Option Queen Letter

The S&P 500 futures contract plowed higher for the day and for another week. We have seen this index rally for the past three months. It is now approaching the 0.618% Fibonacci retracement number which is at about 1237.86. We observe on the daily action, a pattern of softness intraday with buying at the end of the day. There could be two possible reasons for this behavior; one is that institutions are making their decision late in the day and investing in the last hour of trading and the other, those who were short all day looking for a market correction, threw in the towel by the end of the day and covered their positions. We believe that it may be a combination of the two causing the end-of-day rallies. We certainly understand the reasoning for this. After all, how happy can you be earning 0.45% on your money and then enjoying the tax you have to pay on that interest your money earned? Basically, you are losing money, even if we were to factor in very tame inflation. (Many economists believe that we are in a disinflationary environment, we disagree and believe that we are in stagflation.) Yes, the market has been overbought for months, but this behavior can continue until it ends. Reasonable people understand that this will persist until it doesn’t. Remember, actions once put in to motion tend to remain in that direction. To change direction we need to see exaggerated force in opposition to the current force and since the “buy the dips” crew is back in action that force is lacking. Think about bad habits like smoking; it is easier to keep smoking than to quit. Quitting takes a lot of effort and pain. Besides, bull markets are a lot more fun than are bear markets.
Earnings season begins on Monday with Alcoa’s release after the close. Expectations are running to the high side and the market will meet those expectations. Think about the comparisons to last year and logic tells you that it won’t take much to beat out last year’s projected depression levels and that this year’s “happy happy joy joy” projections will be positive. The question you need to ask is whether the forward looking projections will be correct. Are we moving into an expansion or something less positive? Unless people find employment and incomes improve, this recovery will be doomed. How healthy is the market really, are we fooling ourselves into buying the propaganda produced by our government? Will we actually be able to pay our debts without crushing our children’s future? Is our currency behaving better because everybody’s is a lot worse than ours is. These are just a few questions that will eventually need to be answered.
It seems that as winter gives way to spring and the blossoms appear our mood improves and we feel compelled to open our wallets and take a little risk. We have noticed investors, are taking more risk than usual. Money appears to be leaving the perceived safety of the money market funds, and is being invested in the equity market where, it has a greater chance of finding returns. That said, here is a little comment about the Bollinger bands. The S&P 500, the NASDAQ 100 and the Russell 2000 all close at or above the Bollinger bands on the charts. When reviewing past history of these indices, you will note, that the Bollinger bands will become wider as the market moves to extremes (either up or down). Rarely is this extreme seen for more than three or so days. If you are buying into the breakout, remember that we will retreat from the upper Bollinger band and likely return to near the 20 day moving average. We need to point out that in July of 2008, we rallied above the upper Bollinger band for many days and did not return to the 20 day moving average until December of 2008. This period could be similar, but only time will tell. This is just an observation not a fact written in stone.
Opening at the Broadhurst Theatre in New York City on April 27th, “Enron” the musical. How about as a follow-up Broadway show: “Obamacare the drama” or “Ruben and Greenspan the Follies.” We love the fact that we can make fun of ourselves. It is healthy and harmless might even warn us not to do it again, something like Prohibition, the subject of many movie scripts.
Monday: Alcoa releases earnings after the close. Tuesday: March import prices are released at 8:30 and February international trade is released at 8:30. Wednesday: March CPI is released at 8:30, March retail sales are released at 8:30, February business inventories are released at 10:00, Chairman Bernanke testifies on “the Hill,” and the Fed Beige book is released. Thursday: March industrial production and capacity utilization is released at 9:15, and the Philly Fed Survey is released at 10:00. Friday: March housing starts and April Michigan sentiment is released at 9:45 to 10:00.
The US Dollar Index retreated in the Friday session. Should the US Dollar Index close below 80.52, the door will be open to 79.65 and 78.77. The uptrend line for the Monday session is at 80.98 or so. The 5-day moving average is at 81.41. The top of the Bollinger band is at 82.56 and the lower edge is seen at 79.85. The stochastic indicator, the RSI and our own indicator all continue to issue a sell-signal with plenty of room to the downside. The Thomas DeMark Expert indicator continues to point higher at overbought levels. We are above the Ichimoku Clouds for the daily time-frame but in the clouds for both the weekly and the monthly time-frames. The uptrend line on the weekly chart is at 80.87. It looks as though the US Dollar Index could see further declines in the short term. To turn this chart positive you will need to see a close above 81.99.
The S&P 500 futures contract closed above the upper Bollinger band in the Friday session. This index has been grossly overbought for months and remains overbought as measured by the RSI and the stochastic indicator, both of which continue to point to higher levels. Our own indicator is not overbought but does continue to issue a buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal. The uptrend line is seen at 1174.89. The 5-day moving average is at 1178.47. The top of the Bollinger band is at 1190.44 and the lower edge is seen at 1150.72. The rally in the Friday session can only be seen as a substantial breakout to the upside. We do need to see some follow-through of this action with better volume. We are above the Ichimoku Clouds for both the daily and the weekly time-frames, but remain below the clouds for the monthly time-frame. We are overbought on all time-frames, daily, weekly and monthly. The next real area of resistance is at the 0.618 level of 1237.86. We do have signs of exhaustion on the weekly chart.
The NASDAQ 100 rallied 0.61% in the Friday session underperforming the S&P 500’s rally of 0.75% and the Russell 2000 rally of 0.70%. The problem we see is that the NASDAQ and the Russell 2000 have led this rally and now seem to be falling behind the rally in the S&P 500. Still the NASDAQ 100 managed to close at the upper edge of the Bollinger band in the Friday session. The NASDAQ closed at the highs of the day. The 5-day moving average is at 1969.38. The top of the Bollinger band is at 1990.92 and the lower edge is seen at 1922.62. Naturally, we are above the Ichimoku Clouds for the daily, weekly and the monthly time-frames. We are overbought on all time-frames. All the indicators that we follow continue to point higher at overbought levels. Overbought is a relative term, in an bull market, overbought levels can be seen for extended periods of time so don’t let the condition fool you into believing that there has to be a sell-off. We will remain at these levels until the daily stochastic breaks below 57 and the RSI breaks below 65. When looking at the point and figure chart, you will notice that the NASDAQ 100 broke out of a double top at 1987.50.
The Russell 2000 closed above the upper Bollinger band in the Friday session. All the indicators are overbought but only the RSI and stochastic are issuing a continued buy-signal. The Thomas DeMark Expert indicator is issuing a fresh sell-signal and our own indicator is flat-lining. The 5-day moving average is at 690.45. The upper edge of the Bollinger band is at 701.43 and the lower edge is seen at 667.15. Should the market retreat, good support will be seen at 648.90. We are above the Ichimoku Clouds for the daily and the weekly time-frames. We are overbought for all time-frames. There is little overhead supply to keep this market down. Don’t fight the trend until it no longer is the trend. The uptrend line is at 693.10.
Crude oil has been in retreat since touching a high of 87.09 in the Tuesday session. There is a strong uptrend line at 82.03 if broken will open the door to 78.57 and 74.59. We are above the Ichimoku Clouds for the daily, weekly and monthly time-frames. The 5-day moving average is at 84.75. The top of the Bollinger band is at 87.16 and the lower edge is seen at 78.40. While we are in retreat, we see some support at 83.09. The market is demonstrating a disconnect with the US Dollar. Generally speaking, as the dollar retreats, crude oil (priced in US Dollars) rallies. Lately, we have not seen this connection. Crude oil also plays into the recovery/expansion chatter. Should the global economies expand, naturally there will be increased demand for crude oil and the price should increase. Many economists see disinflation in our future. We see stagflation in our future, increased prices with stagnate wage growth. Thus, we have less money to spend on ever higher bills.
Gold is headed higher as people become concerned, not about inflation but rather, about currency risk. Gold the ultimate currency has been inching higher as the PIIGS problems continue. The Euro has been battered and the US Dollar is plagued with debt. The market is concerned about the Pound Sterling and most other currencies ergo, gold becomes the vehicle of choice. You can trade gold in all currencies. Simply stated this has kept the demand for gold high. The 5-day moving average is at 1131.86. The top of the Bollinger band is at 1158.06 and the lower edge is seen at 1078.42. Gold is overbought and will issue a sell-signal in the Monday session. It likely will retreat to 1145.80 and then 1132.80, but will find a bid upon shallow retreats. We have supply up to the December 2009 highs. It does look as though, we are going to go through those highs in the not too distant future.

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