Option Queen Letter

It may be that the time is now ripe for us to reflect on why high oil prices have not had the negative effect on the economy that it was expected would follow this and associated escalations, now attributable to concurrent, though unrelated, military activities. Well, with interest rates at current levels, and they were lower, with the oil price push and other raw commodities also reflecting, it seems that the price push has not curbed the spending spree which, to now, the consumer has enjoyed.

The housing bubble did not burst, rather, it is like a tire with a slow leak, which, given awareness, allows the driver the luxury of the time needed to get help before becoming stranded with a flat spare on the side of an empty road. We are left with the hope that all these drivers, call them: homeowners, are using this time to reassess their obligations, to perform the fixes and repair their obligational problem before disasters from failing to heed the warning signs; subjects them, too, to the side of the empty road.
So, warning stated, where does that leave us and our future, which is why you’re reading this “gloom-&-doom” prospective. Well, so long as the leak in the housing market is but a slow deflation in housing prices, (thank you, ChairmanB.) the speculators and investors do have the opportunity to fix their problem. Should these warning signs, and they are genuine, albeit late, warning signs, be ignored, we will be standing at the front end of a disaster. When we compared this to a slow leak which becomes a flat tire on a deserted road, we weren’t kidding; the investor has time now; soon, however, time will be running out.
Along with this, globally {do you like that word?}we have been enjoying the fruits of low labor costs. We do not expect these costs differentials to change soon, but neither do we expect that labor costs will further reduce; all of which brings us to another thought: Inasmuch as this cheap labor seems now to be as cheap as it is going to get and, considering that the costs of transporting goods from thither to yon, will not be cheaper, we further add to this mix, the cost of raw materials, which are unlikely to attenuate and, tada! We have: Inflation. “Okay, so what” you say, but just think: if wages are not accelerating to the upside, and money is becoming more costly to borrow, from where then, is this extra moolah to come? No, we don’t think it will be the consumer, who has, by now, probably bought enough toys to slake any significant consumer-buying urgencies. We believe that buying will probably initiate when corporate America realizes that it has to start to replace its now-aging technology. We believe that the last massive upgrade seen for both hardware and software was just before the millennium. Microsoft will be producing its newest Windows software, named VISTA; they hope it will arrive sometime in 2007 as forecast (theirs). With this software, to be available to corporations, probably before we can get our hooks onto it, there will be the usual, needed upgrade in hardware to run the stuff. Purchasing managers have been stalling on buying hardware in anticipation of the requirements for satisfying this known upgrade. Slowly, those purchase orders will begin to appear and, much as in the turn of the century, these orders will stimulate the technology sector enough, to create another run on technology stocks. Thus, in our humble opinion, the next buying spree will be corporate.
While we have spoken to the stagnant wage growth here in the USA we are not speaking of white collar workers but rather, the blue collar workers. It seems that the higher income individuals continue to enjoy the rewards of executive pay, while the worker bees are working for the same paycheck, albeit with fewer benefits.
As to the market: It seems as though this market is getting used to the conflict in the Middle East and is again watching earnings and economic data. We do have the liability of weekends, which have been addressed by selling out, on Fridays and rebuying on Mondays; that is, so long as we haven’t seen anything too awful over the weekend. Why? Simply stated, we don’t need the risk of the weekend, when we can’t trade or get out of our positions. Better to be flat than at risk, especially with the pressure cooker of emotions and ammunition out there.
Tuesday: July consumer confidence is released at 10:00 and June existing home sales are released at 10:00. Wednesday: The Federal Reserve Beige book is released at 02:00. Thursday: June durable goods are released at 08:30, June new home sales at 10:00 and mutual fund sales and redemptions are released. Friday: 2^nd quarter GDP is released at 08:30, employment cost index is released at 08:30, housing vacancies are released at 10:00 and weekly leading index is released at 10:30.
The put/call ratio closed the week at 116/100 down from the previous 121/100. The VIX closed the Friday options expiration session at 17.40, down from the previous week’s 18.05 but higher than last month’s 15.89 and last year’s 10.52. A word about the VIX. This index has begun a rally and as such, we believe that until the uptrend line on the VIX is violated, we will enjoy an expanding range to the upside. The short-term uptrend line is at 15.16.
The US Dollar index remains above the uptrend line, dating back to May 15, 2006. After a three day sell-off in the US Dollar index, we continue to have some downside bias. The stochastic indicator is issuing a continued sell-signal, as are all the other indicators that are followed in our analysis. The 5-period exponential moving average is at 85.95. The top of the Bollinger Band is at 86.82 and the lower edge is seen at 84.32. The uptrend line is seen at 84.82 for the Monday session. A decline to that level is possible, without disturbing the upside bias of the chart. On the other hand, for this market to look better, we need to see a close above 87.05, the high of the July 19th session. If we do a simple Fibonacci retracement from that July 19^th high, we find that we closed close to the 50% retracement number and, that there will be support at the 62% retracement level of 84.43. Frankly, we would prefer to use the uptrend line of 84.82 as a stop for a bullish position. The weekly chart is friendlier, showing that last week we managed to close, just marginally, above the downtrend line; however, that wasn’t very convincing.
The Euro rallied, in the Friday session and closed above the long-term uptrend line, for the first time in 4 sessions. The stochastic indicator is issuing a continued buy-signal, as are all the indicators we generally consider. The 5-period exponential moving average is at 1.26878. The top of the Bollinger Band is at 1.29281 and the lower edge is seen at 1.25568. The weekly chart looks as though the Euro is continuing its downside movement. The stochastic indicator is issuing a sell-signal, but our own indicator is issuing a buy-signal. The RSI is curling to the upside, although the Thomas DeMark Expert indicator is not issuing anything of value. We did see the weekly close above the uptrend line. We have two downtrend lines on the Euro which are important to clear. The first is the level at which we closed the Friday session: 1.27370 and the second, is at 1.28440. If we can stay above the one just cleared and get above the second downtrend line, we should be set up for a rally to the 1.30667 level. This is, all: basis, the weekly chart.
The S&P 500 September futures contract issued a mechanical buy-signal in the Wednesday session. Again, we caution that this signal is mechanical; we do not alter or touch anything to get this one. The stochastic indicator is issuing a continued sell-signal. Our own indicator is just crossing and will issue a sell-signal in the Monday session. The RSI is pointing to lower numbers, but the Thomas DeMark Expert indicator is issuing a continued buy-signal, at overbought levels. The 5-period exponential moving average is at 1251.06. The top of the Bollinger Band is at 1297.04 and the lower edge is seen at 1230.13. The weekly charts may have a possible buy-signal from the stochastic indicator, our own indicator and the RSI; however, this is a possible, “not-yet-there,” signal. None of the indicators has issued a buy-signal, at this time, but seem poised to do so. The weekly uptrend line is seen at 1235.20, for this week. If we close below this level, we will surely visit the lows of October 14, 2005; that low is 1200.80, yikes! The monthly chart looks negative, with all indicators issuing a sell-signal. There is a positive on the monthly chart and that is: this month, our low was higher than the previous month.
The NASDAQ 100 September futures contract in the Friday session, came within one point of the previous low seen on July 18, which low was 1458.00. The stochastic indicator, our own indicator, the RSI and the Thomas DeMark Expert indicator, all are issuing a continued sell-signal. Both the RSI and stochastic indicators are at oversold levels. The 5-period exponential moving average is at 1479.08. The top of the Bollinger Band is at 1601.44 and the lower edge is seen at 1433.69. The weekly chart looks awful, but seems to be in too steep a decline for it to continue too long at this angle. If the bottom holds, we could see a rally back to the 1532-1533 area, with some resistance seen at 1494.50 and 1515.09, along the way.
The Russell 2000 declined in both the Thursday and Friday sessions. Sadly, the Friday session low, removed the previous low of 673.40, seen on June 14th. This is not a good thing, if you are of the bullish ilk. The stochastic indicator and all the indicators we generally follow are uniformly issuing a sell-signal. The 5-period exponential moving average is at 685.85. The top of the Bollinger Band is at 7.41.03 and the lower edge is seen at 665.16. The weekly chart does not look good, either. On the daily chart, there is a short-term downtrend line at 705.93 and a longer-term downtrend line, at 718.45. To turn this chart to the bullish side, the very least that would be needed would be a close above the short-term line. Even the monthly charts look bad and show that we have an immediate liability to the 658 area. It should also be noted that the decline in the Russell 2000 was twice as sharp as that seen in the Russell 1000; thus, the rally, should it come, will reflect a similar behavior. Should the rally fail to be as robust as that, we would “duck and cover.”
The Continuous Commodity Index fell in the Friday session at the New York Board of Trade. This index, a better gauge of commodity prices than is the Jeffries Reuters CRB, seems to be feeling the pangs of a possible economic slow-down. The stochastic indicator is at oversold levels and looks as though it could issue a buy-signal as early as the Monday session. Our own indicator is going sideways and not really issuing anything. None of the other indicators are telling us anything of value, other than that the index is oversold. The 5-period exponential moving average is at 380.97. The top of the Bollinger Band is at 400.02 and the lower edge is seen at 375.35. We have definitely broken to the downside and are in danger of retesting the June lows of 363.63. The weekly chart has a mechanical sell-signal. The stochastic indicator and the other indicators, except for the Thomas DeMark Expert indicator, which is pointing higher, are all issuing a continued sell-signal. The monthly charts are much more positive than are the others, but all indicators are issuing a sell-signal.
September cocoa had a bad week. The market was flying high, when profiteers entered and gave cocoa a reality check, sending it back to the congestion area it had been in, prior to the recent run-up. The stochastic indicator is oversold and continues to issue a sell-signal. The RSI is diverging slightly with a higher low than seen in the Tuesday session. Our own indicator is slightly positive, but not really tilting. The Thomas DeMark Expert indicator is going sideways. The market is extremely oversold, but can remain that way for a while. We have noticed that we have an 8-count on the bottom. The candle seen on the weekly chart is huge, demonstrating the 2-handled, fall-from-grace, which cocoa endured. The indicators on the weekly chart are all pointing to lower levels. The monthly chart has a positive that we can point to; the lows are getting higher.
September coffee took a hit in the Friday session, at the New York Board of Trade. The curious thing we noticed was that when all seemed gloomiest, the ring and the trading was the dullest. The stochastic indicator is issuing a buy-signal, as is our own indicator. Both the Thomas DeMark Expert and the RSI are also issuing a buy-signal. The 5-period exponential moving average is at 96.67. The top of the Bollinger Band is at 104.64 and the lower edge is seen at 94.23. The downtrend line is at 95.95 for the Monday session. The weekly chart is more troubling than the daily chart. The indicators continue to issue a sell-signal, although they are at oversold levels. The monthly charts are oversold, but not indicating that there will be a bounce. The lowest low we could find was 91.60, from November of 2004. This week will be a very telling week for the coffee market.
August crude oil has a doji-like candle, seen in the last session. The stochastic indicator is issuing buy-signal, as is the RSI. Our own indicator has not issued a buy-signal at this time, but is curling to the upside and will probably issue a buy-signal in the next session. The 5-period exponential moving average is at 73.80. The top of the Bollinger Band is at 76.98 and the lower edge is seen at 72.00. The weekly charts show that we are in a holding pattern, not really making progress to the upside, nor are we making progress to the downside. The weekly indicators are issuing a sell-signal. The Thomas DeMark Expert indicator is the only one diverging, issuing a buy-signal, but at overbought levels. The monthly charts are overbought and the chart looks like a market in a continued uptrend.
August natural gas looks as though it could be forming a “W” pattern. We will not believe that it is a “W” until it closes above the 6.46 level. That would project a rally to the 7.60 level. The stochastic indicator is issuing a continued buy-signal, as is the RSI and our own indicator. The Thomas DeMark Expert indicator is really not telling us anything. The 5-period exponential moving average is at 5.995. The top of the Bollinger Band is at 6.36 and the lower edge is seen at 5.353. The weekly chart is not so positive, as is the daily chart, but neither is it that awful. The monthly charts show: all indicators issuing a buy-signal, with a doji-like candle in the last month of trading. This is good for the bulls because this indicates that we could see a rally. August heating oil has a doji-like candle, seen in the last session. The market has been trending lower for this past week; thus, this candle indicates that the direction could be changing. The stochastic indicator is issuing a buy-signal, from oversold levels. Our own indicator, as well as the RSI, is issuing a buy-signal; only the Thomas DeMark Expert is issuing a sell-signal and, is at oversold levels. The weekly chart has a rather large red candle with a lower high and a lower low. This, obviously, is not a positive reading. The stochastic indicator is issuing a continued sell-signal and is at oversold levels. The monthly chart does not add any positive information to this analysis. If long, be careful.
You would think that with the entire crisis on the globe today, that gold would be on an upside tear; not so, says the chart: August gold has a doji-like candle, created in the Friday session at the COMEX. The stochastic indicators, as well as all the other indicators we follow, are issuing a continued sell-signal. Gold closed below the uptrend line on Friday. Should this situation not be reversed within a day or so, we will have to turn negative on gold. The 5-period exponential moving average is at 633.60. The top of the Bollinger Band is at 666.00 and the lower edge is seen at 610.60. The weekly chart has a bearish engulfing candle, seen last week. This means that we expanded the range of the previous week and closed near the lows of the week. The stochastic indicator, the RSI, and our own indicator, are all issuing a continued sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal, but is at overbought levels. This week will tell a lot for the gold bugs. At the moment, we are cautious, but would be buyers at the 587, or so, level.
NYA CASH (7953.14)
Resistance 7986.95 7992.02 8038.11 8062 8105.04 8126.32 81.41.49 8155.05 8169.07 8189.11 8204.31 8241.15 8252 8271 8282 8290 8322 8361 8390 8400 8422.24 8438.02 8478.49 8494.40 8512 8526.76 8580 8598 8634.88(H)
Support 7924.62 7901.40 7897.69 7883 7872 7855 7805 7798.30 7780.33 7753.95 7739.47 7716 7708.11 7693 7677 7667.64 7642.81 7634.58 7621.26 7599.78 7566.02 7546.67 7529.15 7516.48 7498.75 7470.90 7455.70 7422.77 7407 7380.75 7369 7339 7316 7293 7280 7263.32 7251.87 7233 7214 7200 7174.95 7160 7138 7116.60 7107 7091 7084 7060 7047 7028 6993.30 6971.22 6958 6936 6924.00 6913 6906.23 6887 6843 6800 6786 6749.41 6701.47 6699.84 6680
RUI CASH (672.40)
Resistance 675.65 678.33 681.17 684.89 688.71 692.41 694.12 696.71 700.64 703.79 706.22 710.69 714.97 717.19 719 722.86(H)
Support 670.69 667.14 665.05 663.18 661.28 658.23 656.20 653.80 650.61 647 644.67 641.46 638.70 635.58 633.87 631 628.46 624.98 621 619.20 617 614.25 611.70 609 607 604.665 602.50 599.39 595.70 593.40 590.58 588 585.27 582 579.24
Russell 1000 Value (715.11)
Resistance 718 720 722.96 725.26 727.53 729.46 731 734 737 740.25 744 748.74 (H)
Support 713.53 710 708.98 705.80 703.39 701.38 700.34 697.65 695.98 693.38 690.61 687.26 684.85 683.16 679.76(just go short) 677 674 671.25 669.40 667.70 666 663.44 661 659 656 653 650 648.11 644.62 641.05 640 638.05 635 632.90 630 627.20 624.61 620 615 613.48 610.29 608.48 607.76 606.92 604.91 599.92 596 593.73 590.6
Russell 1000 Growth (482.72)
Resistance 487.88 490 492.80 495 498 500.03 502.52 504.29 506.74 508.43 510.32 513.71 516 520.25 522 525 527 530 532 534.43(H) 536 539
Support 481.43 477 475 471 468 464 462 460.87 457.82 455 450.31 445.34 443.88 442 440 438 436 434 432 429 427 425 423 421 418.68 416 414 412 410
TO A0 (Russell 2000 cash) (681.24)
Resistance 684.90 687.29 690.14 694.20 696.04 701.16 703 706 709.30 711 714.32 716 718.52 720.32 723 725.08 729.55 731.14 735 737.45 739.75 742.40 746.09 749.70 753 755 758.12 761 764 767 772.12 774.71 776 779 781 784.62(H)
Support 679 677.08 673.22 671.98 669.05(just go short) 666.36 663.65 659.35 655.95 653 650 647.35 644.33 642 638 635.33 632.73 630.40 628.54 626.91 624.41 621 618 615.31 612.71 609.41 607 601 596 593 590.53 587 584 579.38 577.93 573 570 567 565.21 559.70 558.58 554.13 551.87 548.45 545 541.96 538 536 533 529 526
SPX CASH (1240.29)
Resistance 1242.70 1248.29 1257.98 1261.02 1265.48 1272.47 1277 1281.40 1284.75 1291.94 1295.57 1296.35 1306.59 1313.92 1319.85 1326.53(H)
Support 1235.18 1231.57 1228.45 1222.52 1219.29 1211.27 1202.35 1199.71 1195.90 1192.34 1187.13 1179.59 1175.44 1171.35 1168.20 1164.50 1161.43 1152 1147 1140 1132.84 1130.54 1128 1124.62 1120.19 1118.60 1110 1094 1090.19 1087 1079 1068
NDX CASH (1451.88)
Resistance 1456.38 1475 1480.31 1490.53 1500.18 1511.53 1522 1533.71 1538.25 1553.09 1576.79 1589.82 1590.83 1595.29 1606.37 1618.85 1628.25 1635.81 1648.23 1652.26 1660.82 1676.63 1685.66 1697 1706.33 1713.84 1720.15 1724 1735.50 1741.35 1749 1761.46(H)
Support 1448 1438 1428 1420.79 1412.63 1408.59 1399.05 1397.50 1388.20 1380 1374 1366.73 1356 1348.27 1334 1320.95 1309
DX U6 (85.67)
Resistance 85.78 86.00 86.16 86.45 86.68 86.70 86.99 87.09 87.24 87.62 87.67 87.77 87.80 87.96 88.08 88.13 88.19 88.27 88.33 88.45 88.33 88.51 88.60 gap to 89.17 89.27 89.37 89.39 89.52 89.69 89.84 89.90 89.99 90.05 90.17 90.26 90.34 90.79 90.99 91.06 91.16 91.18 91.22 91.33 91.49 91.55 91.60 91.68 91.74 91.98 92.05 92.27 92.45 92.54 92.61 92.80 93.00 93.28
Support 85.60 85.49 85.32 85.27 85.16 85.01 84.66 84.53 84.50 84.42 84.37 84.23 84.16 84.12 84.01 83.88 83.79 83.67 83.60 83.57 83.47 83.41(I) 83.30 83.15 83.05 82.99 82.86 82.72 82.65 82.59 82.37 82.18 82.02 81.98 81.81 81.75 81.66 81.48 81.39 81.31 81.25 81.12 81.00 80.98 80.69 80.22(4/28/95)
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282

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