Archive for May, 2013

Sunday, May 26th, 2013

There will be no Option Queen Letter for the next three weeks. We will return on June 23, 2013

What is all the hollering about? The market retreated, it didn’t collapse, it is just a healthy correction and a shallow one at that. You would have thought it was another 1000 point drop in the S&P 500 the way people were carrying on. It was a small pullback with people snapping up shares. Take a look at the big picture, we could seriously drop to 1576 in the S&P500, which is a mere 74.50 handles (a handle is a point) below the Friday close, and remain in an uptrend. What is more important is what is going on in the economy. Our seniors and baby boomers are being starved by the Fed’s ZIRP interest rate policy. Clearly, seniors cannot live on a negative return and because of this are being forced into risker assets just to obtain some yield. Every time the market drops, people who have missed this rally step in to buy in an effort to catch up with their benchmark and those seeking yield buy stocks that will give some return on their investment. This is not rocket science just plain common sense.

The problem with all this stimulation from the Fed is that small bubbles are beginning to percolate in the economy. We see housing prices rising, not so much from the individual’s purchases but rather from fund purchases of properties to fix up, flip and/or rent out. Okay so it is only in spotty areas but it causing prices to rise, this is good and makes the home owner feel better about paying the mortgage each month. We clearly remember the last housing bubble, which was inspired by Greenspan keeping interest rates too low for too long. This time we are going to sell into the bubble! The problem with bubbles is that they do not end well. Another problem is that the Fed has manipulated funds for so long that the quiver of arrows will likely be empty for the next crisis. We are still not out of our crisis and employment continues to remain stubbornly high. Inflation, as measured by the government is low, but inflation as measured by the average working person is high. The cost of food, the cost of real-estate taxes, tolls, utilities etc. keep getting higher, not lower as the government would have us believe. Stock prices continue to rise because there is no place else to go. The mattress, nay, that is also a negative return, but at least you don’t have to pay tax on that.

The only saving grace that this country has is that when compared to other countries, we are the best of the awful. Look at France, an accident waiting to happen. Should the financial problems in France continue to expand, it could face insolvency and then, what is going to happen to the euro? Those with brains and money have fled France and its socialistic behaviors. The policy of taxing the rich and at the same time cutting down work hours and expanding government giveaways encourages people not to work. Great and the USA is on that path. France is a bit more mature and has been doing it longer thus it will fail long before the USA awakes to what it is doing. The economy in the US cannot survive if almost 50% of the people do not pay taxes. Sooner or later, money will flee and with it, the tax proceeds. The current welfare government was elected into office by those getting the free government handouts. All of that said, the USA is still the best bet for investors. No, don’t buy bonds, they likely will begin to fall in price and rally in yields. (As bond prices rise, the yields drop, as bond prices fall, yields go higher.)

We do have some good news created by the expiration of the Bush tax cuts. We saw an increase in the taxes collected at the end of the 2012 tax year because many sold out positions to avoid the higher taxes of 2013. It seems to have been a one-time-occurrence. This did however help even states like California back into the black. Let’s not mistake this 2012 payroll tax and income tax raise of 1.9 trillion with permanence. It likely is a one year wonder.

Anybody paying attention to corporate tax laws in the USA, US corporations have about 2 trillion dollars abroad? Do you know that GE paid NO TAX? How about Apple? Under our laws, here in the USA, a corporation can defer paying tax on their profits as long as the profits are held abroad. These funds can be repatriated the funds over the course of a year at…..ready…..a discounted tax rate. Here is another tidbit; US corporations are allowed to deduct expenses against foreign held profits on which taxes are deferred. It was thought that with the drop in the corporate tax rate of 5.25% that the money would return to our shore and would be used for new hires. The result was, for the most part, not new hires but rather increased dividends and share buy backs….not jobs.

The S&P 500 left a doji candlestick on the chart as a result of the Friday trading session. We are above the Ichimoku Clouds for all time-frames. Friday’s action was an inside day. The 5-period exponential moving average is at 1653.37. The top of the Bollinger Band is at 1684.07 and the lower edge is seen at 1576.45. The chart pattern that stands out is that of a bull flag. The retreat seen this past week and only for three days has been contained. The distance from the recent low on April 18th to the recent high on May 22 is 155.00 handles or points. The recent retreat from the high was 51.25 handles or points, taking the high print and the lows print results in a retreat of about 33%. If the market retreated to 1608 it would only be a 50% retracement. The one thing we did notice is that finally, the indicators that we watch. retreated and are no longer overbought. Both the stochastic indicator and our own indicator are beginning to curl a little, not buy-signal just a losing of momentum to the downside. The RSI has gone flat and the Thomas DeMark Expert indicator is actually becoming oversold. Only one disturbing thing at the moment is that the high on Wednesday was made on lightish volume and the decline was seen on heavy volume that is not something we like to see. The point and figure chart remains very bullish. The 60 minute 0.1% by 3-box chart has both upside targets which and downside target.

The VIX chart, which is the volatility on the near options of the S&P 500 seems to have a rounding bottom and may be forming a cup-and-handle formation. If that is true, that we will have a period of market difficulty, in other words the market will finally have a correction. The Fibonacci retracement that would negate that pattern it a drop in the VIX below 13.69. Should the VIX drop below 13.29, we will be in for more upside in the S&P 500 and more downside in the VIX which moves in the opposite direction of the S&P 500, thus, when the S&P 500 rallies the VIX drops.

The NASDAQ 100 rallied 0.75 points on the day and left a red/black doji like candlestick on the chart. The reason the candlestick was red/black is that this market opened higher than the closing level. We did see the market make a higher low and a lower high showing a narrowing of the range. We are above the Ichimoku Clouds for all time-frames. We did see a nine-count on the chart about a week ago. The stochastic indicator and our own indicator continue to point lower but are losing momentum on the downside and the faster lines is beginning to curl to the upside, no change of direction seen as yet. The RSI is basically flat at 62.25. The Thomas DeMark Expert indicator is pointing lower at oversold levels. The 5-day exponential moving average is at 2999.28. The top of the Bollinger Band is at 3063.15 and the lower edge is seen at 2862.32. These Bollinger Bands are beginning to contract thus it would come as no surprise to see the markets back and fill for a while. If you traded staying long above the 5-period exponential moving average and going short or out below that level you would have gained 217.87 points on that simplistic trade. At 20 dollars a point per mini that is equal to $4357.40 just trading one mini contract. Had you bought the opening after the buy signal and sold the opening after the sell signal you would have made 205.50 points or $4110. Again this simplistic strategy is based on going long above the 5-period exponential moving average and selling when the index is below the 5-period exponential moving average. The daily point and figure chart is very bullish with no downtrend lines but the 60 minute 0.1% by 3 box chart seems to be consolidating a bit. There are downtrend lines on that chart as well as uptrend lines.

Three days ago on Wednesday, we saw a very negative candlestick on the chart. The Russell 2000 rallied printed a new high, reversed and closed below the previous day’s close. When the bulls were in control they fumbled and failed to follow through causing sales as the market traded below its opening price. That day, the market printed a low, and then rallied back a bit. On Thursday, the market opened tried to rally failed and reversed course printing a new low but rallied back to almost the opening price. Friday again the market tried to rally failed, although it did print a slightly higher high than the previous day but then fell to test the lows which were slightly higher than the previous day’s lows. The market finally rallied back to almost that opening level. The 5-period exponential moving average is at 986.18. The top of the Bollinger Band is at 1011.55 and the lower edge is seen at 927.23. We are above the Ichimoku Clouds for all time-frames. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are all pointing lower. The RSI is flat slightly below overbought at 60.86. The upward trending channel lines are at 1014.04 and 973.26. 14.8% of the daily volume was seen at 976.60.
The daily point and figure 1% by 3-box chart continues to look bullish with no downside targets and no downside trendlines. When we look at the 60 minute 0.1% by 3-box chart, we see an unfilled upside target and a market that seems to be consolidating. We flipped the candlestick chart upside down and it makes us think that we could retreat to the 951 area.

Crude oil retreated in the Friday session leaving a shaven headed candlestick on the chart. This is a strange chart, we can make a case for an “M” pattern which would project the market retreating to 84 to 85. On the other hand should the market rally above 97, it will go back to the century mark. The other side of the coin is that below 92 the door opens to 90, 87.5 and 86. The 5-day exponential moving average is 94.600. The top of the Bollinger Band is at 97.54 and the lower edge is seen at 92.24. The downtrend line is at 96.94 and the uptrend line is at 93.29. Everything is pointing to the importance of these numbers, Bollinger Bands, trendlines etc. The 1% by 3-box point and figure chart has both upside and downside targets. We have close above the downtrend line for the moment. The 60 minute 0.1% by 3-box chart highlights almost the same numbers as seen before. We do have a downtrend line and both upside and downside targets. There is a heavy volume number and that is 95.90 where 11.5% of the volume occurred on the monthly chart.

Gold has been trying to defend the lows and so far, it has been successful. The uptrend line is at 1342.60, but the real line in the sand is 1323 the low seen in April. So far it has held up. The congestion point is around 1385.50. Gold is below the Ichimoku Clouds for the daily, weekly but above the clouds for the monthly time-frame. The stochastic indicator is pointing to higher levels but the RSI is pointing lower, call it divergences. The 5-period exponential moving average is at 1384.33. The top of the Bollinger Band is at 1508.8 and the lower edge is seen at 1345.47. The Bollinger Bands seem to be starting to expand telling us that volatility will likely return to this market. The down trending channel lines are 1401.41 and 1310.88. The Market Profile chart shows us that 22.4% of the volume from June 24th was at 1386. Important levels for gold are: 1398 and 1381. So long as we are below and above those numbers, we go nowhere fast. Above the 1398 level, we will likely melt to the upside and below 1381 to the downside. The 60 minute 0.5% by 3-box point and figure chart has both upside and downside target but some very stiff downside trendlines. It looks as though this market need to trade above 1468 to even bother the shorts on the 1% by 3-box daily chart, the number is even higher.

The US Dollar Index closed the Friday session down 1.08 on the day at 83.76. For those who have not been keeping up with the latest and greatest, the index broke above the July 2012 highs last week and has started to pull back a bit after a series of volatile moves. The index is currently below the 5-period exponential moving average (83.90) and above the 20-period simple moving average (83.06). The Bollinger Bands are still expanded with the upper band at 84.84 and the lower band at 81.28. Currently all indicators that we follow are pointing lower. The 60 minute .05 x 3 Point and Figure Chart though still in an overall uptrend has several countertrend internal trend lines and a new activated downside target of 82.15 (along with two activated upside targets of 86.4 and 86.1. The index has pulled back below the upper band. The retreats seen in the last week were not sever enough to do any major damage and the US Dollar Index managed to stay above 83.45, a fairly important level going back to August 2010. This is our line in the sand, below which we worry the index will pull back into congestion. If the index can manage to stay above this marker, we see it moving onward and upward.