Archive for October, 2015

Sunday, October 25th, 2015

The markets took off right on schedule helped by strong earnings and accommodative global banks. We are entering a season which is the most joyful season of the year. The season begins with Thanksgiving, which the Canadians have already celebrated, and end with Christmas and the New Year. The season’s feelings of forgiveness and feelings of generosity which generally mask underlying problems. These problems will crop up by the end of January and beginning of February when sobriety returns and the depressing chill of winter sets in.

The S&P 500 will make a new high. Why? Because when the market sees the high within its sights it needs to find out what is above the high. This behavior is a matter of curiosity and an effort to find orders that can be taken advantage of.

As to the central banks, they all seem to be in a race to throw money at the markets and their economies putting pressure on the value of their currencies and boosting their export business. The strong US Dollar and American exporters suffer when this happens. Just looking at the earnings this quarter notice the evidence of pressure the strong dollar has put on US exporters. Also take note of their earnings guidance which, for the most part because of weak exports, has been scaled back a bit. Even non-exporting companies that are in competition with cheap imports for sales are feeling the pressure on their bottom lines.

The US strong bull market is an aging bull and is showing signs of this increased age. The advances are in the blue chips and large capitalization stocks leaving the small capitulation stock lagging. This is a sign of age. That said, we expect to see this rally continue into the end of the year as the market probes the upside and suckers in the last of investment dollars.

Much of the US Dollar’s rally is due to the fact that the FOMC is determined to raise interest rates, which we believe it should do and likely should have done long ago. Zero loses its effect especially after so many years of zero. We are of the opinion that the FOMC is needed for many reasons but it should not include excessive easing and tinkering with the business cycle, which is as what they have been doing.

“If you look at the daily chart of the S&P 500 futures continuation, you will see a large “W” formation. We closed the Friday session just above the critical neckline of 2021 which put us on alert as to a possible rally to 2128.” The Option Queen Letter of October 18, 2015….

The S&P 500 enjoyed a robust rally in both the Thursday and Friday sessions. We expect to see some digestion of the gains in the next few sessions. With the old time high not too far overhead we would expect to see that high removed. The very steep up trending channel lines are 2016 and 2103. The first area of resistance will be seen at 2109.50 then the high of 2134. The stochastic indicator has just issued a sell-signal. Our own indicator is overbought but continues to point higher and the RSI is in overbought territory still pointing higher. Although the market rallied in the Friday session, it lost a lot of the day’s gains by the end of the day. The 60 minute 0.2% by 3-box point and figure chart has an upside target of 2109.80 which, at this point, looks entirely doable. The daily 1% by 3-box chart has no upside target at the moment. The Transportation Index continues to issue a sell-signal which is a Dow Theory sell.

The NASDAQ broke out of its trading range in the Thursday session and never stopped to look back. The Friday close was above the upper Bollinger Band which tells us either the index retreats back into the band or the band will expand to accommodate the increased volatility. All of the indicators that we follow herein are overbought but only the stochastic indicator is issuing a sell-signal. The daily 1% by 3-box point and figure chart looks strong but has no upside target. The 0.2% by 3-box 60 minute chart has an upside target of 5112.6, again very possible. The Market Profile chart has a huge area of single prints. Also the high volume area was seen at 4602 which is a level below the closing level.

The Russell 2000 rallied in both the Thursday and Friday sessions. The candlestick left in the Friday session is a little troubling insomuch as it is a doji-like candlestick. The Russell is below the horizontal line at 1167.70 which is the top of the current trading range. We would expect to see a rally should this index manage to cross that line. The quality of that rally will write volumes regarding the future action of this index. As to the RSI, we are not overbought and have lots of room to the upside. The stochastic is overbought but continues to point to higher levels. Nine percent of the volume occurred at 1162. The most frequently traded number was 1159. The high volume area was on the close. The chart also shows us that very little volume was seen at the high of the day. This index will remain the most volatile index although its outperformance, of late, has been to the downside. Once the market believes the rally in the large caps, it will migrate to this index for greater action.

As the US Dollar rallies, crude oil declines, unless there is a shift in demand which, at this time, there is not. All the indicators that we follow herein continue to point lower although they are becoming oversold. That said there isn’t a bend to be found and there is no indication that we are sold enough to mount a reflex rally. Should we break below 44.6, you can expect to see a test of 39.02. We have resistance all the way up to 51.66. On Friday, crude oil opened at the low end of its daily trading range, peaked at about 9:30 tested the downside momentum twice, once at about 10:#0 and then again at about noon then proceeded to go sideways for the rest of the session, closing the day with an after-hour probe higher and settling about in the middle of the day session’s range. What we saw was a rejection of the low as well as a rejection of the high, basically the positions must have been squared away by about 1:30 or so and the rest was just noise. The Market Profile chart shows us that there is a bimodal curve here with the fat-belly of the upper curve at 45.50 and the lower curve’s belly at 44.75. The high volume area of the day was 44.65. The 60 minute 0.5% by 3-box point and figure chart has a downside target of 42.76 and, it doesn’t look good. The daily 1% by 3-box chart looks even worse with a downside target of 37.04. The transportation index is diverging with crude oil….is it telling us something?
The crude oil market is married to the US Dollar index for now. Keep the wallet on the hip!

Gold retreated in the Friday session leaving a scary looking candlestick called a “high wave” candlestick. That candlestick had long tails and a small body. You see a rejection of the high and a rejection of the low. In this chart we see a great deal of volume near the close and below the closing level. The RSI is going flat on the slightly overbought side of neutral. Both the stochastic indicator and our own indicator are pointing lower with plenty of room to the downside. The high volume area and most frequently traded price was 1162.40. The gold platinum spread is getting a bit wider…so is the economy slowing down? The gold US Dollar index is telling us that as the dollar gains strength, gold drops. The Market Profile chart tells us that the fair value for the session was 1163. The Bollinger Bands are contracting again and this will eventually lead to a violent move in this product. The daily 0.8% by 3-box point and figure chart continues to have an upside target of 1270.86. The 60 minute 0.25 by 3-box chart has a downside target of 1128.58. Again keep your eyes on the US DX for clues regarding the action in gold. Although we like gold long-term we encourage you to pick your spots to begin accumulation.

The US Dollar Index enjoyed a mega rally beginning in the Thursday session and following through to the Friday session. The volume was robust and showed a spike at the 97.055 level with very light volume at the lows of the session. The action in the Friday session was a breakout from the trading range and has opened the door to the highs for the year. That said, we are very oversold as measured by all the indicators that we follow. It should also be pointed out that only the stochastic indicator has a slight bend, the others are just pointing higher. The Market Profile chart shows a different view insomuch as it presents a bimodal chart with a bulge in price at 96.40 and a bulge in volume at 96.350. We see a rejection of the high on this chart and a settlement closer to the low. This index is within shooting range of the 98.425 high and although the Market Profile chart offers some concern, it is likely that the market will go gunning for the shorts and try to run up to the August 15th high. The inter-daily chart shows that the lion’s share of the volume occurred in the early in the morning on Friday at about 7:10. After that the volume dried up until mid-session when it perked up again. The 60 minute 0.1 by 3-box point and figure chart clearly shows that the upside target was achieved and has been surpassed. This chart certainly looks good but the RSI is overbought but continues to point higher. The daily 0.5% by 3-box point and figure chart has an upside target of 100.834. This chart looks very bullish. At the moment this index looks very bullish and we would not fight the trend. The weekly chart is very bullish.