Archive for February, 2012

Sunday, February 26th, 2012

Please email OptnQueen@aol.com if you should want the edition with charts.

The good news is we have survived, here in the North East, with minimal snow this winter. The bad news is that the snow shovelers have no income from this winter, well so far. Now, if you lived in other parts of the nation you were buried in snow, but hey we had it last year. The green shoots are springing up all over as we shake off the cold of winter and begin to enter into the spring season. The daylight hours are increases as in the positive mood on Wall Street.

The NASDAQ 100 has removed the October 2011 high and has appreciated 19% from that low. It has been on an upward spiral since gapping higher on the first trading day of the year. There have been six trading days when this index closed lower than its opening levels, six since the first trading day of January. That is a very impressive record. The S&P 500 has advanced 18% from their lows. The Russell 2000 has rallied 23%, all this signaling that the bulls are in firm control of this market. The S&P 500 is approaching the high last seen in April of 2011. The NASDAQ 100 has rallied beyond the April 2011 high. We can hear the howls out there screaming that we are overbought and have to sell off! Actually, we can remain overbought for extended periods of time in a bullish market. Have you ever heard of being “bullishly overbought?” We can purge some of the overbought condition by sideways movements. In other words, we do not have to plunge to remove this condition. Our biggest concern with this market is that there are so many bulls out there that we are again reminded of Bob Farrell’s rules, when everyone agrees on something it probably is going to be wrong.

The question to ask is; “are we in a brand new bull market?” or is most of the market strength the result of too much money sloshing around at zero interest rate. This money is seeking yield and is finding it in old name blue chip stocks. Not only is the yield worth the investment but the tax favored status of that dividend encourages investors to purchase the stock rather than the bond, which may not enjoy the same tax status. Municipal bonds are, so far, not in that category and continue to enjoy tax free treatment. Unfortunately, this asset class is currently under review as a possible source of tax revenue. Should that come to pass, it would cause local funding for projects to skyrocket as these “tax free” bonds become taxable and will have to compete with corporate and other taxable instruments. The result will be that funding projects will become too costly which would end some improvements states and cities would likely have made and, oh by the way, severely reduce the workers needed to complete those projects. We believe that the uproar of this possibility will prevent this from getting further than a media sound bite.

Tuesday: January durable goods are released at 8:30, February consumer confidence is released at 10:00 and S&P / Case-Shiller home prices for December are released at 10:00.
Wednesday: 4th quarter GDP is released at 8:30 and February Chicago PMI is released at 9:45.
Thursday: January personal income/consumption is released at 8:30, January construction spending is released at 10:00 and February ISM manufacturing index is released at 10:00.

Since we last looked at it the US dollar index it has fallen out of bed, breaking below the critical support line at 78.893 on a downward gap. A large bearish engulfing candle was seen on the 23rd with a large tale probing the depths below that critical support line. The index is toying with the 78.255 level and should it break that level we can see 77.751 in the not so distant future, should the index break. We are below the 20 period moving average which had been acting as support and the Bollinger bands are starting to expand after some significant narrowing during the backing and filling of previous weeks. The upper band is at 79.845 and the lower band is at 78.455. The stochastic indicator is issuing a sell signal and is moving sharply down. The RSI is pointing lower printing lower highs and lower lows and our own indicator is also moving sharply lower and giving a sell signal.

A weekly chart of the US Dollar index shows just how critical the current support level is. A break above the down trend line could bring us back to 79.464 followed by 80.545

The S&P 500 index has been trading in an upward channel for the entire 2012 year. We agree that the New Year is only two months long but the rally which began at the end of November has been very impressive. The stair-stepping upward pattern seems to be losing a little momentum and is likely to back and fill at these levels. The previous high of 1374.25 will act as resistance hold the market at bay. There is a possibility that the market will jump the level and cause a wave of buying as trend following applications are set into motion. We are comfortably above the Ichimoku Clouds for all time-frames. We are also overbought as measured by the stochastic indicator for all time-frames. As an aside, we have been overbought since the end of December with only one brief episode, at the end of January, where we crossed below the overbought level. The other periods have seen brief pokes below overbought but the index has remained, for the most part overbought. The Thomas DeMark Expert indicator is going flat at overbought levels, the RSI is overbought but going sideways and our own indicator is issuing a sell-signal. The 5-day exponential moving average is 1360.49. the top of the Bollinger band is at 1377.71 and the lower edge is seen at 1310.33. The upward channel lines are 1386.14 and 1347.46. Does the chart look good? You bet it does, the only problem is that there are too many bulls lose in the arena.

The NASDAQ 100 has been on an upward move since opening higher, leaving a gap on the chart, as a New Year’s gift. Since that time, this market has done little to help out the wounded bears and has enjoyed a fantastic rally. At this time, however; the market seems to be stalling and looks as though it is taking a pause from the upward trajectory. We are overbought as measured by all the indicators that we follow yet, only our own indicator and the fast stochastic is giving us a sell-signal. Remember previous sell signs have resulted in only a pause in the upward thrust of this market. There is nothing on the chart that tells us that this will be any different from the recent rests. We are above the Ichimoku Clouds for all time frames. We have no overhead supply to worry about and if the bulls can muster the strength, there is little to hold this market down. Until or unless the stochastic indicator breaks below 64, this will be nothing more than a backing and filling in this index. The 5-day exponential moving average is at 2592.68. The top of the Bollinger band is at 2635.89 and the lower edge is seen at 2461.98. The up trending channel lines are 2656.69 and 2581.39. Trade with care and don’t forget to use trailing stops, if you are long.

The Russell 2000 made its high for the 2012 trading year on February 20, 2012 when it printed 835.80. Since the beginning of February, this index has been trading in a rectangle, or trading range. The 5-day exponential moving average is at 824.27. The top of the Bollinger band is at 841.34 and the lower edge is seen at 796.32. We are above the Ichimoku Clouds for all time-frames. The Market Profile chart shows us that above 830.50 there is no supply and little to hold down this market. The Russell 2000 is currently trading slightly below the up trending channel line. The channel lines are at 865.69 and 627.87. This market has not enjoyed the overbought behavior that the other markets have enjoyed. While we have not moved much below the neutral level we have seen the indicators move around quite a bit showing that this market it less stable than the other two covered in this report and more liable to decline on any whiff of bad news. If the general market sells off, this would be the index to sell or sell short. It will react more violently and will yield more bang for the short buck. We caution that these markets have demonstrated that the crowd is buying the dips so keep those stops tight.

Here is a question for you? What do the crude oil chart and the NASDAQ 100 chart have in common? Answer is that they are both aggressively moving to the upside. The crude oil market took out the resistance at 103-104 and never looked back. Yes, it is extremely overbought but as we have seen in the past, it can stay in this condition longer than the shorts can afford to remain short. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is at 107.20. The top of the Bollinger band is at 109.01 and the lower edge is seen at 93.73. When we look at the weekly chart, it is clear that 113 is our next target then 114.83. We have closed above the upper Bollinger band on the weekly chart and it would not be surprising to see this market pause. We see no overhead supply to hold this market down. As we move from winter to spring, we also move to the anticipated summer driving season….ca ching!

Gold declined in the Friday session leaving the beginning of what looks like a bull flag on the chart. The 5-day exponential moving average is at 1764.51. The top of the Bollinger band is at 1778.10 and the lower edge is seen at 1699.99. We are above the Ichimoku Clouds for all time-frames. The stochastic indicator has just given us a sell-signal and the RSI is pointing lower. Our own indicator is curling over but no signal has been given. The Thomas DeMark Expert indicator is overbought and going sideways. The Market Profile chart indicates to us that until or unless the market trades above 1807.50 that it likely will remain in its current range. Trading above 1807.50 would open the door to the old highs. When looking at the weekly chart, it is clear that gold is comfortably above the downtrend line and continues to point to higher levels.

“FEMA swore that it would never hand out money like that again.” NYTimes Moral Hazard: A Tempest-Tossed Idea by sjao;a Dewan