Option Queen Letter

Mr. Market has cancer and although it seems to be in remission at the moment, it appears that it is complete denial of; the disease, the treatment necessary to rid the disease or hold the line against further progression of the disease. How can we say that? Well, it appears that with the infusion of mass amounts of liquidity the Federal Reserve has helped the market get off life support systems and actually regain some strength. As we have stated in the past, this will work for a time and then another Black Swan event will cause the weakness in the repaired system to give way to chaos. Are we calling for the demise of the system as we know it today? No, we are urging those who are in charge to take off their blinders and finally fix what is wrong in the system.
We fear that much of what is wrong has been inspired by those who are in charge of fixing the system. Mass liquidity led to the last bubble which was a result of trying to avoid a recession. Here we are again at very similar points. A jobless recovery, stagflation and no solution. We have averted a catastrophe but haven’t fixed the problem.
We entered this new century after a massive bubble leading us to a high in 2000. Massive liquidity was pumped into the system to avoid a millennium meltdown. From that high the market retreated until 2002-2003 when, it took off, pausing briefly in 2004 consolidating with an upward tilt until 2006, and then like a bird flew skyward until the crack up in 2007 beginning with Bear Stearns and ending with Lehman Bros. Today we are approaching the 0.618% retracement number for the previous 2007 to the low of 2009. Do you think we will correct or go sailing towards the moon without a refueling stop? Better yet, why do you suppose the real-estate bubble followed the high tech bubble and what is the new bubble going to be? Was it the Feds objective to avert a recession that caused the initial bubble, was it the fact that the government wouldn’t do anything to avoid the initial bubble and then fueled the housing bubble again refusing to see the bubble. Seriously, we have a problem here and we are not acknowledging that problem nor are we fixing that problem. We certainly don’t know how to fix the problem, but we believe the first step in any solution is to acknowledge that a systemic problem exists.
Today, we are back to the “put 3% down” for a purchase of a new house, so what we learned from the housing bubble? While interest rates are low, the banks are not lending money (why lend if you can make the spread without risk). We have learned nothing from the previous melt-down. Shame on us.
Monday: Many markets remain closed for the Easter Holiday and March ISM non manufacturing index is released at 10:00. Tuesday: The FOMC minutes of the recent meet will be released. Wednesday: Consumer credit is released at 3:00. Thursday: Retailers release same store sales, the European Central Bank and the Bank of England issue their interest rate decisions and offer comments regarding their decisions. Friday: March wholesale inventory is release at 10:00.
The US Dollar index enjoyed a rally in the shortened Good Friday session rallying from the low of the session seen at 7:35 to a session high at about 10:05, closing the session just off that high. There was a strange print which, we are sure, was an error at 7:25 or so. Must have been a bad tick, if not, it truly was strange taking the market to 80.52. You might say it was our data source but we have checked more than one source and use more than one source for our charting. There is an important downtrend line at 81.597 that the US Dollar index needs to remove before we will return to the “bullish” posture of the past. The 5-day moving average is at 81.617 and, so long as we are below both that line and the trendline we will remain cautious. It is interesting to note that the 20 moving average is at 81.58. Combine these three numbers; the 5 day moving average, the 20 day moving average and the downtrend line and the number becomes very important. Thus, any move above 81.61 or so should bring buyer into this market. The top of the Bollinger band is at 83.763 and the lower edge is seen at 79.397. The stochastic indicator and the RSI are both issuing a fresh buy-signal. Our own indicator will also issue a buy-signal within a day. The Thomas DeMark Expert indicator is issuing a continued sell-signal and is oversold. We are in the Ichimoku clouds for the daily time-frame and below the clouds for the weekly and monthly time-frames.
The S&P 500 futures contract traded briefly on Good Friday following the March monthly “Job Report” release. This abbreviated session was positive until the final numbers were posted when, a strange thing happened, we saw the numbers adjusted downward without explanation. The session actually closed at 1178.50 and later was posted at 1173.70. We are not sure why therefore, this data skews our chart and makes us question the validity of the indicators that are drawn from these numbers. We can tell you that the S&P 500 closed above the Ichimoku clouds for the daily and the weekly time-frames, but remains below the clouds for the monthly time-frame. The 5-day moving average is at 1167.91. The top of the Bollinger band is at 1182.13 and the lower edge is seen at 1139.13. The Friday session probed to the upside posting another higher high in this bull move. We are still far below the 0.618% retracement level from the 2007 high of the market. When we look at the Market Profile chart we note that we are in single print area with no overhead supply. We should have little trouble making progress to the upside. Should we stall at this level it is likely that we will retreat to the 1164 level and possibly lower to 1132. The market is grossly overbought but has been overbought for months, thus the condition is being noted and probably is of little value at the moment. This will be valuable because the longer we stay overbought the worse the downdraft will be when it begins.
The NASDAQ 100 futures contract which traded briefly in the Friday session actually closed the session at 1962.50 and was adjusted downward at 12:06 PM to 1952. Again we see the downside adjustment with no explanation. Thus, we will not regard this bogus close as factual until some reliable source explains this adjustment. This will affect the moving average and other calculations so take them as possibly needing adjustments. The 5-day moving average is at 1955.61. The top of the Bollinger band is at 1980.64 and the lower edge is seen at 1899.00. Naturally the market is above the Ichimoku clouds on the daily, weekly and even the monthly time-frames. The stochastic indicator and our own indicator both continue to issue a sell-signal. Both the RSI and the Thomas DeMark Expert indicators are going sideways. Even with the adjustment to the closing prices, the NASDAQ 100 did not challenge the highs, or even come close to those levels seen in the Thursday session. The chart looks to be rolling over to the downside. Should this market retreat below 1940.75 the door will be open to 1919 and 1900.
The Russell 2000 on the CQG system was not adjusted as both the S&P 500 and NASDAQ 100 futures contracts were and therefore shows a gain in the Friday shortened session. Strange, it was adjust on e-signal but not on CQG which is the platform we prefer. This chart is forming a wedge, or pennant. It certainly looks as though in about three or four days we will have a resolution to that consolidation. The downtrend line is at 683.90. Should we close below 675.40, expect to visit 664.10. The 5-day moving average is at 681.03. The top of the Bollinger band is at 688.25 and the lower edge is seen at 667.80. We are above the Ichimoku clouds for the daily and weekly time-frames. When looking at the Market Profile chart you will notice that we are at the upper edge of insecurity, should we trade above 690, there will be little resistance and we could melt higher. As to the indicators, we have a mixed bag, with the Thomas DeMark Expert indicator giving us a buy-signal and the RSI and stochastic indicator both going sideways our own indicator is just issuing a sell-signal. So here we are a signal for any mood. This tells us to be careful and alert. On the downside, a move below 660 will inspire the bears to return for a feeding session with support returning at 637.
Crude oil rallied in the Thursday session removing the high seen on January 11, 2010. This tells you that somebody out there believes the recovery story enough to be buying the crude oil that will be needed to supply any kind of global expansion. While it is true that the weakness in the US Dollar seen on Wednesday and Thursday helped, the fact is that crude seems to want to rally. The 5-day moving average is at 81.94. The top of the Bollinger band is at 84.10 and the lower edge is seen at 79.40. Naturally, we are above the clouds for the daily, weekly and monthly time-frames. If we do a Fibonacci retracement from the highs of 2008 we notice that we are not even at the 50% retracement levels and have lots of room to run to the upside. That is bad news for the users of crude oil and for those that see no inflation in the future. The Market Profile charts warn us that should crude oil trade above 85.50 there is little overhead resistance.
Gold is moving to the upside and looks as though it is getting ready for another run to 1133.9 1145.8. All of the indicators that we follow herein are pointing higher with room to the upside. We are above the clouds for all time-frames. The 5-day moving average is at 1104.71. The top of the Bollinger band is at 1135.53 and the lower edge is seen at 1087.37. Gold had broke above the downtrend line and seems to be heading higher. Until we trade above 1145.80, this move will be no more than trading range activity. We continue to bullish gold but will wait to see how it behaves as we approach the overhead resistance levels.

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