Archive for September, 2016

Sunday, September 18th, 2016

Option Queen Letter
By the Option Royals
September 18, 2016

Whether there is good news or bad news, the market can deal with a result; however, what it can’t deal with is uncertainty. We are in the last quarter of the election cycle, of tax loss selling, as well as the important Christmas sales season (important because retailers depend on Christmas sales to boost their income). Some of these events, the elections and tax selling specifically, will have a downward bias for the markets. Others, such as the Christmas shopping season, should have an upside bias. Of course, then there are the FOMC decisions: one this week on Wednesday, and one in December. All in all, there is more push to the downside than to the upside. The market is reflecting all of this by its sideways behavior.

Our defensive plays are in sectors that will not be affected by higher interest rates,(although a quarter point isn’t going to make much difference), and sectors that will survive an economic slow-down. We came up with healthcare, drugs, food and utilities. Much of our discretionary spending can be cut. We can always shop less and drive less. After these, food is perhaps slightly less elastic; we can begrudgingly cut down on groceries. Heating, utilities, drugs and healthcare are for the most part completely inelastic. It is only with great pain that economic circumstances can begin to impact these last purchasing decisions. Returning to our discussion of the Christmas sales season, in general, parents will cut down on adult Christmas gifts just to make sure the children are taken care of. Therefore, the only manufacturers that we feel secure with in this last quarter are those providing stuff for children such as toy makers.

If there is indeed a slowdown in our economy, vacations and thus airlines, hotels and restaurants will suffer. That said, specialty restaurants that cater to Christmas parties will naturally survive. Bonuses just might be a little light for the banking sector which reflects the slack economy.

The December S&P 500 future’s contract closed down 5.50 handles (points) at 2132.50 in the Friday session losing 0.26% on the day. The volume was high for the index in the Monday, Tuesday and Wednesday sessions and slowed down for the rest of the week. There was higher volume in this current expiration than in the previous quarterly expiration. The short-term downtrend line is 2147.92 and the short-term uptrend line is 2118.50. The Bollinger Bands seem to be stabilizing at moderately expanded levels. The stochastic indicator continues issuing a buy signal but has gone flat. The RSI is flat and our own indicator is issuing a buy-signal. This divergence warns us to focus on the index and review our information frequently. The Friday session yielded a doji like candlestick, an inside day There is a point of inflection at 2130 on September 22, 2016. As you know, this market must continue to trade within the uptrend and downtrend lines until September 21-22. It is interesting to note that September 22 is the day after the FOMC meeting. The most frequently traded price in the Friday session was 2134.50. The weekly chart shows some divergences in the indicators. The market initially sold off during the overnight session then recouped some of the loss during the day-session and closed down slightly on lightish volume.

The NASDAQ 100 gained 2.25 handles (points) in the Friday session closing the day at 4816.00.The most frequently traded price was 48.06.75. This market sold off in the evening session and then recouped the losses and managed to close positive by the Friday close. The candlestick seen in the Friday session was a doji like candlestick. It appears from the chart, that the lows were rejected and the market rallied into the end of the session. That is positive behavior for a market. The Bollinger Bands are expanding which tells us that although there is a FOMC meeting this week expect to see dull trading until Wednesday at 2:00 that volatility is in our future. That said, the volatility is rather subdued by historic measures.

The Russell 2000 closed the Friday session with a loss of 1.70 handles (points). The candlestick left on the chart was an inside day. The stochastic indicator has just issued a sell-signal as has the RSI, only our own indicator remains positive. The market looks as though it is coiling and will resolve that coil by the 21- 22nd. The most frequently traded price was 1219.00 however the highest volume was seen at 1217.50 where 10.2% of the day’s volume traded. The Bollinger Bands continue to expand but at a more muted rate. We expect the market to go nowhere until the FOMC releases its decision. From there, we would expect to see somewhat more volatility as the market digests the information. Remember, the Russell 2000 will likely be where much tax selling is seen.

The US Dollar Index rallied 0.782 in the Friday session clearly removing the short-term downtrend line and approaching the August high of 96.21. All the indicators that we follow herein are issuing a buy-signal. Should the market remove the 96.21 level, the door will be opened to 96.87 and 97.10. Naturally everything depends on the FOMC’Ss action and most importantly the statement which accompanies the decision. The most frequently traded price during the day-session was 95.97. The highest volume was seen at 95.90 where 8.5% of the day’s volume traded. There is a long-term downtrend line at 96.87 which if removed will open the door to 97.25 and higher levels. A higher US Dollar is negative for commodities and also is somewhat deflationary.

Crude oil retreated 0.72 handles (points) in the Friday session. Oil did breach the horizontal line at 43 but managed to close above it. Should the 43 level fail to support the market, 41.10 will be the next level of support. All the indicators that we follow herein continue to point lower with plenty of room to the downside. The most frequently traded prices were 43 and 43.50. Crude oil is trading at the lower level of the down trending channel lines (47.31 to 42.47). Crude oil is in a downtrend and will feel the pressure of a rising US Dollar and the slowing economy.

Gold lost 4.90 in the Friday session closing at 1309.10. All the indicators that we follow herein continue to point to lower levels. There is support at 1302.1 and below that 1253.70. Gold needs to close above 1346.33 to reverse the down trend. We expect to see a little bounce in gold insomuch as the decline’s angle is too steep to continue at the rate. The most frequently traded price was 1317.50. Until or unless something unstabilizes the market or banks, gold will continue to trade as a commodity and inflation hedge. Deflation is more of a problem today than is inflation. While this is true for the short-term, things do change.

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