August 6th, 2017

Option Queen Letter
By the Option Royals
Jeanette Young, CFP®, CMT, CFTe, M.S. & Jordan Young, CMT
August 6, 2017

This past Friday a favorable “Jobs Report” was issued……but was it really that favorable? We do not think so. It wasn’t bad but nothing to write home about. Health care and bars/restaurant jobs were the winners, the rest hardly moved. The average worker continues to struggle paying higher real-estate taxes and health care costs. The increases seen in crude oil will also translate into increased commuting costs. We do not expect to see the average worker have enough money at the end of the month to buy discretionary items especially with school shopping just around the corner. Fortunately the higher income earners continue to spend, and although we do need the average earners to spend to move the needle in growth, we will take what we can get. As to taxes, the government has it all wrong. The average worker needs a break both on real-estate taxes as well as income taxes.

The S&P 500 has been moving sideways since July 17, 2017. While it isn’t a terribly long period of time it does show us that the market is having a difficult time breaking out to new highs and is demonstrating rotational trading. One bothersome note is that many of the blue chips are down on the year. The leadership in the index is rotating with lack luster volume.

We know a retreat of at least 10% is in our future, we just don’t know when it will happen. Until that time, the market will continue to rotate and make new highs. As Bob Farrell said; “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. There are no new eras – excesses are never permanent.”

The S&P 500 lost 0.25 handles (points) in the Friday session. The Bollinger Bands have begun to contract tell us that volatility is abating. The short-term uptrend line is at 2467 and the horizontal resistance line is at 2477.75. The life-of-contract high is 2480.50. Above that level, there is no resistance. Should the market remove that level, on a closing basis and stay above that level for two days with heavy volume, we will see trend followers as well as others dog-pile into the index. The RSI is just beginning to bend upwards, but had break the downtrend line and close above 62.20 or so. Our own indicator continues to issue a sell-signal. The stochastic indicator is also issuing a continued sell-signal but is bending to the upside. The first downside support is at 2447.50. The most frequently traded price is 2472.75, but the highest volume, 9.2%, was seen at 2473. The point and figure chart is a little concerning but nothing to worry about at this time. The market opened higher on the positive “Jobs” number by lost all of what it had gained by 10:00. It then tried to recover its losses but by 10:50 lost its strength and retreated somewhat. The rest of the session was more or less sideways.

The NASDAQ 100 gained 7 handles (points) in the Friday session. The downtrend line is at 5925 and the flattish uptrend line is at 5855. The Bollinger Bands are contracting. The RSI is at 54.23 and has a slight bend to the upside. The stochastic indicator continues to issue a sell-signal but the fast line has curled to the upside but has not issued a buy-signal. Our own indicator continues to issue a solid sell signal. The most frequently traded price was 5890.50 and the highest volume of 9.9% was seen at 5898. The point and figure chart shows that the market is contracting and almost forming a pennant. This tells us that there will be a break out to one direction or the other which makes sense when you look at the contracting Bollinger Bands on this chart. The NASDAQ 100 acted much like the S&P post “Jobs” numbers; however, it did try to regain the rally, after the post opening sell-off and did so more successfully that did the S&P 500. The close on this index was positive. We believe that the NASDAQ will assume a direction by the 17th of August when the downtrend and uptrend lines meet. That said, if the NASDAQ breaks to either side before that date, the signal will be false.

The Russell 2000 gained 6.10 handles (points) in the Friday session. The Bollinger Bands are wide and not contracting. The Friday session left a candlestick with a higher low and a lower high but the real body of the candlestick was bullish. The stochastic indicator is issuing a buy-signal as is the RSI. Our own indicator is beginning to curl to the upside and likely will also issue a buy-signal in a day or two. The steep retreat that began on the 26th of July is too steep to continue at that pace. Support was found at 1400. The Market Profile chart clearly shows the break in this index. The curve seen on Friday was a bimodal curve. The most frequently traded prices were 1410.20 and 1410.75. The market made a low for the day at 10:00 and then regained all that was lost and closed near the high for the day. There is a horizontal line of support at 1393.50.

The US Dollar Index rallied 0.673 in the Friday session. Both the stochastic indicator and the RSI are issuing a strong buy-signal. Our own indicator is just about to join with the group and issue a buy-signal. The short-term down trending channel lines are 93.068 and 92.21. The longer down trending channel lines are 95.22 and 93.86 We doubt that the short will be worried about this one day rally but know that should we see this market close above 93.86 that some angst will return to the trade. First resistance is 94.415. The US Dollar index moved up on the “Jobs” numbers but then retreated trading narrowly. By the close the index lost steam and closed a little weaker that was seen for most of the day. The dollar did well in retaining most of the gains seen at the opening.

Crude oil gained 0.49 handles (points) in the Friday session. The medium term uptrend line is 46.55. The shorter flattish uptrend line is 48.43 and the short-term downtrend line is at 49.70. What this tells us is that should the market remove 49.70, it will open the door to 50.43 and then 52.38. Should the market fall below 48.43, then it is likely that the market will retreat to 46.69. Both the stochastic indicator and the RSI are issuing a buy-signal. Our own indicator continues to issue a solid sell-signal. The most frequently traded price was 48.95. Crude oil rallied on the “Jobs” number and held on to that rally for the entire session. An improving job market along with a draw down on reserves was enough to keep the product in rally mode. Negative for this product was the strength seen in the US Dollar, which normally would have put pressure on crude oil.

Gold retreated 9.3 handles (points) in the Friday session, but remained inside the upward trending channel lines. Both the stochastic indicator and the RSI are issuing a sell-signal. The very wide Bollinger Bands are beginning to contract. The bi-modal Market Profile chart shows us that the day session in gold was clearly to the downside. The most frequently traded price was seen in the overnight session, 1275. The most frequently traded prices in the day session were 1263.50 and 1264. Remember if there is no inflation, or no perceived inflation, gold is a bad bet to rally; however, if there is perceived inflation, gold becomes the hedge against inflation. When the US Dollar is stronger, gold is weaker, that is unless there is some currency insecurity in the globe that could impact gold. Then, gold acts as a currency. Right now, there seems to be stability in currencies, yes they move around but there is no perceived risk of currency turmoil thus, gold is depressed because the dollar rallied.

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