Option Queen Letter

The tourniquet has been applied but how long before the ‘bleeding’ problem is repaired? True, the infusion of liquidity into the system successfully stalled the inevitable resolution of some of the finest, most creative packages of loans that ever been seen in all recorded history. The problem with tourniquets is that although they provide a quick-fix to a possibly fatal injury; they are a momentary, not a terminal solution, to the problem. We need to see the problems properly addressed and properly resolved.


It is our belief that the government should not bail out those who made bad decisions, based on greed and avarice. These entities should be allowed to fail; thus purging the market of the problem and its vendors, while reminding the perpetrators, that crimes do not go long unpunished, even on Wall Street. Our Government should not fund this “bail out” and, since we are the taxpayers, we should not be obliged to fund this folly.
Ah, we can’t blame the perps, they saw free money, so why not take some? We do blame those who early cast a blind eye on the problem and did nothing to rectify it. Remember, laws are frequently imposed as Society’s answer to abuse. We don’t need to punish people for creativity, but when that creativity hurts the innocent, perhaps the not quite so innocent, people, a restriction on lawlessly indifferent activity needs to be set in place. The loan mess was created by greed; the result of that mess is now at hand. There have been many who early-warned of the impending problem. We have been warning for some time that this hungry consequence would ultimately occur. We are not specially brilliant; we just used ordinary common sense in arriving at that conclusion.
It seemed curious that the market made a U-turn in the Thursday session. True, the funds rate published on the FEDERAL RESERVE BANK of NEW YORK site, indicated that we were going to see a drop in the Federal Funds rate. From August 10 through the 16th, we noticed that the rates were below the targeted rate. So, perhaps other marketers noticed that and, when the market dropped on Thursday, suddenly a horde of rabidly excited buyers emerged?�..ha, we don’t think so. Overnight in Asia, the markets apparently made a similar U-turn and abruptly reversed the decline. These are weird times and we guess that everyone in the know, figured it was a good time to buy. We cast a skeptic eye on that theory, but then, on option’s expiration Friday, before the markets opened�.bamm! The Fed did it, reducing the funds rate by 50 basis points. Before you go out and buy a new car or boat, remember that the bandage placed on the wound is but a temporary fix. The damage done to the market can not be erased with this fix; it will take time to remove the fear of the unknown, the possible blow-ups waiting out there.
A little history on the VIX or volatility index: On 9/11, the VIX peaked at 43.74. You may believe that this number represented the high of the move, but it wasn’t. The actual high of the move was seen in August of 2002, when the VIX printed: 45.08. The current high of the VIX for this move is 37.50. That volatility will continue in this market, for some time. We have been living in an era called: the “Goldilocks” era, because of the rampant complacency seen in the market. We have been alerting you to this posture for some time, telling you that ultimately the bubble must burst. Now, we remind you that we continue to face this risk, a risk that should abate by the end of 2008. We are not yet at the half-way mark, in this mess, with more problems yet to be revealed. So long as these uncertainties exist, the VIX will remain high; when compared to that three-year run of complacency which the VIX has enjoyed. If you really want to take a look at volatility; look at the VXO, which is the volatility index for the OEX, or the S&P 100. That index peaked at 60.63 in October of 1998. On 9/11 this index was at 38.56 and, on July of 2002, at 56.74. The peak seen this week was at 37.69. While we would expect to see a return to 25.17, whereat support should be found, we believe the days of a low volatility are over, done, finished, kaput!
The S&P 500’s bounce, on Friday, took the index to its 50% retracement number, where resistance was found. The market rallied from the Fed announcement to that level, and fell back a bit, allowing the late-comers to enter the market, before another assault to the upside was undertaken. By the day’s end, the traders and marketees were exhausted, tired, ready to crash at the local pub or perhaps, an easy-chair at home. This past week’s trading felt like a roller-coaster, and came as no surprise.
From the Russell 1000 and 2000 pit where we stand, the week seems eerily quiet. The population of the pit was involved in watching, “Shark attacks” on U-Tube, a snake eating a lizard, Sudokos, crossword puzzles, etc. Actually, as you see, there was very little action, in either the futures or the options. We did notice that after the Fed cut the discount rate, the naked put-sellers returned, albeit with smaller size, than previously. Strangely, we did see call- buyers appear on Thursday; do ya think they knew something? Perhaps, they viewed the Fed sites and discovered what we found; that the funds rate is in the mid to upper 4% range, not the targeted 5.25%.
ICE pulled the plug on electronic trading in cotton futures on Thursday, when it was discovered that the limits had been violated, electronically. What a mess! The spreads were distorted and the trades, outside of the limits, canceled. The pit applauded, cheered and yelled with joy, when the announcement of the electronic trading halt, was made. We have been told that some of the executing floor brokers, told their electronic friends to “go away,” when they called the floor for an execution. It was pit-vengeance, to the nth degree.
The US Dollar index peaked on Thursday, reaching resistance at 82.00. The market retreated on Friday, continuing the decline begun on Thursday, motivated by the Fed action on Friday. We see exhaustion signs on this index. All the indicators that we follow herein, are issuing a sell-signal. The 5-period exponential moving average is at 81.364. The top of the Bollinger band is at 81.721 and the lower edge is seen at 79.659. The first tier of support should be seen at 80.89; below that, 80.81and 80.615. The weekly chart shows that we remain below the downtrend line, which is at 81.922, for this coming Friday. The indicators are uniformly issuing a buy-signal, for the weekly time frame. The monthly chart is not as friendly with the US Dollar index, below the downtrend line, and in a position to probe the recent lows. The US Dollar index monthly chart is below the Imoku clouds and is trading along the lower edge of the Bollinger band. The indicators are issuing a buy-signal, on a monthly basis.
Here is a direct quote on the Euro written in last week’s letter: “Alert! Warning; we could be forming an “M” pattern in the Euro. The conditions that would signal that “M” formation are: 1, the Euro can not make a new high, 2, the Euro needs to close below 1.36310. The result of these two conditions will lead to a return to the 1.3410 and 1.3306 levels.” The Option Queen’s Letter of August 12, 2007. And the answer is, that it was an “M” pattern. The low was seen on Thursday when 1.3370 was printed. We continue to see a little more room to the downside, but we are happy with the results of this analysis. The RSI and the stochastic indicator are issuing a buy-signal on the daily chart. Both the Thomas DeMark Expert indicator and our own indicator are in agreement with that signal. The 5-period exponential moving average is at 1.35221. The 5 period moving average on the Globex traded product is, 1.351160. The top of the Bollinger band on the Globex product, is at 1.3931 and the lower edge is at 1.345152. The pit numbers differ, with the Bollinger bands at 1.39392 and the lower edge at 1.34523. The 200 day moving average is at 1.340083. For the weekly time frame, we see some support at 1.33130. Should we remove that level, we will open the door to 1.3113 or so. The indicators, basis the weekly chart, are uniformly issuing a sell-signal. Even the monthly charts are issuing a sell-signal. The Euro remains above the monthly uptrend line, at 1.3370. Only the Thomas DeMark Expert indicator is issuing a buy-signal, on the monthly chart; the rest are issuing a sell-signal.
We are getting buy-signals on the yen. Although Friday’s rally was robust, it was not enough to remove even a half of Thursday’s rout. We would expect to see the market rally to the 114.00 area, where some resistance will be found. We do not expect to see any interest rate change in the Bank of Japan’s interest rate announcement, this week. The decline his been too steep to continue at this pace and, at the very least, we expect to see some sideways action or even, a bit of a rally. The indicators are uniformly issuing a buy-signal, on the daily chart. The 5-period exponential moving average is at 114.979. A close above this level, would be encouraging. The top of the Bollinger band is at 121.053 and the lower edge is seen at 114.132. We are currently below the lower edge of the Bollinger band, a level of instability. As you know, we can not remain at these levels for very long and, we either move back inside the bands, or the bands expand. If this market is able to rally, it will find stiff resistance at 116.924. The weekly chart illustrates the severity of this past week’s decline. This is perhaps one of the worst weeks seen in recent times. We have now opened the door to the lows of 110.920, last seen in the week of December 8,th 2006. The indicators, on the weekly chart are mixed. Both the stochastic indicator and the Thomas DeMark Expert indicator are issuing a buy-signal, while the RSI and our own indicator, are issuing a continued sell-signal. Go figure! The monthly chart looks awful and all the indicators are uniformly, issuing a sell-signal, for that time frame.
The British Pound Sterling is oversold and seems to be trying to turn back to the upside. The indicators are oversold and going sideways. The downtrend line for the Monday session is at 199.12. The 5-period exponential moving average is at 199.07. The top of the Bollinger band is at 207.05 and the lower edge is seen at 197.84. The uptrend line for the Monday session is at 198.06, a level we need to stay above, to stay somewhat positive. The decline in the BP has been too steep to continue at this pace and needs, at the very least, to go sideways to remove some of the oversold condition. The weekly chart shows the downtrend line at 201.18, which is a level which needs to be removed, to turn this chart around. The indicators are uniformly issuing a sell-signal on the weekly chart. We see some support at 197.43 and at 196.60, on the weekly chart. The monthly chart shows that the BP is rolling over to the downside. The indicators on the monthly time frame, are all issuing a uniform, sell-signal. We remain above the uptrend line on the monthly chart.
The Canadian Dollar enjoyed a robust rally in the Friday session. The indicators are uniformly issuing, a buy-signal. The downtrend line is at 94.84 for the Monday session. The 5-period exponential moving average is at 93.77. The top of the Bollinger band is at 96.61 and the lower edge is seen at 92.77. We need to see the Canadian Dollar stay above Thursday’s low of 92.05, for the bulls to stay in control. On the weekly chart, the downtrend line is at 95.25. The indicators on the weekly chart are uniformly issuing a sell-signal. The chart clearly shows that there will be support at 92.33 and at 91.20, should we decline to those levels. The indicators on the monthly chart are neutral, not issuing anything of value. We note that the chart shows that the range of recent moves is expanding, and as such, we expect to see more volatile behavior, continue in the future.
The Australian Dollar has a long-tailed, doji candle, on the chart, as a result of the Friday session. All the indicators are uniformly issuing a fresh, buy-signal, from oversold levels. The decline has been too steep to continue at this rate. It looks more like a waterfall than a reasonable chart. It could well be that this is the blow-off needed, before a rally can begin. The 5-period exponential moving average is at 81.01. The top of the Bollinger band is at 89.82 and the lower edge is seen at 79.88. When looking at the weekly chart, we are impressed with the enormity of the move, to the downside. The candle left on the chart is huge and red. Last week’s range was from 84.96 to 76.65�wow! We almost touched the March low of 76.57, but rallied before testing that level. The indicators on the weekly chart are uniformly issuing a continued sell-signal. We must caution that we did close below the lower Bollinger band and that is not a level which can be maintained for very long. Either we move above that lower band or, the band expands to accommodate the increased volatility, in the Australian Dollar. The monthly chart shows that the lower edge of the trade should find support at 76.57.
The New Zealand Dollar has a long-legged, doji candle. We have an 8-count, as a result of the Friday session. The indicators are uniformly issuing a buy-signal, all from oversold levels. The 5-period exponential moving average is at 70.60. The top of the Bollinger band is at 81.83 and the lower edge is seen at 68.96. As you might have noticed, we closed the day just above the lower Bollinger band, at 69.04. The downtrend line is all the way up, at 74.52. Friday’s session almost matched the low seen in March, when the Kiwi traded at a low of 66.63. The indicators on the weekly chart are all pointing to lower levels, although they are now oversold.
The Swiss Franc rallied in both the Thursday and Friday sessions. As a matter of fact, in the Friday session, the Swiss Franc traded to the downtrend line, before retreating. The downtrend line for the Monday session is at 83.46. All the indicators that we follow are uniformly issuing a buy-signal, emanating from oversold levels. The 5-period exponential moving average is at 82.88. The top of the Bollinger band is at 84.45, and the lower edge is seen at 82.26. The weekly chart shows signs of exhaustion. The indicators are uniformly issuing a sell-signal. The market looks as though we could retest 81.32. We have broken the uptrend line on the weekly chart. The monthly chart is forming a pennant. The indicators on the monthly chart are pointing higher. We believe that if the market can close above the daily downtrend line, it will rally to 84.02, where it will find some stiff resistance.
The S&P 500 retraced 50% of the downside move, in the Friday session. We did have an 8-count, as a result of the Friday session. The indicators continue to issue a buy-signal, nearing neutral levels. The downtrend line for the Monday session is at 1481.20. The 5-period exponential moving average is at 1440.01. The top of the Bollinger band is at 1537.88 and the lower edge is at 1404.15. For all interested: we did not remove the March lows of 1368.70. It is reasonable to believe that this level could be tested before the downdraft is over. It would be important for the market to stay above that level. The Friday session left a long-tailed candle. When the Fed came in, the bears and shorts ran for cover; this was exacerbated by the expiration of options. The stochastic indicator on the weekly chart is issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a continued sell-signal, at oversold levels. The RSI is going sideways and our own indicator is also flat. All the indicators on the monthly chart are issuing a sell-signal. As a point of interest, we are below the 200 day moving average, which is at 1462.63.
The NASDAQ 100 enjoyed a rally in the Friday session, but not to the extent of the enjoyment seen in the S&P 500. Three of the four indicators followed herein, are issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal, at oversold levels. The downtrend line for the Monday session is at 1969.48. The 5-period exponential moving average is at 1914.83. The top of the Bollinger band is at 2057.58 and the lower edge is seen at 1860.74. The March 5th low in this index was 1704.75. As you have, doubtless noticed, we are pretty much away from that level, while the S&P 500 came very close to their low of March 6th, the NASDAQ 100, did not. This is telling us that this index is behaving better than is the S&P 500 index. The indicators on the weekly chart are uniformly pointing lower. It does look as though the stochastic indicator is getting ready to issue a buy-signal, but none yet. It is the only indicator in that position; the rest are solidly pointing lower. All of the indicators that we follow herein are issuing a uniform sell-signal, on the monthly chart. We remain cautious on this market.
The Russell 2000 rallied in the Friday session, after coming within 6 points of the March 6th lows. The indicators are uniformly issuing a continued buy-signal. The 5-period exponential moving average is at 779.56. The top of the Bollinger band is at 824.90 and the lower edge is seen at 747.38. This chart actually looks to be the best of the indices. We actually closed above the downtrend line, which is 776.80 for the Monday session. The rally halted at a very interesting spot, within one point of the resistance level of 807.20. The weekly chart has a doji candle, with an expansion to the downside. The indicators are undecided and offer no help on this time frame. The monthly chart indicates that we continue to have a downside liability. The indicators are curling over to the upside, but continue to issue a sell-signal. If, the Russell 2000 can manage to close above 807.20, we will open the door to a return to 818.60 and then, 829.35. Do not be surprised to see a test of the recent lows.
The Continuous Commodity Index cash made its low on Thursday, as the US Dollar index was declining. There is a linkage, as you know, between dollar- based commodities and the US Dollar. This is easily illustrated by this past week’s actions. As the US Dollar rallied, the Continuous Commodity Index declined; when the US Dollar declined, the Continuous Commodity Index rallied. Did you wonder why crude oil rallied; well, it is priced in dollars and adjusted for the decline in the US currency, as did the other dollar-based commodities. All the indicators that we follow herein are issuing a buy-signal in the Continuous Commodity Index. The 5-period exponential moving average is at 407.73. The top of the Bollinger band is at 429.14 and the lower edge is seen at 404.82. On the weekly chart, we have a mechanical sell-signal. The indicators are uniformly issuing a sell-signal. The chart shows that we have a liability to 386.63. The monthly time frame yields the same results. The indicators are uniformly issuing a sell-signal. We did close on the uptrend line, of the monthly chart; so, from that view-point, we are still positive.
December cocoa has a doji candle, as a result of the Friday session. As you know, a doji candle indicates that the market is in a period of transition. This candle tells us that the market is ready to change directions; for cocoa, that is an indication that a rally could be coming. The indicators are mixed. The stochastic indicator is issuing a fresh, buy-signal. Our own indicator is curling to the upside, but has not issued a buy-signal, as of this writing. The Thomas DeMark Expert indicator is issuing a sell-signal, at oversold levels and the RSI is simply going sideways, at oversold levels. The 5-period exponential moving average is at 18.58. The top of the Bollinger band is at 21.22 and the lower edge is seen at 17.47. We continue to stay below the downtrend line, which is at 18.36. The weekly chart continues to look lower. The indicators are uniformly issuing a continued sell-signal, although some are approaching, or are at oversold levels. We should find some support at17.68-17.55 and at 16.90 below.
December coffee hit our target of126.00, and fell apart after completing the “W” formation. The market fell out of bed, as the US Dollar rallied. The market cratered on Thursday, falling 7.75 before closing the day, just 0.25 off the low. Friday, the market regained strength, with the help of the currency. Three of the four indicators that we follow are issuing a fresh buy-signal. Only the Thomas DeMark Expert indicator continues to issue a sell-signal, from oversold levels. The 5-period exponential moving average is at 120.85. The top of the Bollinger band is at 126.14, and the lower edge is seen at 113.95. On the weekly chart, we remain above the uptrend line. Three of the four indicators that we follow herein, are issuing a sell-signal; only the Thomas DeMark Expert indicator is issuing a buy-signal, albeit from overbought levels. The monthly chart remains positive.
October sugar did hit our target low of 9.17 and then, went to 9.11, before stopping. Friday, the market rallied, along with most other dollar-based commodities. We have a 9-count on the bottom. The indicators, except the Thomas DeMark Expert indicator, which is neutral, are issuing a fresh buy-signal. The 5-period exponential moving average is at 9.51. The top of the Bollinger band is at 10.60 and the lower edge is at 9.15. The downtrend line is at 9.45 for the Monday session. The weekly chart shows a rounding- topping formation. The indicators, uniformly, are issuing a continued sell-signal, at neutral levels. The chart continues to look as though sugar can and probably will, go lower.
November Frozen Concentrated Orange Juice made a low in the Thursday session, when it printed 117.75. The stochastic indicator, RSI and our own indicator, are all issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The downtrend line is at 129.08. The 5-period exponential moving average is at 128.50. The top of the Bollinger band is at 148.49 and the lower edge is seen at 121.68. The weekly chart continues to look lousy. Obviously, there are plenty of oranges around and the hurricane season doesn’t seem to bother the trees. The weekly indicators continue to point lower, although they are at oversold levels.
Thursday’s limit-down move, created some chaos and a 9-count on the chart. The stochastic indicator, RSI and our own indicator, are all issuing a uniform buy-signal. The 5-period exponential moving average is at 61.90. The top of the Bollinger band is at 65.97 and the lower edge is seen at 60.36. The downtrend line is at 61.92. The weekly chart shows a waterfall-like spill in the price of December cotton. The indicators are uniformly issuing a sell-signal. There is a low, seen in February, of 56.27. It looks as though we might test that level. Should we go below there, we will find support at 55.05.
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282
www.optnqueen.com/

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