Archive for October, 2016

Sunday, October 30th, 2016

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
www.OptnQueen.com
optnqueen@aol.com
October 30, 2016

Here is a good question for the FOMC; how has the employment landscape changed in the last decade? To address this question one must review technology and how it has helped efficiency and reduced the need for human employment. Today, we have technology that will invest for you, type a letter using voice commands, build you a car and hey, even drive it for you. Where the humans are needed is on the programing and design side. Yes, auto financial planners will come up with a financial plan following a few brief questions on time horizon, risk tolerance etc; however, humans are needed to perpetually update and adjust the models powering them. What about all of those traditional financial planners who you might have hired…….gone, zapped out by technology.

Well, perhaps all of these jobs are not all together extinct; rather, the jobs have become fewer in number as they become more centralized. For many years I spent my days in the pits of the New York Board of Trade, making markets in futures and options. As I assessed liquidity and mood, I bought, sold and kept track of my inventory. Today, that job has evolved. Yes, an algorithm executes the trades and automates many of these functions; however, technology has also made the landscape more complex. With multiple exchanges, dark pools and brokers, a market maker/analyst often assesses the many changing rules and functions across all of these platforms, providing instructions to a developer who then codes them into rules based strategies. The job is still there; it has just become more complex. As we move into the future we must understand that jobs are morphing and changing. Unfortunately, we humans are not learning some of these new skills that will be needed to keep employed.

What about the grocery clerk? Do you really need him or can you order on-line? What about feeling and seeing the vegetables to make sure that they are fresh? Go to the store, put in the code for the fruit or veggie you are buying, scan the product and then bag it without a clerk. The only employee in that scenario is the employee standing there as a monitor in case you run into trouble. Again, we see the jobs becoming fewer in number and centralized, not extinct.

About a year ago we wrote that a strong US dollar would have a negative impact on US multinationals. Today we clearly see that we were correct. Remember, a strong US Dollar is deflationary. Commodities priced in dollars are declining, with the exception of crude oil, which is a story in and of itself. Imports are becoming cheaper for the US consumer which in turn is putting pressure on multinationals who have had to increase wages (minimum wage), but have been unable to pass through that cost to the consumer on their products. In other words, their margins are getting pressured. Together with technological innovations we see a perfect storm.

Today, we live in hope that crude oil will pull us out of this economic funk as it did following the financial implosion seen in 2008. Following the 2008 financial mess, increased drilling rigs, production of oil, transportation of petroleum products and all of the ancillary jobs that came along to support the industry played an important part in putting Americans back to work. Towns had a rebirth and expansion was seen. Will this happen again? True, our oil reliance isn’t going anywhere anytime soon; however, incredible innovations in hybrid and electric technology have forever changed the landscape of this industry placing permanent downward pressure.

This week we saw an increase in GDP. So we seem to have a sort of inflationary deflation. Medical costs, insurance, and housing are for sure going higher with the caveat that housing prices will probably level off and stagnate when the FOMC raises rate. The minimal expansion in the housing market will at first increase to lock in rates before they go higher but in the end, the increase in rates decreases the affordability rate of the houses purchases. We actually saw a decrease in consumer spending which was reported as 0.6% X-autos. The much anticipated tick up in rates, expected from the FOMC at their December meeting will undoubtedly increase rates. . It all comes down to how much money is in the till and how much can be allocated to housing. If the mortgage interest rates are higher, then the price of the homes bought will have to be cheaper. After all, this is a matter of dollars and cents.

The S&P 500 advanced 0.25 handles (points) in the Friday session. This quarter of a point move did not leave a doji candlestick on the chart because the market opened at 2127.25 which was a 0.75-point gap below the Thursday’s close, thus giving the candlestick a real body and not qualifying as a doji which has either a very small body or none at all. We did see the bears try to push the trade to the support line of 2107 and fail to attain that level. The chart shows a lower low and a lower high which is a downtrend. We are in a range-bound market at the lower edge of the range which is 2107.00 to 2191/50 with the mid-point at 2149.50. All the indicators that we follow herein continue to point lower. The most frequently traded prices were from 2125.50 to 2127. The curve seen on the Market Profile chart is a normal bell-shaped curve with a small bulge at the top between 2133 and 2133.75. The market opened the Friday session slightly below the close of the Thursday session. By about 12:30 the index traded higher up to the midlevel resistance line of 2135.25. From there, the market retreated printing the session low at about 2:00 and then regained a bit of what it had lost closing the session at 2123.75. The Bollinger Bands are not showing us much and remain flattish. The biotech sector was punished reflecting the concern voiced by elected officials regarding their pricing of drugs. It would seem a better idea for those elected officials to scrutinize insurance companies which have been increasing premiums rather than the drug companies that are trying to recoup some of their R&D costs. So long as the market stays within its trading range, we will see a dull market. That said, once the market breaks to either side, join the trend and don’t fight the tape.

The NASDAQ 100 made a new high on Tuesday and then retreated for the rest of the week. The market retreated 1.50 handles (points) in the Friday session. This index is clearly stuck in a range between 4919.50 and 4629.00 with the mid-point at 4786.25. The Bollinger Bands remain flattish but the volume picked up slightly in the Friday session. All the indicators that we follow herein continue to point lower. The most frequently traded price in the Friday session was 4812.75. The Bollinger Bands remain flattish. The market opened the Friday session and took off to the upside printing the high for the day at 10:50. It then retreated to 4826 at about noon, then rallied back to 4842 by 12:20 which was the last gasp of the day’s rally. By 2:00 the day’s low was printed and some position adjustments led a slight rally into the close.

The Russell 2000 added 2.90 handles (points) in the Friday session closing at 1186.70. Before you celebrate the rally, this index has closed below an important support line, 1190.30. That horizontal support line has been inforce since July, of 2016. Both the stochastic indicator and the RSI are now issuing a muted buy-signal. Our own indicator continues to point lower without a bend to the upside. Although the retreat in the Russell 2000 has been solid, it’s angle too steep to continue at this pace and will attempt to return to the mean. The candlestick left on the chart is a doji-like candlestick. The high for the session was seen at 12:20 after which the market retreated. The bounce back occurred at 2:00 and the market regained some of what it had lost by the close. The bulk of the volume was seen at 1184.43 where more than 9% of the day’s volume was traded. The most frequently traded price was 1185. The weekly chart looks as though this market has rolled over to the downside. The point and figure chart does not look good.

The robust rally in the US Dollar took a news inspired break and retreated 0.584 handles (points) in the Friday session. Both the stochastic indicators and the RSI are issuing solid sell-signals, but our own indicator is issuing a buy-signal. The most frequently traded price was 98.825 but the heaviest volume, 10.5% of the day’s volume, was seen at 98.75. The Bollinger Bands are contracting from their widely expanded levels. We have a FOMC meeting this week and the Presidential Election next week both of which will cause the US Dollar index to react. We do not expect to see any action from the FOMC and we have no clue as to what the election results will be. The good news is that the mudslinging will soon end.

Crude oil retreated 1.06 in the Friday session closing the week at 48.66. The down trending channel lines are 49.92 and 48.27. The horizontal resistance line is 49.36. Both the stochastic indicator and the RSI are pointing lower while our own indicator is issuing a buy-signal. The week’s volume was lower in the Friday session, when compared to a week ago. The Bollinger Bands are contracting and becoming narrow. This tells us that we will be in for some volatility in the near future. The Market Profile chart can be described as boring with the most frequently traded price seen at 49.50. The weekly chart clearly shows that we are in a trading range. If we close above 53.38 we will go to 60 and 62.52. As we approach the breach of the 52-53 levels we would see a scramble as shorts cover their positions. On the other side of the trade, below 39.19 we could see a quick downdraft to 35.24 and a test of the 2016 low of 26.05. It is our opinion that neither will occur and that we will remain steady in the range.

Gold gained 6.50 handles (points) in the Friday session. Gold has broken out of its trading range and the door is now opened to 1301 and 1311.30. The candlestick seen in the Friday session was a bullishly engulfing candlestick. The stochastic indicator is issuing a fresh sell-signal and the RSI is pointing higher. Our own indicator is doing nothing. The Bollinger Bands are currently contracting which tells us that volatility will return to the market in a few days. Gold printed the high for the day at 2:00 then retreated into the close. The most frequently traded price was 1267.50. We believe that the next move in gold will likely be to the upside.

Risk
Trading futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future results.
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