Option Queen Letter

Ready, set, start shopping! Yes, we are entering the spring housing season when buyers appear to shop and find homes. Why the sudden rush, well, it is clear that interest rates are not going to go any lower and it is just as clear that interest rates on home mortgages likely will increase in the future. The Federal Reserve has signaled to the markets that the free lunch is over so, those who have been sitting on the sidelines waiting for further declines in home prices will be encouraged to purchase the sought after home and lock in the rates now. Naturally, this will appear as an encouraging sign for the economy. Look for the housing numbers to increase in the next few months. Remember too that some of these purchases will steal from future purchases and that we likely will see an upward blip now, and a slow down later. This the same type of behavior that we saw in car sales during the cash for clunkers promotions. A further government encouragement is the tax breaks for first time purchases and purchases that will expire in April.
The market, as measured by the S&P 500 has been in rally mode for the past six trading session, although the trading session on Friday left a doji like candle on the chart. We would not fault the market if, it decided to take a break from the current rally to allow for some backing and filling. Friday’s action left an outside day on the chart. When the bears had the ball they failed when the bulls had it they also failed this leads us to believe that Friday’s action was a transition day which could lead to a reversal of direction. It appears that the market took the Fed’s hike in the rate as a positive, acknowledging that the economy seems to be expanding. It further appears that the Fed is on watch and trying to extricate itself from the stimulus game, although they have said, at their meeting, that they stand at the ready to do whatever is necessary to prevent an economic implosion. We wonder how they will handle the bankruptcy of the various states here in the USA. Are they going to rescue New York or California, after all, both states are larger and more populated than is Greece…..hum?
Tuesday: February consumer confidence is released at 10:00 and December Case-Shiller home price index for December is released at 9:00. Wednesday: January new single-family home sales are released at 10:00 and January equipment leasing and finance index is released at 10:00. Thursday: January durable goods are released at 8:30, mutual fund sales and redemptions and December house price index is released at 10:00. Friday: 4th quarter GDP is released at 8:30, January existing home sales are released at 10:00, and Chicago purchasing managers’ report for February is released at 9:45.
The US Dollar index traveled above the upper Bollinger band, intraday in the Friday session, a moved back inside the band. Actually, the US Dollar index opened on a bullish spike looking a lot like a short-covering rally, and then, when the buyers retreated, the sellers took the lead and leaned on the market bringing it back to the previous day’s range. This action illustrates the power of a short-covering rally. It would not surprise us to see the US Dollar index trade down to 79.64 and perhaps 79.085 before starting another rally. The uptrend line is at79.93 for the Monday session and 79.97 for this coming Friday. We are overbought as measured by all the indicators that we follow for the weekly time-frame. The daily time-frame is near overbought levels and pointing higher. The 5-day moving average is at 80.277. The top of the Bollinger band is at 81.179 and the lower edge is seen at 78.253. We are above the Ichimoku clouds for the daily time-frame but remain below the clouds for both the weekly and the monthly time-frame. If we could see the US Dollar index close above 81.53, we will see more shorts scared out of their positions.
The action on Friday in the S&P 500 was a clear rejection of the high and a rejection of the low. It would not surprise us to see the S&P 500 retreat to 1084.16 and even 1075.87. The stochastic indicator, the Thomas DeMark Expert indicator and our own indicator are all overbought. Both our own indicator and the stochastic indicator have just issued a sell-signal. The RSI is going sideways slightly below overbought levels and the Thomas DeMark Expert indicator is doing the same but at overbought levels. The 5-day moving average is at 1085. The top of the Bollinger band is at 1113.07 and the lower edge is seen at 1051.57. Friday was the sixth day up, and the probability of a retreat is likely. We are inside the Ichimoku Clouds on the daily time-frame, above the clouds for the weekly time-frame and below the clouds for the monthly time-frame. We would be very cautious moving forward, so stay nimble.
The NASDAQ 100 also enjoyed a sixth day of a higher close than open in the Friday session. We see signs of exhaustion. The NASDAQ 100 lost 1.50 in the Friday session. The stochastic indicator is issuing a fresh sell-signal as is our own indicator and the Thomas DeMark Expert indicator. The RSI is going sideways near overbought levels. We are inside the Ichimoku clouds for the daily and monthly time-frames but are above the clouds for the weekly time-frame. The 5-day moving average is at 1818.16. The top of the Bollinger band is at 1893.15 and the lower edge is seen at 1673.11. The market looks heavy and could use some time to back and fill or retreat. The Market Profile chart tells us that should the NASDAQ 100 close above 1819.75; it likely will quickly rally to 1841.50.
The Russell 2000 was the best performer in the Friday session. This index close up 2.50 for the day while the S&P 500 closed up 0.70 and the NASDAQ 100 lost 1.50 on the day. The stochastic indicator and the Thomas DeMark Expert indicator are both issuing a sell-signal. Our own indicator looks as though it might issue a sell-signal in the next session. The RSI is sitting at the overbought line going sideways. We do have signs of exhaustion, on this, the sixth day up. The Russell 2000 closed above the Ichimoku Clouds for the daily time-frame and remains above the clouds for the weekly time-frame as well. The 5-day moving average is at 612.62. The top of the Bollinger band is at 633.05 and the lower edge is seen at 583.13. We could see some follow-through buying early in the Monday session but we believe that a rest is warranted now and that we likely will see some backing and filling or a decline in the coming days.
Crude Oil rallied in the Friday session taking it above the upper edge of the Bollinger band and above the Ichimoku Clouds. The stochastic indicator is overbought and continues to point higher. The RSI is pointing higher with plenty of room to the upside. The 5-day moving average is at 76.09. The top of the Bollinger band is at 79.41 and the lower edge is seen at 70.57. We suppose that the Feds recent action inspired the crude oil bulls into believing that the economy is expanding and thus will need more crude oil. We are not entirely sure that the expansion will be as robust as crude oil is forecasting. So far so good, the market looks as though it has further to run to the upside.
Gold is going sideways and is below the Ichimoku Clouds for the daily time-frame. The stochastic indicator is overbought but continues to point higher. The RSI is not overbought and has plenty of room to the upside. The 5-day moving average is at 1101.58. The top of the Bollinger band is at 1133.98 and the lower edge is seen at 1053.29. The chart looks as though the market is consolidating at these levels. The weekly chart looks like there is plenty of room to the upside and that gold is breaking above the downtrend line. We find gold above the Ichimoku clouds for the weekly time-frame. We will remain on the sidelines until gold trades above 1140.30 at which point, we will go long.

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