Archive for December, 2016

Sunday, December 18th, 2016

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
December 18, 2016

Procrastinators alert! There are only ten trading days left this year for you to take your losses for tax year 2016. Check the kennel for pound puppies that you can sell. Remember, you cannot repurchase these dogs until 30 days have elapsed or else you will create a wash sale. When looking for things to sell, don’t forget your bond portfolios, which likely would be a good source of a loss. If you do find bonds that you have a loss in, you can buy a similar bond to the bond being sold to maintain your portfolio while preventing a wash sale. Say you have a loss in a NJ Turnpike Bond,you can replace that bond with a Port Authority Bond at about the same price and with a similar coupon. You will create a loss for tax purposes and really have moved the asset sideways, not changing your position. We used to love doing bond swaps, lots of fun.

Here is the skinny on Congress moving forward in January: if the Republicans do not get their act together and get work done, they too will be replaced in the next election. We believe that the American public is sick and tired of a do-nothing Congress yielding a political stalemate on everything. They do nothing but raise money for their next campaign. Time to punch the clock and get some work done for the people that elected them to do the people’s work.

What we can glean from reading what the super stars of portfolio management suggest for 2017,avoid retail shares and buy financials. This is the theme. Going to Bob Farrell’s rules of investment, “When all the experts and forecasts agree – something else is going to happen.” Thus, we should think of ways to hedge portfolios so that should the financials fail and the retailers advance we are covered. Today, with volatility low, you can buy cheap downside protection on your portfolio and help fund that protection by selling calls. The strong US Dollar will continue to keep inflation in check and so long as there are no changes in tariffs, we will continue to enjoy cheap prices on imports.

The S&P 500 lost 2.75 handles (points) in the Friday session. The Bollinger Bands are flattish and not telling us much. The current trend channel is downward sloping. The channel lines are 2269.5 and 2242.16. The stochastic indicator is losing momentum although still issuing a buy at overbought levels. The RSI is also positive at 72.43 but has lost momentum to the upside. Our own indicator is issuing a sell-signal but isn’t going anywhere. Volume is falling off a bit and did not display the usual volume surge that accompanies the roll and expiration. Maybe everybody is Holiday shopping. The most frequently traded price in the day session was 2253 but the highest volume for the day session was seen at 2252 where 6.1% of the day’s volume traded. The Market Profile chart shows a bimodal curve and a chart of an inside day. Actually the traded has been compressing over the past few trading days. When looking at the point and figure chart, the compression of the past few days is clear. The weekly chart shows the new life-of-contract high and also shows a very overbought market. We can remain overbought for longer than you might believe, do not try to predict the when, just know that a retreat will happen and when it does, should take back some of the recent gains.

The NASDAQ 100 printed an inside day in the Friday session. The index lost 19.50 in the Friday session closing at 2915.25. The Bollinger Bands are expanding and it would appear that we could be in for some more volatility in this index. The market looks as though it is stalling. Both the stochastic indicator and the RSI continue to point higher although at a very slow rate of change. Our own indicator is issuing a sell-signal but nothing with true conviction. If we were to describe the action, it would be that of muddling through with no thrust or excitement.

The Russell 2000 gained 1.60 handles (points) in the Friday session. The stochastic indicator is at a point where it could continue to issue a sell signal or could issue a buy signal. It is on the overbought side of neutral but has plenty of room to either rally or retreat. The RSI is flat at 64.02. Our own indicator looks as though it could give a buy-signal in a session or two. The Bollinger Bands are flattish. The volume has been retreating but remains average. This market needs to stay above 1348.10 or risk a visit to 1307.

The US Dollar Index retreated 0.273 handles (points) in the Friday session. Here is a quote from last week’s Option Queen Letter: “Clearly with the FOMC ready to push the rate increase button, this index is waiting, for the expected one quarter rate increase, to run to the upside. Resistance is clearly at 102.120 but above that level lies at 104.12 and 106.504.” While the US Dollar index did fall slightly short of our target number of 104.12, we haven’t closed the door on that target yet. The Bollinger Bands are expanding painting the picture of future volatility. Both the stochastic indicator and the RSI are now issuing a sell-signal. Our own indicator is several days away from that signal. Friday’s action left an inside day candlestick on the chart. The most frequently traded prices were at 102.925, 102.875 and 102.825. The quarterly chart of the US Dollar index shows a rounded bottom and we are now at the breakout to the upside stage. This may or may not happen. It will take time for this index to digest some of its recent action.

Crude oil gained 1.13 in the Friday session closing the day at 52.03. The RSI is giving us a buy-signal and the stochastic indicator will likely issue a buy-signal tomorrow. Our own indicator is curling to the upside but needs a couple of days to give us a buy-signal. The volume has been fading all week, which, is not a good sign. The Bollinger Bands are steady and not telling us much. We can see crude oil trying to go to the 60 zone but danger lurks below 49.61 which would open the door to the 45 level. The chart continues to look positive but we wouldn’t bet on this until we either break out to the upside and stay there or retest the uptrend line at 48.

Gold gained 5.40 in the Friday session closing the day at 1133.20. Clearly, gold does not see inflation in the future nor does it see instability. Gold is a fear trade or an inflation trade. We neither have fear in the market, the optimism numbers are high and the inflation number, well totally under control. Gold is drifting lower within the down trending channel with resistance at 1156.52 and support at 1114.73. The stochastic indicator is now issuing a buy-signal as is the RSI, both are oversold. Our own indicator will issue a buy signal in a few days. Looks like gold is headed for 1041…

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