Archive for July, 2017

Sunday, July 30th, 2017

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, CFTe, M.S. and Jordan Young, CMT
www.OptnQueen.com
optnqueen@aol.com
July 30, 2017

Chaos in Washington along with a divided congress have weighed heavily on the US Dollar. This has had a positive effect on the price of commodities, which has been good for agriculturals, energies and precious metals. The weakened US Dollar is also helping the multinationals with exports insomuch as their exports become more competitive as the US Dollar weakens, this has had a positive effect here in our own markets. This is exactly what the Federal Reserve wanted to see. Although we are far away from inflation, a weaker currency helps increase inflation. Why because imports cost more due to a weaker dollar, and thus domestic companies likely will have greater sales.

When news writers bemoan the fact that the US equity markets are not reacting to news, they are wrong. The market is reacting via the US Dollar, which has been on a steep retreat since about March 9th. Normally, a hawkish sounding FOMC and raising interest rates along with statements indicating the FOMC will “begin tapering its balance sheet,” should strengthen the US Dollar, but it hasn’t. We also have the ECB speaking of increasing rates in Europe and then there is England which is also talking about rates. All of this puts pressure on the US Dollar and thus, it is falling. The big question the media has had is why the stock market is rallying in the face of all the current bad news, i.e. North Korea, declining transportation stocks, retreating blue chips like General Electric etc. The rally in crude oil has helped the energy sector which is pulling the market higher. We also have a very active “buy the dips” crowd, who, for the most part, missed the rally and are trying to catch up with their bench-marks. Naturally this is a very simplistic view.

We believe that something external will cause the market to retreat and correct. There are many large capitalization stocks that are already in retreat. That said, we also do not know when that will begin, thus we operate in asset protective mode, i.e., selling covered calls and placing trailing stops below our profitable positions.

The S&P 500 retreated 1.25 handles (points) in the Friday session leaving an inside day candlestick on the chart. The market looks like it is forming a rounding top, a bit shy of our upside target. It is interesting to note that the market, continued to find support on the retreat and we did print a higher low than the previous day low although we printed a lower high on the day. All the indicators that we follow herein continue to issue a sell-signal. Unfortunately for the bears, that rate of change is slowing and the velocity to the downside is also abating. The Bollinger Bands have expanded and could begin contracting again, although, there is no sign of that on the chart at this time. The most frequently traded price was 2464.50 but the highest volume was seen at 2465.50 where 9% of the volume for this index was traded. The intraday chart shows that the rally began at 3:40 into the close. Perhaps people were short or just needed to get out of positions before the weekend began.

The NASDAQ 100 gained 3.5 handles (points) in the Friday session leaving a narrow ranged long tailed candlestick on the chart. The low was higher but the high was lower. All the indicators that we follow herein continue to issue a sell-signal. The Bollinger Bans are wide and could begin to contract in the next session. The most frequently traded price was 5872.50; however, the highest volume was seen at 5896 where 7.3% of the volume was traded. The point and figure chart illustrates the market failure in the last few session. The intraday chart shows that the market bulged early in the session and maintained the rally into the close.. The heaviest volume was seen early in the session.

The Russell 2000 lost 2.60 handles (points) in the Friday session. A new life-of-contract high was seen on Tuesday, since that date, the market has retreated violently. All the indicators that we follow herein continue to issue a sell-signal. The Bollinger Bands are beginning to contract which indicates that the volatility should abate. The most frequently traded price was 1426.
Basically, if the market rallies, this index out performs to the upside, if the market retreats, this index will outperform to the downside.

The US Dollar Index declined 0.505 handles (points) in the Friday session. We have broken below the lower channel line and have projected a steeper channel line with the lower level at 92.795 and the upper line at 93.403. Both the stochastic indicator and the RSI continue to issue a sell-signal both at oversold levels but showing no signs of a bend to the upside. Our own indicator is issuing a buy-signal. The most frequently traded price was 93.58. The most frequently traded price for the day-session was 93.20. The intraday chart shows that the market opened lower and by 11:00 am stabilized basically trading sideways for the rest of the session. The next support level for the US Dollar Index is 91.88.

Crude oil broke out to the upside this week jumping over the downtrend line in the Thursday session. Crude oil gained 0.75 handles (points) in the Friday session. The next upside target is 52.38. All the indicators that we follow herein are overbought and continue to issue a buy-signal. The Bollinger Bands are again expanding telling us that more volatility is to be expected in this product. The most frequently traded price for all sessions was 49 but for the day session, was 49.60 to 49.70. This market rallied early in the session and maintained its price without retreating much.

Gold gained 9 handles (points) in the Friday session. The Bollinger Bands are expanding which indicates that volatility is back. Both the stochastic indicator and the RSI are overbought and continue to point higher. Our own indicator is issuing a weak sell-signal. The upward trending channel lines are 1239 and 1270.40. The next resistance level is 1273.50. The most frequently traded price in all session on Friday was 1265. The most frequently traded price for the day session alone was 1275.5 The Market Profile chart shows a bimodal curve. Gold rallied in the early part of the session then remained range bound on very light volume. We are not sure what will happen here, certainly, if the US Dollar continues to retreat, gold will be a beneficiary of that move. Rising interest rates globally, generally is not a good thing for gold insomuch as rising rates keeps inflation at bay. Gold is the classic anti-inflation hedge with the benefit of being a safe haven during currency turbulence.

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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