Archive for May, 2017

Sunday, May 7th, 2017

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT
May 7, 2017

The long-term chart of the VIX cash, not the futures, was range bound from 9.4-10 from 2005-2007, with occasional spikes to 20 or so. For those calling for a market crash based on the VIX’s prolonged low levels, we recommend a review of not only a historic chart but also Bob Farrell’s “Market Rules to Remember:” “When all the experts and forecasts agree – something else is going to happen.” Lately all of the forecasts are for imminent doom. Meanwhile, we do see a “Breakaway Gap,” a very bullish signal on our charts of the S&P 500 and NASDAQ 100. In contrast, the Russell 2000’s chart has been in decline, closing the gap to the downside. We remember that between 2005 and 2007 the VIX traded at 9.4. We could not get any premium for selling options. On the floor, we commonly bought “Lotto tickets,” cheap puts on the financial indices. These “Black Swan” events would appear in about every one in ten expirations of the index. The entire cost was paid for with one hit. What this says about the market is that we cannot predict when the event will occur, but we do know that it will occur as “Excesses in one direction will lead to an opposite excess in the other direction.” “Markets tend to return to the mean over time” (Farrell again).

Regarding a possible downturn in the markets, we suggest investing in the stock of companies that produce toilet paper, liquor and pharmaceuticals. Clearly a downturn will cause gastrointestinal disruptions, alcohol is helpful in dulling the pain of valuation loss and pharmaceuticals are always needed to treat the ailments of stress, shock and trauma.

The continuation chart of the S&P futures does not show that a new high was printed in the Friday session; however, when you look at a non-continuation chart, it does show a marginal new high made in the Friday session. The Friday session closed 13.40 handles (points) higher on the day. All of the indicators on this chart are pointing higher with the stochastic indicator in overbought territory. The Bollinger Bands are expanding telling us that more volatility is in our future. Remember the gap on this chart, 2356 to 2365.25, which certainly looks like a “Break away Gap.” The most frequently traded prices were 2387.5 and 2388, for the day session. Including the night session the most frequently traded price is 2385.50. High volume area was 2387.5 where 10.8% of the day’s volume traded. Our point and figure chart shows us that the two poles, which look like goal posts, still exist on our chart. Seemingly 2399 is a big number and should we remove that number……well, up, up and away! Remember that there is no overhead resistance. The 10 minute TradeFlow chart indicates to us that the market opened and traded in a relatively small range until about 3:30PM when, it exploded to the upside on volume.

The NASDAQ 100 gained 23.25 handles (points) in the Friday session and earned another new high for this index. The “Breakaway Gap” noted in last week’s letter continues to bode of more gains for the future. As to the indicators, both the RSI and the stochastic indicator are overbought and pointing to higher levels. Our own indicator will issue a buy-signal within a day or so. The Bollinger Bands are expanding telling us that more volatility is coming. The point and figure chart of this index remains bullish. The most frequently traded price was 5622.75, but the most volume, 5% of the day’s trade, was seen at 5626.50. The rally to the upside occurred at 3:40PM when, the NASDAQ 100 lifted to the upside into the close of good volume.

The Russell 2000 futures contract gained 8.60 handles (points) in the Friday session. This index has been lagging both the NASDAQ 100 and the S&P 500 indices. The Bollinger Bands are no longer expanding but going flat. The stochastic indicator is curling to the upside but had not issued a buy-signal while the RSI has issued a buy-signal. Our own indicator continues to point lower. The down trending channel lines are 1397.11 and 1369.38. The most frequently traded price in all sessions was 1388.25, while for the day only session the prices were 1391.25 to 1392. The Market Profile chart looks as though this index will try to move higher. This index also had a “Breakaway Gap” but that gap has been filled which negates the signal. The rally in this index began at about 3:20PM and pulled the index higher into the close.

The US Dollar Index lost 0.237 handles (points) in the Friday session breaking below important support at 98.56. The next level of support is 97.62 and 97.455. A depreciating US Dollar is good for the US economy insomuch as we become more competitive with others, price-wise. The strange story is crude oil and gold which, as the US Dollar retreats, should be gaining lots of strength. The Bollinger Bands are not aggressively expanding but remaining rather constant. All the indicators that we follow herein are pointing lower. The down trending channel lines are 99.159 and 97.664. The most frequently traded price was 98.65. The market is telling us to “pay no attention to that man behind the curtain,” Wizard of Oz. In our case it is the Chairperson behind the curtain. We have been given a clear signal that interest rates will be ratcheted higher in June. Usually that would support the US Dollar, but in this case, that was not the result.

Crude oil gained 0.95 handles (points) in the Friday session. Although the product did manage to close at a support line, reversing quickly from the day’s low of 43.76. Much damage has been done to the chart this past week as crude traded solidly below its support at 47.58 which opened the door to 44.07 and 41.32. Both the stochastic indicator and the RSI are issuing a buy-signal. Could it be that the rejection of the 43.76 level became a buy-signal? We believe that it is just an oversold bounce and that time will tell if the market is going soft of crude. We are in the summer driving season which is a seasonally strong period for crude. Right now, we will just watch this story as it plays out.

Gold lost 0.2 handles (points) in the Friday session leaving a doji candlestick on the chart. Doji’s are created when the bulls and bears are evenly matched and neither wins. It is believe that this inability to force the market to close either higher or lower is an indication that the market is about to reverse direction. It has been our experience that this does not always work what it does tell us is that the market is in a transition period, The Bollinger Bands are expanding and we can expect to see further volatility in this market. All of the indicators that we follow herein are pointing lower but all are beginning to curl to the upside and will likely issue a buy-signal in the next session. It is import for fold to stay above 1225.7 or risk a trip to 1198.

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Past performance is not necessarily indicative of future results.
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