. The Bollinger bands remain narrow and tell us to get ready for an increase in volatility soon.”

A quote from last week’s Option Queen Letter: “We find ourselves in a well contained downtrend. With Europeans away on vacation for the month of August, the trading desks will be lightly populated giving way to thin markets which will react on thin volume. It is important that the Euro stays above 152.55 or risk a return to 149.46 and 147. All the indicators on the weekly chart are uniformly issuing a continued sell-signal with plenty of room to the downside. 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.” The well contained downtrend blew up and the Euro fell out of bed. The anticipated return to 149 seems to have happened all in one day, Friday. Yes, we are oversold as measured by all our indicators save the Thomas DeMark Expert indicator. No, we have nary a bend or movement to the upside to give the dying bulls some home. We are more oversold than we have been in more than six months. Naturally, we are below the Ichimuko clouds on the daily chart but we remain comfortably above the clouds for the weekly time-frame. The damage done Friday was severe. We have opened the door to the 144 to 146 area not seen since January of 2008. If you have the ability to look at a Market Profile chart, you will see that we last traded at 144 in February and between 145 and 147 in January. The chart looks really scary for the Euro bulls. The 5-period moving average is at 153.20. The top of the Bollinger band is at 160.44 and the lower edge is seen at 151.74. We closed below the lower Bollinger band and either the bands will expand or, we will rally back to within those Bollinger bands. Remember also, that Euro land is on vacation during the month of August and light volume will exaggerate the trade. We remain negative on the Euro and believe that the slowdown and inflation seen in the USA are beginning to be felt in Europe.

The rally in the Friday session of the S&P 500 finally broke the index above the 1291.25 resistance are printing a high of 1298 on very light volume. There is another horizontal line found at 1305.25 which we believe will offer some resistance. Both the stochastic indicator and our own indicator are overbought but continue to point higher. The RSI is not overbought and pointing higher. The 5-period moving average is at 1275.95. The top of the Bollinger band is at 1301.32 and the lower edge is seen at 1219.645. We continue to trade below the Ichimuko clouds on the daily and weekly chart. The market looks as though it can continue a bit higher but will need to pause for a while to regroup and work off some of its overbought condition. The indicators on the weekly chart continue to point higher. The Market Profile chart tells us that if we trade much higher, we will enter the lightly traded area up to 1306.50 which will propel us to the equilibrium areas of 1313.20 to 1346.70. We will encounter supply as we trade above 1306 which becomes heavier all the way up to 1366 or so. The uptrend line is at 1262. The downtrend line is at 1321.24. Although this report appears to be bullish, we remain cautious on this market and believe that this is a bull rally within the confines of a bear market. We will remain of this opinion until there is evidence to change.

The NASDAQ 100 underperformed the S&P 500 in the Friday session. That said, the chart of the NASDAQ 100 looks as though it is breaking to the upside after completing a rounding bottom. We have crossed above the 50 day moving average and, although we are above the upper Bollinger bands, seem to want to move higher. All the indicators that we follow herein are issuing a continued buy-signal albeit at overbought, grossly overbought levels. We have just penetrated the Ichimuko cloud on the daily chart. The 5-period moving average is t 1877.35. The top of the Bollinger band is at 1904.834 and the lower edge is seen at 1781.24. As you can see, we closed above the upper Bollinger band, where we will either see increased volatility or, a retreat. The weekly chart shows the market under the Ichimuko clouds but breaking to the upside. The indicators on the weekly chart have more room to the upside. Remarkably, the monthly chart shows nothing special about this past week just a continuation of the trading range seen on the monthly chart with a bias to the upside.

The Russell 2000 has been leading the market higher for the past several weeks. All the indicators that we follow herein are grossly overbought yet, continue to point higher. We have signs of exhaustion and we are near an area where we could stall. The 5 day moving average is at 719.48. The upper edge of the Bollinger band is at 742.73 and the lower edge is seen at 667.237. We crossed above the Ichimuko clouds on the daily chart but continue to trade below the clouds on the weekly chart. Although we are above the 50 day moving average, we expect to see some backing and filling in this small cap index. We have been on an upswing for the past five weeks and could stall here. The Market Profile chart tells us that above 748.60, we could see a quick move higher taking us to levels not seen since December of 2007. Remember the number 744.55, which is the downtrend line on the weekly chart and, we must close above that number, on a weekly basis, to turn this market back to positive. This index seems to under-perform on the downside and out-perform on the upside perhaps because there aren’t many small cap brokers or bank.

The Continuous Commodity index has been on a steep slide to the downside. All the indicators that we follow herein are oversold, but nary a one is issuing anything but a sell signal. The slide has been so steep as to alert us to worry that this waterfall-like action will probably end shortly allowing some of the overbought condition to correct. The 5-day moving average is at 522.206. The top of the Bollinger band is at 591.98 and the lower edge is seen at 506.4489. We are below the Ichimuko clouds on only the daily chart. For the other time-frames, we are above the clouds. Both the weekly and the monthly charts give us reason to believe that we will pause here or near these levels. The Market Profile chart indicates that should we decline further, that there will be good support at 479 to 489 yikes!

Crude oil closed near the lows in the Friday session. All the indicators that we follow are oversold, but none is issuing a buy-signal. The retreat has been steady with brief rallies within the context of a down-trending channel. The downtrend line for the Monday session is at 119.60. The lower channel number is 109.65 for the Monday session. We are below the Ichimuko clouds on the daily chart, but above the clouds on both the weekly and the monthly chart. The weekly chart shows a very oversold market but one that is trending lower. We are oversold enough to see a rally but unless the downtrend line is removed, it will be a rally in the context of a downtrend. The 5-day moving average is at 118.87. The top of the Bollinger band is at 140.87 and the lower edge is seen at 112.20.

Gold has been decline for over a month taking it from 999.40 on July 15 to Friday’s low of 857.50. The stochastic indicator is issuing a fresh buy-signal at grossly oversold levels. The RSI continues to point lower at oversold levels. We are trading below the Ichimuko clouds. The 5-period moving average is at 883.94. The top of the Bollinger band is at 1006.96 and the lower edge is seen at 859.69. We are oversold enough to encourage gold bugs to nibble a bit. We do see a liability to 846.40 and would not be surprised to see that number removed, temporarily. We continue to trade above the Ichimuko clouds on the weekly and monthly chart. It has been a nasty sell-off but an astute market observer should have noticed that gold did not make a new high when crude oil was making a new high. Further, gold did not make a new high or even a close to the high trade when the Euro was trading up in that stratosphere. These were early clues regarding the fragility of the energy rally. We shall see how this plays out and watch gold for clues regarding the currency and energy markets.