Option Queen Letter

Sadly, what we now need, to avoid a recession, is a good war: unfortunately, we are already so involved; but a good war is the only way to spend our way out of a possible recession; hence, we’re obliged to either increase the war or, to start another war. Wars are inherently good for the economy.


Just look at the Iraqi war; it pulled us, kicking and screaming out of a recession, it has generated significant numbers of jobs in the defense industry; it has created more military jobs. Those who were called-up to serve, to defend out country….or, to fight this off-shore war, left jobs which, were, latterly, filled by others. Were we to end this war;our economy would quickly feel the pain of increasing unemployment.
On this note, we would also see industries,such as defense and munitions, necessarily,cut back on production and, naturally, on employment;also: we will see all of those supporting industries; e.g.: military clothing; supplies, daily living needs, etc, cut back, as the military is forced to downsize. Wars stimulate spending, buying and employment: Peace is an economic non-starter. At this time, should we withdraw troops and fail to send out gobs of guns, rifles, tanks, rockets, planes, helicopters, etc., it would have a negative effect on those industries. We are not war- mongers….we hate to see our precious young men and women put in harm’s way. Why, if it were up to us, we would bring every last soldier home. Unfortunately, it is not up to us.
This week is a quadruple witching expiration, of options, futures, etc. Uncle Ben (could be called Gentle Ben) will have a double-shot at causing, either financial peace or financial chaos, on Tuesday, when the FOMC releases its interest rate decision and, on Thursday, when he testifies on the “Hill.” A quarter-point hike is in the market, already and many marketers are looking for a 50-basis point, cut. What is not being bandied about, is the implications of a 50-basis point-cut and the negative reaction that the US Dollar will feel. A 50-basis point cut would clearly signal that the economy is in real trouble; not good news for those looking forward to expansion. A 50- basis point cut, in the face of inflation, tells us that the fear of recession is real.
Just as an aside, the Continuous Commodity Index cash, made a life-time high, in this past week’s session; there is no inflation, just higher prices. There is tightness in some of the agricultural markets such as wheat and grains. This has an effect on the cost of meats and poultry as well as the cost on many of the foods we eat. At first, the price of the meats and poultry will drop as the herds are brought to the market light rather than fatten them up to their slaughter weight. This usually has the effect of flooding the market. Once this drive is over, then fewer animals are being bread to slaughter thus it creates tightness in the market and a rise in prices. The cost of poultry will simply go up unless somebody can start a “bird flu” rumor to keep poultry prices down. Crude oil did advance this past week, but this item was not the main culprit. Crude oil has been in a range for some time and traded to 78.40 in July of 2006, plummeted to 49.90 in January of 2007 and now has rallied back printing a new high. Gold is making a new high and seems to enjoy a safety play. As we have speculated in the past, as the US Dollar declines, it makes it harder to hold dollars and some of those dollars are moving into gold.
Then we have the continuing saga of the sub-prime mess and the spectre of foreclosures and financial ruin. The blame game will continue and only the poor souls that either have already lost their homes or are in foreclosure will be hurt by this mess. The financial institutions will be rescued, while the little guy is thrown to the sharks swimming around the murky waters of “refis.” In case that isn’t enough excitement for the week, we have PPI to be released on Tuesday and CPI on Wednesday. Whew!!!! Valium anybody?
Monday: The Empire State manufacturing index is released at 7:30.
Tuesday: August PPI is released at 8:30, August home builder’s survey is released, Lehman et al released their 3rd quarter earnings and the FOMC releases its interest rate decision (probably a ¼ point cut) along with a statement.
Wednesday: August CPI is released at 8:30, and August housing starts are released at 8:30.
Thursday: August leading indicators are released at 10:00, September Philly Fed Survey is released at high noon, and Fed Chairman Bernanke speaks on the “Hill.”
Friday: Yom Kippur.
The US Dollar index enjoyed a two-day rally this past week, leaving the end of the week on a pleasant note. All the indicators that we follow herein are issuing a united buy-signal. Remember, on Tuesday, the market will be pushed by the action of the FOMC. If the rate cut is too aggressive, the US Dollar index will plummet. Remember also that the roll will be complete on Monday and the front month will now be December, therefore, we are basing our analysis on that expiry. The 5-period exponential moving average is at 79.717. The top of the Bollinger band is at 81.592 and the lower edge is seen at 79.067. This market could easily bounce back to 80.052. The weekly chart shows the slow and steady decline of the US Dollar index. We see mixed signals from the indicators; the stochastic indicator on the weekly chart is about to issue a buy-signal but hasn’t done so at this time, the RSI is flat near oversold levels, the Thomas DeMark Expert indicator continues to point lower and our own indicator is still issuing a sell-signal but curling to the upside. The monthly indicators continue to point lower albeit at oversold levels. With the 1992 low so close at hand, it seems likely that the market will try to reach to that level and test it. Don’t be surprised to see the level violated with a quick “V” once the probe is made. We say that because, there will be sell-stops below that level which could trigger an exaggerated action to the downside. Once those orders are filled expect to see a rally back above that level.
The Euro made its high on Wednesday of this past week. The December Euro is exhausted and looks as though it could retreat. The indicators are uniformly issuing a sell-signal. The 5-period exponential moving average is at 138.367. The top of the Bollinger band is at 139.854 and the lower edge is seen at 134.073. We see signs of exhaustion on the weekly chart. The indicators that we follow are issuing a continued buy-signal for the weekly chart. This rally looks like a probe to the upside with no follow thru. Remember, the markets expected to see both the ECB and the Bank of England follow suit and adjust interest rates lower, however; this has not occurred. As a matter of fact the ECB continues to remain hawkish regarding inflation. When we look at the Ichimoku clouds, we notice that the Euro is flying above them. We feel that the Euro is overbought at the moment, and the either sideways action or some retreat will relieve it of that condition.
We told you that we liked the Canadian Dollar! This currency is quickly approaching parity with the US Dollar; unfortunately, it is exhausted and may need a pause before it continues its trek to par. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are all issuing a sell-signal. The RSI continues to point higher but is sort of flattish. The 5-period exponential moving average is at 96.06. The top of the Bollinger band is at 97.08 and the lower edge is seen at 93.15. The weekly chart shows us a huge green candle as a result of this past week’s rally. This has been the best week that the Canadian dollar has seen in a long time. The indicators continue to issue a uniform buy-signal with more room to the upside. The monthly chart is exhausted. We are so close to the par level that it seems likely that we will test that level. At this time, however; we need some backing and filling or consolidation before that assault is made.
The British Pound Sterling looks as though it fell off a cliff in the Friday session. As a result of that session, there is a gap on the chart from 201.93 to 201.15. All of the indicators are uniformly issuing a sell-signal. We should find some support as we near 199.79. Below that level, there is a gap that will carry us to 198.54 and yet another gap to carry us to 197.57. The 5-period exponential moving average is at 201.69. The top of the Bollinger band is at 204.09 and the lower edge is seen at 196.81. The weekly chart has a red-13 count and a bearish engulfing candle as a result of last week’s trade. The indicators all are issuing a continued sell-signal. The uptrend line is at 199.07 on the weekly chart. It is likely that we will cut below that line and test 197.54 again.
The Australian Dollar has signs of exhaustion in the December contract. We have a 6-count on the daily chart. The stochastic indicator and our own indicator are issuing a fresh buy-signal at overbought levels. The Thomas DeMark Expert indicator is issuing a sell-signal and the RSI is going sideways near overbought levels. The 5-period exponential moving average is 83.06. The top of the Bollinger band is at 84.75 and the lower edge is seen at 78.60. The weekly chart is bullish with a large green candle as a result of last week’s trading. The indicators are uniformly issuing a continued buy-signal with plenty of room left to the upside. The Australian dollar is likely to stall at 84.83 where we see some congestion.
The New Zealand Dollar is exhausted. The stochastic indicator and our own indicator are both issuing a sell-signal. The Thomas DeMark Expert indicator is going sideways as is the RSI. The 5-period exponential moving average is at 70.03. The top of the Bollinger band is at 71.67 and the lower edge is seen at 67.37. We need to see a close above 71.01 to get a move to the upside. At the moment, it looks as though we could go down and test the lip of the gap at 70.05 and then possibly rally before retreating to 68.88. The weekly chart of the New Zealand Dollar is positive. All the indicators that we follow herein are issuing a uniform buy-signal with plenty of room to the upside. The upshot of this is that on a daily basis, we could see some retreat but in a bigger picture, it appears that the market wants to rally.
December’s Yen contract continues to look heavy. We have seen a retreat in four of the five past sessions still; the indicators indicate that there is plenty of room to the downside. Only one of the indicators is at oversold, the others have lots of room to retreat. The 5-period exponential moving average is at 88.18. The top of the Bollinger band is at 89.64 and the lower edge is seen at 86.71. The weekly chart shows signs of exhaustion. The range of last week was smaller than the previous week’s range leaving an inside candle on the chart. The stochastic indicator, the RSI and our own indicator are all issuing a sell-signal from slightly above neutral. The Thomas DeMark Expert indicator is going sideways at neutral. We see a point of inflection occurring on Tuesday where the uptrend and downtrend lines meet at 88.05. We should see some fire-works from that collision. Strange that it occurs on the day of the FOMC meeting and the PPI report here, in the USA.
The December Swiss Franc contract had a good day on Friday and looks as though it is resolving to the upside. All the indicators that we follow herein are issuing a solid buy-signal from oversold levels. The 5-period exponential moving average is at 118.281. The top of the Bollinger band is at 120.618 and the lower edge is seen at 117.359. At the very least we expect to see a rally to 118.530 and then to 118.990. The weekly chart shows the rejection of 117.585, which was the low of the move. The indicators are curling to the upside but have not as yet, issued a buy-signal. We would expect to see the Swiss Franc regain some of its recent losses and trade up to 118.62 basis the weekly chart. We are positive on the Swiss Franc.
The S&P 500 chart has a gap from 1481.00 to 1486.00. Four of the past five days have been rally days. This market has signs of exhaustion as well as a 5-count on the top. The stochastic indicator and our own indicator are curling over to the downside but have not issued a sell-signal, both are at overbought levels. The Thomas DeMark Expert indicator continues to issue a buy-signal at overbought levels. The RSI is simply going sideways. The 5-period exponential moving average is at 1540.22. The top of the Bollinger band is at 1563.14 and the lower edge is seen at 1501.09. We have been project that the S&P 500 could reach as high as 1510 before running into some steep resistance. Although Friday’s rally felt and looked good it failed to remove the high of the Thursday rally. We poked our head into the clouds and closed just a tad below them. Friday’s session yielded a lower high and a lower low but, left a green candle on the chart. The weekly chart looks positive. All the indicators that we follow herein are issuing a continued buy-signal. The monthly chart looks positive as well. The indicators on the monthly chart are overbought but continue to issue a buy-signal. All in all, we would expect the market to react to the economic data scheduled for release this week, the FOMC release and the quadruple witch expiration. It could be a very volatile week for the S&P 500.
The NASDAQ 100 made a lower high and a lower low in the Friday session which, was a positive session….but not positive enough. There is a gap on the chart from 2006.00 to1995.00. The stochastic indicator is curling over to the downside and will issue a sell-signal within a session or two. Our own indicator is will issue a sell-signal in the next session. The Thomas DeMark Expert indicator is issuing a continued buy-signal at overbought levels. The RSI is simply going sideways. The 5-period exponential moving average is at 2012.33. The top of the Bollinger band is at 2052.48 and the lower edge is seen at 1886.11. The market looks as though it is curling over to the downside with definite signs of exhaustion. The downtrend line for this coming week basis the weekly chart is at 2019.99. The uptrend line is at 1966.22. The indicators on the weekly chart all continue to be positive for the NASDAQ 100 with more room to the upside. The monthly chart is slightly more confusing. The stochastic indicator continues to issue a buy-signal at overbought levels, our own indicator is issuing a fresh sell-signal, the Thomas DeMark Expert indicator is issuing a slight sell-signal at overbought levels and the RSI is simply overbought.
The Russell 2000 underperformed the other financial indices in the Friday session. This index did expand its trading range from the previous day and in doing so printed a lower high and a lower low leaving a long tailed candle in its wake. The indicators are uniformly mutedly positive on the Russell 2000. While they are all pointing higher the slope is very flat leaving a very iffy signal. The 5-period exponential moving average is at 785.12 for the Monday session. The top of the Bollinger band is at 805.96 and the lower edge is seen at 771.07. The uptrend line for the Monday session is at 778.04 and the downtrend line is at 792.06. These lines converge into a point of inflection on Thursday. When we look at the weekly chart it is clear that we must stay above the low of 737.70. We are trending lower in a very organized downtrend. The monthly chart has a doji like candle. All the indicators that we follow herein are issuing a sell-signal on the monthly chart. We remain cautious that is until and unless we see a close above 807.40 and then a close above 809.50. At that point there is little doubt that we will return to 824 and higher.
The Continuous Commodity Index cash made a life of contract high in the Friday session. Yes, there are signs of exhaustion here and yes, we are overbought by most measures. Only the Thomas DeMark Expert indicator is not overbought and is trendless going sideways at neutral. All the other indicators that we follow herein are overbought and pointing higher. The 5-period exponential moving average is at 422.68. The top of the Bollinger band is at 431.37 and the lower edge is seen at 396.29. The uptrend line is at 417.19. The weekly chart also has signs of exhaustion. The indicators on the weekly chart are uniformly positive and continue to issue a buy-signal. The monthly chart is also overbought and we have a scary 14-count. The indicators continue to issue a buy-signal at overbought levels. Should the US Dollar weaken further, we will see the prices of commodities traded in US dollars appreciate. Thus, we will have inflation while those with strong currencies will not have inflation.
December cocoa enjoyed a strong rally in the Friday session. This rally left a large green candle on the chart. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period exponential moving average is at 18.28. The top of the Bollinger band is at 18.64 and the lower edge is seen at 17.43. If December cocoa can remove 18.72, then we will have a run to the 19.27 and 19.82 levels. This chart looks as though it could be a tea-cup formation but it is too early to say. We can say that if we take out the 17.68 level, it is not a tea-cup formation. The weekly chart is less positive. We could be looking at a bear flag but again, it is too early to day. We did have a doji-candle as a result of last week’s session. Some of the indicators are oversold but all of the indicators are going sideways and are of no value. The monthly chart isn’t telling us anything of value. We must wait and see on this commodity.
October sugar has a really flat chart. We have been going sideways for some time now range-bound between 9.08 and 9.73. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal. The Thomas DeMark Expert indicator is trendless, flat, going nowhere. The 5-period exponential moving average is at 9.34. The top of the Bollinger band is at 9.55 and the lower edge is seen at 9.24. Notice how narrow the Bollinger bands are and, they are getting narrower. The weekly chart shows us that we need to close above 9.47 to encourage the bulls to return to this market. The indicators on the weekly chart are uniformly negative. Perhaps, the production of sugar plates will help the price of this product. This past week’s Barron’s article on corn sugar applies to all sugar. It might be cheaper to use sugar cane and beets rather than to use the sugar from corn in making ecologically friendly products still, there is the problem with the cost of this dinnerware.
December coffee looks as though it is trying to break its way out of its range. Friday’s session saw the product close near the highs and peak its head above the recent high of September 10th. This is very encouraging in the face of the rally in the US Dollar in the Friday session. The stochastic indicator is overbought but continues to issue a strong buy-signal. Our own indicator and the RSI are in agreement with that finding. The Thomas DeMark Expert indicator is overbought and going sideways. The 5-period exponential moving average is at 119.17. The top of the Bollinger band is at 121.39 and the lower edge is seen at 115.10. The weekly chart is very encouraging. There is a large green candle on the chart and the market looks as though it is going higher. The stochastic indicator, our own indicator and the RSI are all pointing higher issuing a continued buy-signal. The Thomas DeMark Expert indicator is issuing a continued sell-signal at oversold levels. Although we are range-bound between 115.00 and 126, it certainly looks as though we are heading for the upper boundaries of that range. The uptrend line on the weekly chart for next week is at 116.00. That means that we must stay above that level to continue this bullish viewpoint.
Frozen Concentrated Orange Juice closed at the highs of the day, in the Friday session. We are probing the three tops seen in the past three sessions. Right now we are pushing against the wall of resistance at 126.00. Should we penetrate that level, expect to see a return to the congestion level of 129-130 which, is also a downtrend line for the Monday session. The stochastic indicator is overbought but continues to issue a buy-signal. Our own indicator is curling over to the downside but has not issued a sell-signal. The Thomas DeMark Expert indicator is going sideways. The RSI is bending upward but without a clear signal. The 5-period exponential moving average is at 121.21. The top of the Bollinger band is at 128.05 and the lower edge is seen at 113.13. The weekly chart demonstrates that we are below the weekly downtrend line at 128.02. To turn this chart positive, on a weekly basis, we need to close above that level. The indicators are uniformly issuing a buy-signal on the weekly chart.
December cotton has enjoyed a six day rally and is exhausted. We remain above the uptrend line at 61.20 for the Monday session. The stochastic indicator is issuing a solid sell-signal. Our own indicator is going sideways on the buy side of the equation. The Thomas DeMark Expert indicator is issuing a solid buy-signal at overbought levels. The RSI is overbought and pointing higher. The 5-period exponential moving average is at 61.68. The top of the Bollinger band is at 63.65 and the lower edge is seen at 55.94. The weekly chart looks positive. All the indicators in the weekly time-frame are issuing a buy-signal. So long as we stay above 57.53, we will rally to 65.00.
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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