Archive for December, 2014

Sunday, December 28th, 2014

The Option Queen Letter
By the Option Royals
There will be no letter next week.

Does the Fed’s action or verbiage indicating that it will normalize its policy tell us that its policy is abnormal? Perhaps, it tells us that this was a failed policy that they need to retract without admission of failure. Yes, we believe that the Fed’s policy failed the middle class and that the beneficiaries of these policies were the banks, corporations and the wealthy omitting the average wage earner. Simply put, the Fed greased the wrong gears leaving the average person with little cash in their pockets to spend on discretionary items.

We clearly see the benefit of lower crude oil prices as a middle income tax cut which allowed workers finally believe that the reduction in fuel costs will last. This confidence helped encourage them to spend their extra cash on items for the holiday season. It would appear that initially the drop in fuel cost was viewed as possibly temporary and thus wasn’t accepted as a lasting trend this might account for the delay in spending. After a while the drop in crude oil’s price became believable and the extra cash was spent. This is an important lesson for the Fed to learn. The average worker can stimulate this economy but to do so there needs to be a mechanism of getting the workers more spendable cash, or, a tax break of sorts. Giving money to the ultra-wealthy will not grease the economic wheels. This is a lesson we should have learned by now.

At this point in the economic expansion we, here in the USA, have not felt the side effects of cheaper crude oil in our energy markets. Once this effect is felt, we will see a sharp reduction in exploration and development permits and as a result of that, reductions in the work force. You may say, so what but it isn’t a so what. This industry helped the USA emerge from the financial crisis and was a leader in stimulating jobs and growth. Now with the reduction in the price of crude oil, it has become cost ineffective to continue recovering crude. We haven’t even touched on the huge debt load these companies have taken in their exploration and recovery of crude. This has a wide effect on towns that have been revived to supply goods and services for these energy companies and, oh by the way, rail transportation which has enjoyed tremendous growth attributable to the movement of crude products.

We haven’t even opened Pandora’s Box with regard to the very strong US Dollar and its effects on the USA exports whose products have become expensive to the rest of the globe as our dollar becomes stronger. This will again disrupt our balance of trade which will also be impacted by increases in importation of foreign cheap oil. Yes this is a well-orchestrated event by the Saudi’s that have allowed, by fueling supply, the price of oil to drop. Their purpose is to bankrupt Russia and put the US shale market out of business. So they make less money but they recapture the markets.

The positive side of the strong US Dollar is that it is a benefit for those countries with weaker currencies to sell their stuff to the US consumers. This will provide some much needed stimulus for that sale and a demand for their products that are cheaper than the US products. By this action we could actually help the rest of the globe by increasing imports and demands for their products. This will help move them into a more financially favorable light.

While the USA is the strongest and the best of the bad now, this could easily change in the near future. Maybe Europe is poised to stabilize and grow. Maybe emerging markets will benefit by exporting their goods to the US. These are possibilities for 2015 and something to look for. It might be a good time to start nibbling on some possible growth stories away from the US shores.

The S&P 500 enjoyed a low volume rally in the Friday session scoring yet another new high for the contract. The market was up 0.37% or 6.75 handles (points) on the day. The stochastic indicator is overbought yet as you know, this condition can persist for a very long time. The lines short and long lines are together at the moment. Our own indicator is still positive although the lines look as though they will cross in the next session. The RSI shows a muted slow upward drift approaching the overbought area with some room on the upside. We will forgive the volume in this past week as investors were involved in parties and not trading. We do not expect to see anything different in the coming shortened last week of the trading year. Maybe some tax loss candidates will appear from the energy and commodity sectors but we do not expect to see much action this week. The 5-day exponential moving average is 2071.45. The top of the Bollinger Band is 2111.95 and the lower edge is seen at 1977.92. The chart shows a slow upside trending market. The wonderful thing about Market Profile charts is that you see when the trades occurred; additionally you can add volume profiles to see where the high volume area was. Clearly 2086.00 was a high volume area representing 12.7% of the day’s meager volume. The most frequently traded price was 2081.52 but this price only had 0.6% of the day’s volume. The 30 minute Market Profile chart shows us that the lion’s share of the trading in the Friday session was positive. We are left with a bimodal profile heavily skewed to the upside. Yes, we are using full day charts not just day-session and our charts include the overnight sessions. The daily 1% by 3-box point and figure chart has a stunning upside target of 2619.43. There is absolutely nothing negative on this chart save the lack of volume. The 60 minute 0.1% by 3-box chart is also positive but without the more aggressive upside target. Still you see a lack of volume on the most recent rally which, again is of concern. Here is the take-away from all this information: the market is getting tired and beginning to lose momentum on the upside. The easiest direct for the market to take is to the upside insomuch as there is no overhead supply. Currently the buy-the-dips crowd is sitting and waiting to put a toe in the market waters and this will support the market on any downdrafts. There is no reason to believe that the Fed is going to raise interest rates anytime soon. The euphoria in the market is beginning to become worrisome. We continue to advise to keep stops tight and make use of trailing stops of very profitable positions.

The NASDAQ 100 rallied 30 handles (points) in the Friday session but failed to make a new high for the year. We expect to the new high printed shortly. The session on Friday added 0.7% on the day and was the best performing financial index. All of the indicators that we follow herein are issuing a buy-signal. The 5-period exponential moving average is 4281.64. The top of the Bollinger Band is 4384.09 and the lower edge is seen at 4133.03. Unfortunately, the volume in the Friday session was extremely light. That said, the volume during this holiday week in all the indices was light. We will need to see more volume come into this market. We do not expect to see that in this coming holiday shortened week so; we will have to wait for the return of regular trading beginning on January 5th to see if we will get volume confirmation of the rally and a breakout to the upside. Another point of interest is that we are losing momentum at the moment. The daily 1% by 3-box point and figure chart has an upside target of 5806.53. There is an internal downside line but that was overcome. The 60 minute 0.1% by 3 box point and figure chart is extremely positive with an old upside target of 4340.80. The 30 minute Market Profile chart is a strange looking curve with the bulk of the trading, 0.9% of the volume at 4291.74, also an important area on the daily Market Profile chart.

The Russell 2000 has enjoyed advances in seven of the past eight trading session and did print a life-of-contract high in the Friday session. All of the indicators that we follow herein are pointing higher. Unfortunately, the volume during this holiday shortened week was dreadful. 14.5% of the Friday volume was seen at 1212.56. The most frequently traded price, per bracket was 1207.96 but that includes the overnight session and only represented 2.1% of the day’s volume. The daily Market Profile chart tells a different story. We will have to wait until after the holiday season to understand this action better. Just a thought, we could be forming a bear flag, not sure yet, but that isn’t exactly positive and goes against seasonality. The January effect is usually seen in this index. The up trending channel lines are 1203.46 and 1219.63. We continue to advise a tight trailing stop for this market. We would also encourage the use of options to hedge any position you might take in this index.

The US Dollar Index gained in the Friday session but seems to be losing momentum to the upside. The 5-period exponential moving average is 90.05. The top of the Bollinger Band is 90.511 and the lower edge is seen at 87.898. The Bollinger Band on the daily chart continues to expand. Our own indicator is losing steam and has issued a sell-signal. The stochastic indicator is overbought and has again issued a buy-signal. The RSI is not telling us much and is near overbought levels. The volume see in the Friday session was exceedingly low. Remember all the indices had low volume this past week so that this fact has little weight in this analysis. The weekly and the monthly charts clearly show the US Dollar index breaking out to the upside. The daily 0.3% by 3-box point and figure chart has a very positive look and an upside target of 90.49. The RSI on this chart continues to point higher but is overbought. The Bollinger Band on the point and figure chart is contracting. The 60 minute 0.1% by 3-box point and figure chart has a downside target of 88.56 and an internal down trend line, of course this bears watching. The heaviest volume for this index occurred at the price of 90.32. The most frequently traded price was 90.314. The profile is that of a triple bump curve. Remember the intermarket relationships between the US Dollar index and commodities.

Crude Oil retreated in the lightly traded Friday session. It looks as though this market is trying to defend this level. The operative word is “trying,” who knows if it will be successful. It is important for this market to say above 53.93. That said, the market probably will test that level and try to break it. The action on that broken level will be very important to watch. Should volume come in and the market free-fall, well it is possible, would be important to judge if this is a flush-out. If so, it could be a point to consider a position for a quick snappy bounce. Keep your eyes on the US Dollar. If the 53.93 level is breached and little action is seen, them it could be a seller’s strike. That doesn’t mean that it is a buy but rather that most of the current selling is over. We believe that crude oil could rally as part of the January effect. The 5-period exponential moving average is 55.94. The top of the Bollinger Band is 70.86 and the lower edge is seen at 50.57. As to the indicators, there is nothing really positive. The stochastic indicator has been oversold for more than a month, the RSI is flat lining and our own indicator is flipping between a buy and a sell. The weekly chart looks like crude oil is emulating Niagara Falls and is oversold, but has been oversold for months and months. Both the RSI and stochastic indicator are in single digits. The 60 minute 0.2% by 3-box chart has a downside target of 51.01. The chart looks awful. The daily 1% by 3-box chart has an upside target of 64.02, but this chart does not have a single uptrend line on it. The most frequently traded price in the Friday session was 56.10. Extreme caution is warranted in trading this product.

Gold rallied in the Friday session on light volume. The market traded just above the downtrend line and retreated from that level. The downtrend line is 1198.65. The uptrend line is 1154.70. The 5-period exponential moving average is 1187.15. The top of the Bollinger Band is 1235.05 and the lower edge is seen at 1163.97. The downward trending channel lines are 1198.65 and 1158.70. The shorts will not become nervous and upset until this market closes above the downtrend line and above 1203, 1214 and 1221 with volume and for more than two trading days. Our own indicator has just issued a buy-signal. Both the stochastic indicator and the RSI are pointing higher. The most frequently traded price in the Friday session was 1194.90 where 10.7% of the volume for the day was seen. The daily 1% by 3-box chart has an upside target of 1358.30. This chart has both internal uptrend and downtrend lines. The 60 minute 0.2% by 3-box chart has a better more positive look. Again, we advise caution especially if trading from the long side in a badly beaten up market.

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment.