Option Queen Letter

Like it or not, we, you and I, all of us are living in an era of social and societal meddling.
If it were but good, rather than just well intended, we might find it in our hearts to forgive the muddling of their meddling. But to confuse good intentions with dilatory results is to fall into the camps of these meddlers. This is not what America was designed to encourage and its proliferate use, whether by Government or by political ideology, especially when reviewing the history of motivated, albeit incompetent good intentions leads to inescapable questioning.

We have to ask: What is so good about an economy slowing down in an environment which has been described, by some of the cognoscentii as stagflation?If the economy slows won’t that have an effect on corporate profits and hence, the tax receipts from those very corporations whose success is linked to the national economy? We are apparently confused as to the wonderful value of a slowing economy. Don’t you think it would be better to have such a “red-hot” economy that the FOMC has to keep raising the rates? These are but a few of the questions whose answers you might ponder as you stumble into the market. While we support the notion that you should have some investments, shouldn’t those investments be of the sort that pays a dividend or a yield? Where is the growth, if the economy is slowing?
This line of thought brings us back to some financial basics. We need to identify that money in our portfolios which is set aside for speculation. This means that we should sit down and decide how much of our portfolios should be ear-marked for risk. Next, take another look at said portfolios and decide how much money will be needed for the short-term, and how much will be needed in, say 2 years, 5 years and 10 years. Now, you are now beginning to think as you should be thinking. Always, think of risk consistent with your own measured comfort zone. If your portfolio keeps you awake at night, change it to a less risky profile. Perhaps these are not thoughts permeating your consideration when buying a stock, a bond, a commodity, a mutual fund, a hedge fund, etc, BUT they should be. If it is a “hot stock that you just know is going to rally,” take your risk capital and use that, and only that; don’t use your mortgage money on any outside, sure-thing, could be great, issue. The risk is implicit, that however great it might seem, it just might not be as advertised, representing, rather, a large hole in which you are tossing away your money, however hard-earned.
Why do we mention this now? Simply because the market is going through a tough period, likely to lead to more manic behavior than is usually seen. Have you been looking at the Dow Jones Transportation Average? We suggest that you take a look; while it took back much of the 2-day sell-off of last Wednesday and Thursday in its Friday action, this index looks awful. Our status as a debtor nation is bound to be tested. We have no idea when, but we do know that sooner than expected, these matters appear and do not have a history of good results.
As to the elections, coming this Fall, to a neighborhood near you, the theme is; “throw the bums out.” It appears that if you are up for re-election, you will have a serious challenge on your hands. Many people are unhappy with the congressional representation that they have, and blame their representatives for a blue collar slow-down and a white collar rally. In plain English, the worker bees are getting starved and the queen bee is getting fat. Legal immigration and minimum wage are not the real problems; it is, rather, more a globalization problem, which may be good for prices, but all too clearly, bad for the blue collar workers.
You see, as the housing market softens, the cash in that asset that has been available for consumer spending, also becomes restricted. As mortgage costs increase, discretionary income decreases. While we expected to have seen this effect unfold somewhat sooner than it did, it is unfolding now. We are aware that many of the many exotic financial instruments placed on housing and on speculation in real-estate, will reset or become payable, starting in 2007. This is not a good thing for an economy, slowing down. While it is a good thing in a low interest rate environment, which we really continue to enjoy, if rising costs, related to taxes, utilities and of living, continue to accelerate, these costs necessarily restrict the amount of free cash flow left for the consumer. Now, as the economy slows, corporations will begin to feel these effects. Corporations run mean and lean; they have no problem with removing the excesses in their systems. Bye-bye, worker bees! Further, if corporations are forced to pay higher wages, they will cut benefits; these will then have to be picked up by the worker. The other side of that coin is, that when workers lose these benefits, they may well choose to have no benefits rather than to pay out the high costs of medical insurance, or to pay or bank for their own retirement savings accounts. This should lead to an increase in uninsured people. These uninsured people will continue to use the system, but will be unable to pay for the care, bringing the cost back to the facility and thus, back to the tax payer.
Monday: July Chicago PMI is released at 10:00 and Janet Yellen, SanFrancisco’s Fed President speaks. Tuesday: July’s report from Challenger, Gray & Christmas is released at 07:30, US July auto sales are released, June personal income and consumption are released at 08:30, June construction spending is released at 10:00 and July ISM index is release at 10:00. Wednesday: the Reserve Bank of Australia releases its interest rate decision. Thursday: The Bank of England releases its interest rate decision, the European Central Bank releases its interest rate decision (expected to raise ¼), and June factory orders are released at 10:00. Friday: July nonfarm payroll and unemployment rate is released at 08:30.
The put/call ratio for Friday closed at 107/100 down from the previous 116/100, this is a neutral reading. The VIX closed the Friday session at 14.33 down from the previous week’s 17.40, but higher than last month’s 13.08 and higher than last year’s 11.57. The VIX imploded this past week and is setting up for a test of the uptrend line at 13.88. We should see a point of inflection in the Tuesday session which means either we remove the downtrend line of 14.60 or we go back and test the 12.74 lows.
The US Dollar index retreated, following the GDP figures released on Friday. This decline was based on the anticipated “pause” in the interest rate hikes, dished out by the FOMC. Next week we can look forward to another FOMC meeting. This week should continue to be an interesting week for the US Dollar index; we have the Reserve Bank of Australia, The Bank of England and the European Central Bank, all with interest rate decisions. On Friday, the US Dollar index removed the 85.15 low, opening the door to the 84.42 level. The stochastic indicator is issuing a continued sell-signal and is getting oversold. Both the RSI and our own indicator are continuing to issue a sell-signal; neither is oversold. The Thomas DeMark Expert indicator is not issuing anything of value. The 5-period exponential moving average is at 85.63. The top of the Bollinger Band is at 86.84 and the lower edge is seen at 84.88. The weekly chart is sending out mixed signals: three of the four indicators that we look at are negative, with only one, positive. The monthly chart continues to look negative.
The chart of the Euro looks positive, with a bullish engulfing candle left, as a result of the Friday session. The stochastic indicator is issuing a continued buy-signal, at overbought levels. Our own indicator and the RSI are issuing a continued buy-signal. The Thomas DeMark Expert indicator is issuing a sell-signal; so there you have it: 3 up and 1 down. The 5-period exponential moving average is at 1.27343. The top of the Bollinger Band is at 1.28510 and the lower edge is seen at 1.25529. The weekly chart continues to look positive; however, should we close below the 1.25050 level, we would become very concerned about the chart. The Euro closed just a hair away from the weekly downtrend line, at 1.28030. This number will be slightly lower for next week. Should we close above that level, we will have opened the door to the 1.29 area and the highs of this year.
The S&P 500 futures contract was the beneficiary of poor economic data. The rally seen in Friday was robust. We have an 8-count as a result of that rally. The stochastic indicator, our own indicator and the RSI are all issuing a continued buy-signal, but are at overbought levels. The Thomas DeMark Expert indicator is at overbought levels, but not issuing any signals at all. The 5-period exponential moving average is at 1273.24. The top of the Bollinger Band is at 1290.38 and the lower edge is seen at 1232.00. We see some resistance at 1289.70, just a hair away from the Friday close. The weekly chart looks as though the market rally could continue a bit longer. The stochastic indicator, the RSI and our own indicator are issuing a continued buy-signal. The monthly chart does not look as good as the weekly chart and would serve to keep us cautious. This week we have the “Jobs data” which is an important data point. Monday is the last day of the month and we can also expect to see some 401K money enter the market. As you know, the end-of-the-month gyrations, are generally positive, giving the market a lift.
The NASDAQ 100 is not so overbought as is the S&P 500. The stochastic indicator is issuing a buy-signal, as are all the other indicators. Only the Thomas DeMark Expert indicator is overbought; the rest are not there at this time. The 5-period exponential moving average is at 1501.34. The top of the Bollinger Band is at 1535.24 and the lower edge is seen at 1453.47. The market seems to be putting in a rounded, saucer-like bottom.
The weekly chart shows us that the trend of the market has been and continues to be, to the downside. We are getting a buy-signal from most of the indicators, but until the downtrend line is broken, we will remain cautious on this market.
Would you believe that the Russell 2000 had an inside day on Friday; it sure didn’t feel like one. The market bulls regained control and ran with the ball to the upside of the chart. The stochastic indicator is issuing a buy-signal, as are all the other indicators. The 5-period exponential moving average is at 696.08. The top of the Bollinger Band is at 716.67 and the lower edge is seen at 670.83. The Russell 2000 did close above the downtrend line, which has been holding this market down for weeks. The weekly charts show us that the downtrend is still in effect and that the indicators are not so friendly. With this information, we will remain cautious on this index.
The continuous commodity index enjoyed a positive week, reigniting the idea that commodities are not dead money, yet. Many of the media had declared this a fact, last week. The stochastic indicator is issuing a buy-signal, as are all the indicators. What is more important is that there is plenty of room to the upside. The 5-period exponential moving average is at 385.84. The top of the Bollinger Band is at 339.54 and the lower edge is seen at 376.58. The weekly charts continue to support our bullish view of commodities. All the indicators are issuing a buy-signal. The monthly chart also looks okay; however, the stochastic indicator seems to be making lower highs, which, is not a good thing. We will keep an eye on this.
The only thing nice that we can say about September cocoa is that it seems to have stopped falling. The stochastic indicator is oversold and is giving no signal at all. The RSI has rallied to just slightly above the oversold line and is now going sideways. Our own indicator is going sideways, as is the Thomas DeMark Expert indicator. We did have a red-nine-count and a tiny rally, after that event. The 5-period exponential moving average is at 14.93. The top of the Bollinger Band is at 17.55 and the lower edge is seen at 13.65. The weekly chart looks worse than does the daily chart, with all of the indicators pointing to lower levels. On the flip side, the indicators are oversold on the weekly charts. The monthly chart has a bearish, engulfing candle, and still no good news for the bulls.
We hear that there are supply problems in the Robusta, but none in Arabica. Okay, we’ll drink to that. Apparently, the rally seen in the Robusta contract, has not ground thru to the Arabica contract, which has, for about a month, been sloshing around its lows. Now that the product is beginning to percolate, we hear whispers about a drought. What will coffee do in the coming week? Well, if there truly is a shortage in Robusta, that shortage will bleed through to the NYBOT product as seen in the Friday session. The market has a 25 cent gap in the chart. Friday, we witnessed one of the best rallies seen in a very long time. It was down-right-scary. The ring believed that this rally would end as previous rallies have, with the usual sell-off, but that did not materialize. Rather, we saw the market drift down after the initial buys were satisfied, but the slow erosion of price did not last, and nibbling buys came into the market, which, by the close of the session, became rather large bites of buyers. Will this buying continue into the Monday session? The stochastic indicator is issuing a continued buy-signal, as are all of the other indicators. The 5-period exponential moving average is at 97.10. The top of the Bollinger Band is at 101.24 and the lower edge is seen at 93.37. The weekly chart shows a bullish, engulfing candle we have not yet broken the downtrend line, but a close over 100.80, will remove that problem. The indicators are uniformly issuing a buy-signal. A close over 105.90, will give us a short-term buy-signal, on the monthly chart. The indicators are oversold on the monthly chart and, it looks as though this rally could be for real, but only time will tell.
September crude has a doji-like candle, as a result of the Friday session. The stochastic indicator is issuing a continued sell-signal, at oversold levels. Our own indicator and the RSI are in agreement with this sell-signal. The Thomas DeMark Expert indicator is issuing nothing of value. The 5-period exponential moving average is at 74.07. The top of the Bollinger Band is at 78.44 and the lower edge is seen at 72.19. The weekly charts show that we have a liability to the 69.50 area. The stochastic indicator is issuing a continued sell-signal, as are both the RSI and our own indicator. The Thomas DeMark Expert indicator is issuing nothing of value. The monthly chart pattern is friendlier, however the indicators continue to point to lower levels, but are at oversold levels.
September natural gas has a very clear uptrend. It almost looks artificial, in that it is so text-bookish. There is a doji-like candle, which is a warning of a possible transition. The stochastic indicator is overbought, but issuing a continued buy-signal. The RSI is approaching overbought and is indicating that higher prices can be seen. Both our own indicator and the Thomas DeMark Expert indicator are issuing warnings that there could be a price decline coming; both are issuing a sell-signal. The 5-period exponential moving average is at 6.921. The top of the Bollinger Band is at 7.320 and the lower edge is seen at 5.452. The weekly chart looks rather bullish, but remains below the downtrend line, at 7.598. The stochastic indicator and all the other indicators are issuing a continued buy-signal. We are below the monthly downtrend line, but all indicators are issuing a buy-signal. We believe that natural gas will proceed higher. Lock in your prices now, ahead of the winter rush.
It looks like you can wait with your heating oil, lock in price, for maybe a week. The stochastic indicator, the RSI and our own indicator are all issuing a continued sell-signal, but are at oversold levels. The Thomas DeMark Expert indicator is overbought, pointing to higher levels. The 5-period exponential moving average is at 2.0320. The top of the Bollinger Band is at 2.1578 and the lower edge is seen at 1.9699. The weekly charts indicate that so long as we do not break the low of 1.9750, we should be okay. The stochastic indicator is curling to the upside, but continues to issue a sell-signal. The other indicators are less clear. We are moving to the December Gold contract, today. Today, we will have a point of inflection in the December gold contract. What does that mean? Well, it means that there will be a dramatic move in gold, today. The uptrend line is seen at 642 and the downtrend line for the Monday session, is at 649. Should we close above that line, we will see a run, back to the 690 level. The stochastic indicator continues to issue a buy-signal, but it is losing velocity. Our own indicator has a similar pattern and the RSI is getting rather flattish. The Thomas DeMark Expert indicator is overbought and continues to issue a buy-signal. The 5-period exponential moving average is at 641.50. The top of the Bollinger Band is at 681.20 and the lower edge is seen at 618.40. The weekly chart does not look as good as does the daily chart. We have mixed signals from the indicators, some issuing a buy-signal and the Thomas DeMark Expert, issuing a sell-signal. The monthly chart looks good, with the indicators issuing a uniform buy-signal.
NYA CASH (8254.98)
Resistance 8264.11 8271 8282 8290 8322 8361 8390 8400 8422.24 8438.02 8478.49 8494.40 8512 8526.76 8580 8598 8634.88(H)
Support 8231.02 8190 8168 8144.86 8108 8071 8022 8009 7953.14 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 (693.38)
Resistance 694.29 696.71 700.64 703.79 706.22 710.69 714.97 717.19 719 722.86(H)
Support 692 690 688 684.66 678.33 675.65 672.40 670.69 667.14 665.05 663.18 661.28 658.23 656.20 653.80 650.61 647 644.67 641.46 638.70 635.58 633.87 631 628.46 624.98 621 619.20 617 614.25 611.70 609 607 604.665 602.50 599.39 595.70 593.40 590.58 588 585.27 582 579.24
Russell 1000 Value (739.24)
Resistance 740.47 744 748.74 (H)
Support 737 734 730.60 727.53 725.26 722.96 720 718 715.11 713.53 710 708.98 705.80 703.39 701.38 700.34 697.65 695.98 693.38 690.61 687.26 684.85 683.16 679.76(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 (496.56)
Resistance 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 495 492.80 490.70 487.88 481.43 477 475 471 468 464 462 460.87 457.82 455 450.31 445.34 443.88 442 440 438 436 434 432 429 427 425 423 421 418.68 416 414 412 410
TO A0 (Russell 2000 cash) (700.03)
Resistance 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 696 694.20 691 687.29 685.64 681 679 677.08 673.22 671.94 669.05(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 (1278.55)
Resistance 1280.42 1281.40 1284.75 1291.94 1295.57 1296.35 1306.59 1313.92 1319.85 1326.53(H)
Support 1272.47 1265.48 1263.15 1257.98 1248.29 1240.29 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 (1510.30)
Resistance 1511 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 1500.18 1490.53 1485.961451.88 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 85.15 85.27 85.32 85.49 85.60 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 85.07 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)