Archive for February, 2013

Sunday, February 24th, 2013

The Government and the Federal Reserve are trying to inflate the economy, but with increased payroll taxes and huge debt loads, where is that spending going to come from? Clearly the middle class earner is muddling along trying to keep things in balance even as daily living costs are increasing. How about the recent flock of college graduates who are burdened with debt from college loans and even higher graduate school loans? When are they going to be able to afford to add discretionary spending to the economic puzzle? The market is telling us that there are limited places one can go to make up for the two percent tax increase levied on all American tax payers. Zirp (zero) interest does not nor has it ever covered that increased tax burden. Where can the tax payer go but the higher dividend paying securities?

This dilemma has provided the market with a dual floor, one provided by those investors just trying to make enough return to keep up with the tax man and another one provided by those investors who feel that they have missed the rally and are looking for opportunities to jump back in. We have been writing about this for a very long time. Our investment mentality is trained to get the most out of investment dollars. With that in mind, we purchase stocks that have a long history of dividend payment and increases of those dividend payments. We then sell covered call options on those securities at a resistance level technically derived, taking care to make the option date expire after the dividend is paid. We simultaneously sell an equal amount of put options on the same security at levels that are technically good support levels. Add to that a firm stop-loss order and you have increased your performance in that investment. Your downside risk is two-fold: the first is that the stock is called away from you before you collect your dividend….this can happen with American style options which are exercisable any time before expiration, and the second risk is the naked put. If the security is put to you, it is likely that you could suffer a loss on that purchase. That is why we advise you to put in a firm stop, not a stop limit which is a stop limited to a price. If you want out of the security, you want to exit the security. We also caution that if you are selling the naked puts, remember to adjust your stop to reflect the additional shares from the exercise of that put. Naked puts are great ways to add to your portfolio. NEVER SELL A NAKED PUT ON A STOCK THAT YOU DO NOT WANT TO OWN.

The US Dollar Index certainly through us for a loop this week and broke out of a triangle pattern that had been forming since the end of August, closing the Friday session at 81.59. This market has been range bound for nearly two years; further a smaller range had formed within those bounds over the past several months. Alas, all things at some point come to an end and this small collar holding the market just may have come off. The Bollinger Bands are expanding with the upper Bollinger Band at 81.46 and the lower band is at 78.87. The 20-period simple moving average is 80.16, the 5-period exponential moving average is at 81.19 and the market is above both of these. The index bounced off of the resistance point created by the “End of August” beginning of “September Step” on the way down. Above this the next congestion zone is between 82.41 and 82.70, however; if the market has enough emotion to push this far, the old July highs may start to look less elusive. There is, of course, downside risk and we do see liability down to the 80.25-80.80 region (two former sticking points). More likely, we see the market pulling back to the “November Rounding Top,” all indicators we follow are curling over and on the verge of issuing a sell-signal, and then after a shallow retreat, making its away higher.
Looking to the weekly chart we can see a strong uptrend still in effect. The index has broken above the November high and it can stay above this high, has little in its way to stop it from reaching 82.62
The 60 Minute .05 x 3 Point and Figure chart looks very bullish. We are in an uptrend and have multiple internal trend lines. We currently have three activated upside targets at 81.25, 81.85 and 83.7. Markets in an uptrend forming internal trend lines and upside targets send a strong signal. What’s more, we interpret the pattern circled on the chart below (from February 21st through the present), as fairly bullish. Please note this is not a traditional “Point and Figure Pattern” and if this were a triple top it would be a far more powerful signal. Be that as it may, point and figure patterns represent a reassertion of control and it is this idea that gives all patterns and targets that go along with these charts validity. By edging forward, pulling back and then going on to break the initial high multiple times, the bulls have shown their control.
The S&P 500 rallied in the Friday session reversing the two-day sell-off seen in the Wednesday and Thursday sessions. The chart shows us that the market returned to support levels in the low 1492 area where we have seen congestion. The sell-off was not exceptionally steep just very swift which, is the nature of sell-offs. We actually never became oversold as measured by the stochastic indicator, our own indicator, and the RSI. The only damage we see is that we are below the uptrend line. We have seen this type of action before but this is the first them in the 2013 trading year that it has occurred. The Bollinger Bands are becoming a bit narrower than they had been. The 5-period exponential moving average is at 1512.11. The top of the Bollinger Band is at 1527.12 and the lower edge is seen at 1490.07. We are above the Ichimoku Clouds for all time-frames. The stochastic indicator, our own indicator and the RSI are all pointing higher bouncing off the neutral zone. The Thomas DeMark Expert indicator continues to point lower at oversold levels. We closed the Friday session at the higher edge of the day’s trading range. The comfort of market determined fair value is at 1507.50. The Market Profile chart warns us that should we close above 1515 we likely will move to 1517 and then 1528. Looking at the point and figure 1% by 3 box reversal chart this market looks as though it could trade higher. We have an upside target of 1812.66. That said, it is only an indication of where the market could take us not a real target. A lot of information will be given when we see how the market reacts from here, it clearly looks very bullish. Looking at the 60 minute point and figure chart we see that we had a nasty decline and since that decline have rallied. We have an unfilled target of 1439.95. On this chart we have both uptrend and downtrend lines. This chart bears watching.

The NASDAQ 100 rallied in the Friday session but failed to both remove the Thursday low and the Thursday high. The range was impressive but not as great as the prior day’s range. A strange thing happened on the way to this rally…we have a mechanical sell-signal which was issued on Thursday and a 13 count. The stochastic indicator has just issued a buy-signal and our own indicator is likely to issue the same in the Monday trading session. The RSI is curing to the upside. The Thomas DeMark Expert indicator is bending to the upside. The 5-period exponential moving average is at 2741.11. The weekly chart looks as though we are forming the right shoulder of a head-and-shoulders top. We are above the Ichimoku Clouds for all time-frames. We would use a 2685 stop for any long positions. While we do believe that we could bounce from that level, it would be negative for the market to probe the gap formed between the last trading day of 2012 and the first trading day of 2013. From a longer term prospective, we remain above the uptrend line drawn from the November 2012 low. We continue to trade inside a rectangle. Until or unless we move wildly above the high of 2786.50 or below 2686.25 we believe that we are spinning our wheels and going nowhere fast! The Market Profile chart clearly defines that range will less tolerance on the downside than seen on the candlestick chart. The Market Profile chart has a tolerance down to 2698 below which it gets more bearish. The point and figure charts are sending mixed messages. The daily 1% by 3 box chart shows a market that has broken above the downtrend line but has failed to meet the multiple upside targets. We would expect the market to take out the high or fail miserably. The 60 minute 1% by 3 box chart shows a market in a congestion area. The trade here is to play the range but be sure to keep your stops tight.

The Russell 2000 rallied 1.04% in the Friday session removing all of what was lost in the Thursday session. The market looks as though it just paused for a few days and seems to be back on the upswing. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is 915.24. The top of the Bollinger Band is at 929.51 and the lower edge is seen at 893.01. The stochastic indicator and the RSI are both pointing higher; our own indicator will issue a buy-signal in the Monday session. We have signs of exhaustion. There are two possible downside targets, 898.30 and 891.10. It is possible that this market will test these levels. Until or unless these levels are broken, it will just be a pause in a continuing uptrend. On the upside, a close above 933.00 will likely cause the market to melt to the upside. There is no overhead resistance above that level. The 1% by 3 box point and figure chart has no downtrend lines and an upside target of 1038.29. The 60 minute 1 by 3 box chart has a downside target of 843 but until or unless we break below the uptrend line, view that target as a warning.

Crude oil rallied in the Friday session after printing a low of 92.44, a horizontal support line. This chart shows an “M” pattern. There is another downside possible target at 91.52. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 94.39. The top of the Bollinger Band is at 98.98 and the lower edge is seen at 93.69. The stochastic indicator is oversold but has not issued a buy-signal. The RSI is flat at oversold levels. The weekly chart continues to look as though the product will trade lower. Both the stochastic indicator and the RSI continue to point lower. The monthly chart is interesting in that it is forming a pennant. The Market Profile chart tells us that below the 92.00 level we will likely retreat to 89.00. The point and figure chart shows that this market is in a range bound market and could easily break to either side.

Gold wins the ugly chart award for this week. The market cracked on Wednesday, rallied on Thursday and retreated on Friday. Until or unless Gold can remover 1626, 1642.60 and 1657, the bears will be in charge of the market. Yes, we are oversold but there is little to tell us that the market is going to change direction. We are at levels where we should find support. The last level is 1526. Below that level, expect the shorts to press their advantage that the market to feel that weight on it. We are below the Ichimoku Clouds for the daily and weekly time-frames but are above the Ichimoku Clouds for the monthly time-frame. The 5-period exponential moving average is 1585.02. The top of the Bollinger Band is at 1713.12 and the lower edge is seen at 1566.13.