The Option Queen Letter by the Option Royals
We are entering the last week of the first quarter of the 2013 year and the last week of the month. These quarterly reports lead portfolio managers on a quest to tweak their portfolios to represent their public performance better. These adjustments to portfolios are seen monthly but seem to have more impact during the quarterly closings. This week should see the market rally as the window-dressing is complete with the new Easter Bonnet. The managers will parade their results in their quarterly publications to their investors. You may say that ETFs do not have this adjustment and in fact they do not, however; the investments in their funds do have an adjustment even a simple asset allocation based on performance will impact the volume and prices of the ETFs.
A major flaw in the newly passed Senate budget is highlighted in the following quote from the Sunday New York Times, March 24, 2013: “Ms. Murray said the plan matched its $975 billion in revenue increases with cuts and interest savings of equal size.” Here is the question of the day; what happens to the “interest savings of equal size” when interest rates go higher? Is this comment indicating that the budget is based on zero interest rates forever or for at least ten more years? Is this a reasonable assumption? We think not! Just as Guam will not tip into the ocean if we put more troops there (A congressman said that the island would tip into the ocean because of the weight of the troops….ugh..yes, in a recorded session regarding deploying troops to Guam.), interest rates will not remain at zero forever. This type of thinking is flawed and dangerous. Reasonable intelligent people should see and understand this. Below are some Thomas Jefferson quotes, just a refresher!
“Never spend your money before you have earned it.” — Thomas Jefferson
“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.” — Thomas Jefferson
“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” — Thomas Jefferson
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” — Thomas Jefferson
“My reading of history convinces me that most bad government results from too much government.” — Thomas Jefferson
We believe that this Passover/Easter season is a good time to reflect on our countries direction and future. As we all gather for the Passover Seders and Easter Dinners, think about the children sitting at the table with you. Think about the legacy we are leaving them and then act. We are responsible for electing our government and perhaps we need to rethink the direction of what we are doing. Remember if everybody is receiving financial support from the government, there will be nobody left to pay the taxes to support the parasites of the government or the cost of running a government. If congress cannot pass and balance a budget, their compensation should be cut including all benefits. They are failing to do their job, why pay them? Think before you vote in the next election, will this person actually do the job or will s/he be yet another elected freeloader.
The US Dollar index took another week to catch its breath closing the Friday session at 82.53. After five straight weeks up, the index has taken two to mosey sideways. The Bollinger Bands are beginning to contract a bit with the upper band at 83.32 and the lower band at 81.49. The market is below the 5-period exponential moving average (82.77) and above the 20 period simple moving average (82.45). All indicators that we follow are continuing to issue a sell-signal with the RSI continuing to create lower lows and lower highs. While the 82.53 level we currently sit at is a stable support area we feel the index has outdone its welcome here. Looking to the 60 minute .05 x 3 Point and Figure chart, we see more room to the downside with the formation of two counter trend internal trend lines and an activated downside target of 82.20. Looking at the daily candle chart, the March 15th low stands out (82.25), so we would tend to think this is a believable range. Below that it’s back to the 82 level. Once this backing and filling has played itself out, it will likely be on to 83.62, an area of stiff resistance through July and a must see tourist stop for index’s on their way to previous highs.
The S&P 500 left a bullish engulfing candlestick on the chart as a result of the Friday trading session. The first rally taking the S&P 500 from 143825 to a high of 1530 took about two months and led to a 67% retracement of that gain. The recent rally from 1481.75 to the current high of 1558.75 took less than a month and since that time has retraced 38% of that gain. The market remains below the uptrend line from late in November. Like it or not, this market is strong. Will it retreat, certainly, but when it is ready to and not on any schedule that I am aware of. It is likely that it could retreat on earning news but please do not expect to see a crash or steep retreat, it just doesn’t look that way on the charts. The stochastic indicator, our own indicator and the RSI all are pointing to higher levels. The Thomas DeMark Expert indicator is pointing lower. The current pattern created by charting the real bodies of the candlesticks for the last five sessions looks like a megaphone. It could probably just be a consolidation pattern, we are not sure. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is 1547.76. The upper edge of the Bollinger Band is 1578.32 and the lower edge is seen at 1494.87. For the weekly time-frame all the indicators we follow have curled over to the downside. It is more like a slight bend than a definitive sell alert. On our own indicator we have a diversion in that on the previous price highs we have been making lower highs on our indicator. This is a concern and as such we are monitoring it. The point and figure charts continue to paint a bullish picture.
The NASDAQ 100 rallied in the Friday session leaving a very large bodied bullish candlestick. This index remains above the uptrend line and rallied 1.07% in the Friday session. The stochastic indicator, our own indicator and the RSI are all pointing higher with plenty of room to the upside. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 2786.25. The top of the Bollinger Band is at 2839.64 and the lower edge is seen at 2712.40. The NASDAQ looks as though it is going through a sideways consolidation. The point and figure charts support the conclusion that the market is going to move higher. The 60 minute two by three box chart shows that the NASDAQ has returned to the area of consolidation. This really cannot be seen on the candlestick chart but is very evident on the point and figure chart. The market profile chart shows a bulging area of consolidation with very thin tails and wicks.
The Russell 2000 seems to be forming a consolidative rectangle. It did rally in the Friday session eking out a high high and higher low on the day. There are some storm clouds on the horizon for the Russell 2000. The stochastic indicator, although pointing higher has been printing lower highs. Our own indicator has been doing much the same thing. The stochastic indicator is positive at overbought levels. The RSI is pointing higher. The Thomas DeMark Expert indicator is issuing a continued sell signal. This pattern of lower highs and lower lows on the indicators has been in place since March 15. As you know, this is a warning to us that something is changing in the market and we should become more attentive to what that change might be. We are above the Ichimoku Clouds for all time-frames. Market Profile tells us the same story about the Russell 2000 that we seem to be in a trading range at the moment. The point and figure daily 1% by 3 box chart is also pointing higher. When you look at the 60 minute 1 by 3 box chart, you see a somewhat less bullish view of the index, bullish but less so with some concerns.
Crude oil enjoyed a robust rally in the Friday session printing a higher low and higher high with a large body on the candlestick closing near the top of the day’s range. We closed inside the Ichimoku Clouds for the daily time-frame but above the clouds for both the weekly and the monthly time-frame. All the indicators that we follow herein are going flat on the slightly positive side of neutral. If this market can remove the 94.09 level, it certainly will rally to the 95.75 level. The Bollinger Bands are becoming narrow which generally precedes a violent move. All the indicators that we follow herein are pointing higher. The 5-period exponential moving average is 93.11. The top of the Bollinger Band is at 94.28 and the lower edge is seen at 90.17. There is an uptrend line at 91.10 and we are above the steeper of the two downtrend lines. There is a horizontal line at 94.09 above which is little resistance. The point and figure daily 1% by 3 box chart shows some downtrend lines that seem to be warning us of some possible trouble ahead. The 60 minute chart looks much better than the daily chart does.
Gold retreated in the Friday session but did not do any damage to the chart. We are below the Ichimoku Clouds for both the daily and the weekly time-frames and above the clouds for the monthly time-frame. The 5-period exponential moving average is at 1606.19. The top of the Bollinger Band is at 1617.41 and the lower edge is seen at 1565.02. The market needs to close above 1616.50 to scare any level headed short into covering. That said, we seem to be having trouble at that area. Since printing the low of February 21, the market has been trying to make its way higher producing higher lows. The uptrend line is 1584.18. The downtrend line is at 1645.37 and it is like that that line is the line in the sand for the shorts or the sideline gold bugs. All the indicators that we follow herein are pointing lower. The Bollinger Bands have become very narrow and we suspect that there will be a big move coming in the not too distant future.
Jeanette Schwarz Young, CFP®, CMT