The Option Queen Letter

US SPX 500 Futures for the Option Queen Letter

US SPX 500 Futures (15 Minutes) chart for Sept. 15, 2013

As to the bull market, remember the trend is your friend, that said, keep your stops tight and don’t be afraid to take profits when presented with that opportunity. One of the biggest mistakes investors can make is not taking profits when they are available. Remember, you can always purchase the issue again. Nothing goes straight up and nothing goes straight down. There are squiggles in-between which generally are good trading opportunities.

This week the FOMC will meet. There is much speculation regarding the FOMC decision to begin removing themselves from the market by tapering their purchases. We continue to believe that this taper, if it occurs, will be mild. We also believe that the general public has not been helped by the FOMC activities in the past and thus, moving forward, this will have little effect on the average person. Corporations, on the other hand have been feeling the inspiration of higher interest rates and have used this time of low cost money to use zip interest rates to purchase other companies, or even buy back their own stock by floating a bond issue to raise money. What has zip done for Jane and John Doe? Basically nothing.

At this time, the risk on trade is back in favor. It is a good time to search for some of the “ole standby” stock that consistently pay and increase their dividends. These issues have under preformed the market lately and while they could decline somewhat in price they will attain stability via their history of paying dividends. We continue to recommend writing calls on these stock purchases (take care to sell the option for expiration after the dividend is paid). For example if you wanted to sell an ABC call for January, make sure that call is after the stock is due to make a dividend payment so that you can collect that dividend. ABC pays dividends on the 10th of March June, September and December so sell your calls to allow you to capture the dividend. (ABC is a fictitious stock and this is not a recommendation to purchase or sell this stock and is being used as an example.)

Remember also, that options expire this week, we have a quarterly witch, and finical futures expire on Thursday after the close and settle on Friday morning once the all of the issues index opened. In case you don’t understand this, trading in the index ceases for September at the close of trading on Thursday, Friday morning the value of the index is ascertained for settlement by adding up each and every issue in the index. This gives you the value of the September futures contract for settlement purposes. Many times it takes more than an hour after the opening to obtain that value. You will have a settlement indication and eventually a final. Some small issues take a while to open and although they are important for the final calculation, the indication given is generally pretty close to the number. As you recall these financial indices settle for cash. These numbers are important for not only the futures traders but also those who trade the associated options on those futures contracts. Once these numbers are final, the commodity market in finical indices generally becomes quiet for the rest of the day. Stock options for September expire at the close of trading on Friday and settle on Saturday. On Monday traders come in and deal with the options assignments generally giving the market a bit of volatility as positions are squared.

The S&P 500 rallied in the Friday session. For the week the index enjoyed a robust upward thrust and only gave back a tiny bit in the Thursday session. The Bollinger Bands are beginning to expand anew indicating to us that volatility should increase. The upper edge of the Bollinger Band is 1692.15 and the lower edge is seen at 1616.96. The 5-period exponential moving average is at 1680.73. We are above the Ichimoku Clouds for all times frames. The upward trending channel lines are 1692.67 and 1652.64. All of the indicators that we follow herein are pointing lower from overbought levels with plenty of room to the downside. The widest portion of the Market Profile chart was at 1678.80, but that was not the highest volume area which was at 1680. The widest portion of the Market Profile chart tells us that 1678.80 was traded in more brackets than any other price. A bracket is 30 minutes. These two areas will be good support on any retreat in this market. Above 1683.90 there will be no resistance and we can move easily to the upside. When looking at a longer time-frame we notice that 1677 should also offer good support for this market. The only caution is that should we trade below that level, the long might just dump their positions. A caution flag is flying caused by the light volume seen in recent days. The daily 1% by 3-box point and figure chart is clearly positive. The 60 minute 0.1% by 3-box chart has a downtrend line and remains inside the triangle created by the upside and downside internal lines.

The NASDAQ 100 left a doji candlestick on the chart as a result of the Friday session. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 3169.12. The top of the Bollinger Band is at 3197.91 and the lower edge is seen at 3033.08. The up trending channel lines are 3202.00 and 3114.25. The very short-term down trending channel lines are 3182.58 and 3153.16. All the indicators that we follow herein continue to issue a sell-signal. The stochastic indicator and the RSI are at or near overbought levels. The Bollinger Bands are expanding indicating that volatility is on the rise. The daily 1% by 3-box point and figure chart clearly shows a solid uptrend with no down trending lines. The 60 minute 0.1% by 3-box chart does have both an internal down trend line and uptrend lines. We have a current downside target of 3127.46 and two unfilled upside targets of 3216.22 and an earlier target of 3242.04. The candlestick chart looks as though the market is rolling over to the downside. We would be careful in this market especially with the FOMC meeting and the quadruple witch we have at the end of the week.

The Russell 2000 rallied in the Friday trading session. The Russell 2000 is above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 1048.82. The top of the Bollinger Band is at 1059.49 and the bottom edge is seen at 1000.93. The Bollinger Bands are beginning to expand which will bring increased volatility to this market. Although the stochastic indicator is overbought, it is issuing a continued buy-signal. The RSI is not overbought but continues to point higher. Our own indicator is flatter than the others and although positive is becoming flatter. This index is very close to its all-time high so any real push to the upside will allow a new all-time high print. Although the 1% by 3-box daily point and figure chart has only uptrend lines there is a downside target of 934.40, however; the 60 minute 0.1% by 3-box chart has only an unmet upside target of 1065.60. We do not feel comfortable with this index in that it behaves erratic and irrationally.

Crude oil has been in a range since the beginning of July. We did have two ventures above the range but continue to return to the range between 102 and 110. The relatively flat up trend channel line is 105.35 and 111.33. The very short-term downtrend line is at 109.21 and the short-term uptrend line is at 107.11. We are above the Ichimoku Clouds for all time-frames. The indicators are not much help and are not giving us good signals. The 5-period exponential moving average is at 108.39. The top of the flattish Bollinger Bands is 110.69 and the lower edge is seen at 104.34. Friday’s session left a long tailed doji candlestick on the chart. As you know doji candlesticks generally indicate that the market is in flux and could change direction. In this case, the direction is also flat therefore we can conclude nothing from that candlestick. The 1% daily 3-box chart has no current down trend lines and only uptrend lines. The 60 minute 0.5% by 3-box chart has both internal up and downtrend lines. We have both upside and downside targets. Right now, it looks as though until or unless we break out of our triangle the direction of the next move will not be known. The upside target is 117.69 and the downside target is 96.41…go figure. The Market Profile chart is a double bell curve for the 30 minute chart with the bulk of the volume at 107.58. The 107.55 number is important on the daily chart (actually a weekly chart reflecting the trades of the week) where 20.4% of the week’s volume occurred. The daily (weekly) is a regular bell-shaped curve with a longish tail with single prints. We feel that most are scared long at this point. We shall remain cautious on crude oil, but recognize that should the market take out the 111.60 area, it is going to trade significantly higher.

Gold rallied in the Friday session but did little to relieve the downside pressure. We are above the Ichimoku Clouds for the daily time-frame, below the clouds for the weekly time-frame and in the clouds for the monthly time-frame. Gold wins the lousy looking chart award for the week. The down trending channel lines are 1385.86 and 1312.84. The uptrend line from July is at 1366.15 and we are far below that level which is negative. The 5-period exponential moving average is at 1346.73 and we are below that level, another negative. The Bollinger Bands, which are expanding are warning us that this market is going to expand it volatility. The upper band is at 1433.69 and the lower band is 1329.36. Notice that we closed below the lower band which tells us that we will likely bounce back inside that band within a day or so. This is not a great market to be long. The stochastic indicator is issuing a buy-signal at oversold levels and the RSI is also issuing a buy-signal. ADX is curling to the upside telling us that the market is beginning to trend. We are waiting for a point to go long, certainly not yet. The daily (weekly) Market Profile chart shows that this market is going to break in one direction or the other direction fairly soon. The daily 1% by 3-box reversal chart has some significant uptrend and downtrend lines. We have an upside target of 1673.96 and no real downside targets at the moment. When we look at the 60 minute 0.3% by 3-box chart we see that 1313.22 was seen and was met. We have significant downtrend lines to deal with on this chart.

The US Dollar Index traded narrowly in the Friday session printing a higher low for the day. That was the positives for the session. The narrow bodied candlestick is red indicating that this market opened higher and traded lower. We are below the Ichimoku Clouds for the daily time-frame but remain above the clouds for both the weekly and the monthly time-frames. The 5-period exponential moving average is at 81.65. The top of the Bollinger Band is at 82.63 and the lower edge is seen at 80.83. We really do not see this market moving either significantly higher or lower and believe that we are trapped in a trading range. The stochastic indicator continues to point lower albeit at oversold levels. The RSI is flat just below the neutral line. The other indicators are about the same, not giving us a reason to be either long or short. The 0.1% by 3-box reversal point and figure chart has an internal uptrend line and a significant downtrend line. You can see the consolidation in this chart. The 60 minute 0.1% by 3-box reversal chart also has a similar pattern of up and downtrend lines. This market will break in one direction or the other in the not too distant future. The Market Profile daily chart is a clear bell-shaped curve. Stand back and go with the direction when it is established.

The Option Queen
Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086


No comments yet.

Leave a Reply