Option Queen Letter
By my calendar, we are deep into the “dog days of August.” And, with precious little time left for summer sun-frolicking and venturesome holidaying, we can confidently anticipate the further dry-up of volume, while the money-movers have slipped away to vacations, preparatory to calendar recognition that we’re barking up the tree blooming in recognition of the pending EOS (end of Summer) Labor Day holiday. Now that the August options are history, players can leave the scene, knowing that little will change until they return. Remember, the Street lives with Goldilocks and the 3 Bears, although, in the interest of accuracy, we should now delete the Bears, in favor of the Bulls, because this is not the tale of Red Riding Hood—-.
Okay, enough of fairy tales; it’s time to face reality; the fact is that now is a really boring part of the summer, or, so it is traditionally expected to be. But, what happens if, as we suspect, it won’t be that usual, boring rally, resting in a trading range? Will our vacationing traders drop their sun tanning oil to pick up the crude? Will their lubricious concerns generate a slip-n-slide, back to reality? The VIX, a gauge one properly uses to calculate exactly how much movement, to the up- or down-side, the market will see ( as measured by the market’s volatility, as calculated by the strikes; strike prices of the S&P 500 futures options contracts for the next 2 months ) on nearing the yearly low. This measurement is telling us that fear is out; that the movement by the markets will be within the trading range, where it has been for some time. That is why the VIX is low; because that trading range has been a reliable anti-fear reference parameter; thus, there is no reason to pay a premium for risk, if none is perceived. So; back to Goldilocks; scrap the Riding Hood scenario!
The inflation gene is not dead! No matter that the proponents of data would have us believe that “all is well.” “Balderdash” is an expressive expletive for them. Sadly, we are reminded of one of the last scenes from “Animal House”, the film, where the ROTC guy runs around, declaring in the middle of chaos, that, “All is well, remain calm.” Ya, sure, ubetcha! While the inflation figures played well on Wall Street, we continue to express concern over inflation. Especially now, with said inflation creeping into wage costs, and, like “little apples,” will surely be passed-through to the consumer. We all know that wage-cost is a big number and that it is inflationary. Further, we continue to get mixed signals, viz.: The Philly Fed survey vs. the Leading Indicators or: Retail Sales vs. the sinking housing market; but wait, you can refinance your mortgage now, while the 10 year bond is down! That should free up some more of your cash for that “Back to school spending” spree. We do have several things to be grateful for: first, apparel prices have been kept in check by cheap imports, and, electronics have likewise been kept cheap for the consumer. After thinking up those two, we kind of got stuck; oh well, at least we came up with two items and we are darned sure that there are plenty more!
Here is a phrase to which we must all pay heed, uttered in a speech on Wednesday by Dallas Federal Reserve President, Richard Fisher; he said that the central bank “will not tolerate inflation.” Okay, does that mean that if we don’t drive or eat, because he doesn’t measure that, you will remain on “pause;” or, does it mean that if wages go up and said increase is filtered into costs, that you will raise? What are you looking at, anyway? What if the economy slows, as that august group of guru’s has planned (this plan is to rid us of inflation) and we recoil, back into a recession, with cost increases? Yes, that is possible, at least in the short-term. There are too many “what-ifs.” Back to data jumping and to data watching; forget the whales; we watch data! As an aside, we thought that the FOMC would go for an 18th increase, not just because 18 is for luck? but rather, to get this part of our Fed-watching life, over and done. Perhaps, they’re saving lucky 18? for later. We must remind you that, as elections approach, the FOMC, which tries to declare itself “NON POLITICAL” (hunh?), that group will be less likely to do anything in front of an election, so: Next time, or: on to the meeting after the election.
Monday: Stay at the beach; all is quiet here! Tuesday: Atlanta Fed President Guynn speaks and Chicago Fed President Moskow speaks. Wednesday: July existing home sales are released at 10:00. Thursday: July durable goods are released at 08:30, July new home sales are released at 10:00 and Treasury announces the next 2 and 5 year note sizes. Friday: Federal Reserve Chairman Bernanke speaks and we will listen!
The put/call ratio closed the week at a bullish 124/100 up from last weeks 117/100. The VIX, of course, took the opposite road and closed the Friday session at a scant 11.64, down from the previous week’s 14.30, last month’s 17.40 and last year’s 13.42
In an article in this past week’s Barron’s Magazine, Marc Chandler writes: “The short-term speculative market has already amassed a near-record short dollar position”; this fact confirmed by the CFTC’s COT report. It is his feeling that any up-tick in the US Dollar index, will cause massive short-covering, pushing the US Dollar index higher. As you know, a short is a buy-ticket, waiting to happen. Chandler further continues, that in the short-term, this will cause a price up-move. Continuing, he sees a decline in the intermediate-term, as the US Dollar goes into what he labels: “Phase Four”, which he believes will commence, by the end of the year. So, there you have it; up, then down, for the US Dollar index. This is of course, possible and could be verified by the chart, albeit with a few ifs and maybes, along the way. The formation seems to be that of a “W formation.” Now, as you know, there are a few rules that go along with that formation. Rule one: we can not remove the low of 84.17; should that be removed, the deal is off. Rule two: we must close above 85.47. Should Rules one and two hold, we can project a high to 87.05, at a minimum. The stochastic indicator is going sideways in the buy-zone, but without conviction. The RSI is going sideways. And, our own indicator is not issuing anything at all. The Thomas DeMark Expert indicator is issuing a sell-signal. There; you have a mixed bag of tricks. The 5-period exponential moving average is at 84.97. The top of the Bollinger Band is at 86.14 and the lower edge is seen at 84.04. The weekly chart is overbought and seems to be signaling lower levels, with the stochastic, our own indicator and the RSI, issuing a sell-signal.
The Euro is possibly giving us an M pattern, which makes sense, since it is the opposite of the W seen in the US Dollar index. The rules here state that we can not take out the 1.29440 level on the upside and, we must close below the 1.27370 level on the downside. This would help us project a retreat to the 1.25050 level. The stochastic indicator, our own indicator, and the RSI are not helping here, with their flattish look. The Thomas DeMark Expert indicator is issuing a continued buy-signal. The 5-period exponential moving average is at 1.28379. The top of the Bollinger Band is at 1.29574 and the lower edge is seen at 1.26623. The uptrend line on the weekly chart is at 1.26280. When reviewing the weekly chart, we see that the stochastic indicator, the RSI and our own indicator are all issuing a continued buy-signal.
Would you believe that after a 5-day rally, we are overbought? Well, of course we are! Now that we have cleared the 1307.50 level, the all-clear signal has tooted on the Street. Believe that one and I have a few other yarns to spool out, about. All the indicators are overbought and none are issuing a sell-signal. The closest to a sell-signal is our own indicator, but it’s not there yet. No doubt, we will turn down from these lofty levels. The 5-period exponential moving average is at 1296.20. The top of the Bollinger Band is at 1302.66 and the bottom edge is seen at 1260.41. Yes, we know we closed above the top of the Bollinger Band, which adds to our argument that we can’t stay here and will retreat. To where will we retreat? Well, how about 1290.70, for a good start? The weekly chart also looks quite bullish. The indicators on the weekly chart are getting overbought and are issuing a continued buy-signal. The monthly charts are in agreement.
All hail the NASDAQ 100; this has been the winning trade. The stochastic indicator is about to issue a sell-signal, as is our own indicator. Both the RSI and the Thomas DeMark Expert indicator are going sideways, at overbought levels. The 5-period exponential moving average is at 1560.71. The top of the Bollinger Band is at 1575.12 and the lower edge is seen at 1456.92. Yes, we know that we are above the top of the Bollinger Band; we have been there for three days. No, we can’t stay there much longer, without a correction, which we will have. Again, the weekly charts verify the daily, with the bullish look. The indicators are issuing a buy-signal on the weekly chart. We could see a retreat to the 1540 level and would continue to remain positive on this market. The weekly chart shows that the NASDAQ continues below the downtrend line and, that it is possible and likely, that we will be turned away at the 1601 to 1610 level. We are not really quite ready to throw away our bear claws; we are just in costume, masquerading as a bull for a little while.
We are looking for a correction in the Russell 2000, beginning at the 719 level. We might not even get to that level, before feeling the sting of a retreat. The stochastic indicator is issuing a continued buy-signal, but really going sideways. Our own indicator is curling over to the downside and is not issuing a signal. The Thomas DeMark Expert indicator is issuing nothing, but going sideways, at overbought levels. The 5-period exponential moving average is at 706.31. The top of the Bollinger Band is at 716.75 and the lower edge is seen at 679.04. The weekly chart is giving us mixed signals, but we should mention that last week was a fabulous week for the Russell 2000.
The continuous commodity index has retreated below the short-term uptrend line. There is a doji-like candle seen in the Friday session, which indicates that this market could be in transition and might return to the upside. The stochastic indicator, our own indicator and the Thomas DeMark Expert indicator are in agreement and are all issuing a buy-signal. The 5-period exponential moving average is at 384.14. The top of the Bollinger Band is at 401.79 and the lower edge is seen at 375.89. The weekly charts show that the market has dropped below the uptrend line. The weekly stochastic indicator is issuing a sell-signal, as are all the other indicators followed herein. The monthly chart is very positive and remains above the uptrend line. The indicators are and have been overbought, for some time and are now beginning to issue a sell-signal.
Yuck, December cocoa looks awful. The stochastic indicator and all the indicators followed herein, are issuing a continued sell-signal. Here is a scenario: Should we gap, open higher and not trade into the real body of Friday’s candle, we could be set up for a bullish reversal; however, there are too many ifs on that one. We just wanted to mention it. The 5-period exponential moving average is at 15.68. The top of the Bollinger Band is at 16.14 and the lower edge is seen at 1499. The weekly charts indicate that December cocoa is oversold; however, the indicators all continue to issue a sell-signal. We would stand aside until clearer signals are seen. Right now, we are inclined to be sellers, even though; we could be setting up for a buy. Remember, the operative words are: ‘could be’!
Give us our daily, Frozen Concentrated Orange Juice (and forgive us from evil). This commodity is waiting for a hurricane and has a moderate storm, priced in (anyone for a job in the Weather Svce?). We had two conflicting reports last week: one, moderate; the other bullish; which to believe? hummmm? The chart is our medium of information and this November’s OJ chart is overbought; not that it hasn’t been overbought for the past month, but here it is, with 3 of the 4 indicators issuing a sell-signal. The only buy-signal is being issued from the Thomas DeMark Expert indicator which, although overbought, is pointing to higher numbers in the future. The 5-period exponential moving average is at 179.83. The top of the Bollinger Band is at 182.12 and the bottom edge is seen at 164.57. Here is the problem with OJ; we have a doji-like candle on the chart, which indicates that the market is in transition; that suggests we could see a change in direction and, we are at the top of the Bollinger Band. True, we were above it on Thursday, but now, we are on it. This tells us that we are overextended to the upside, don’t ya think? The weekly chart is also showing us a grossly overbought market, which could pull back to the 169.70 area and continue its bullish bent. On the daily chart, the uptrend line is at 172.40. Keep tuned for the next exciting chapter of the saga of Frozen Concentrated Orange Juice.
December coffee seems to be backing and filling and, although it has had a two-day sell-off, it has remained above the short-term uptrend line. That line for Monday is at 106.05. Here is the scenario for coffee: If the contract closes above 110.60 and better, 111.50, we will go to 114. Okay, on the other hand, should the contract close below 104.70, bye-bye, coffee; we should, and likely would, visit the 95-96 area. The indicators aren’t any help, because most are neutral, going sideways. The Thomas DeMark Expert has a bend to the upside, but nothing to write home about. The 5-period exponential moving average is at 107.55. The top of the Bollinger Band is at 114.35 and the lower edge is seen at 97.72. The good news is that we have broken the weekly downtrend line. We hear that some fund managers are short Arabica and long Robusta; sounds interesting.
We are moving on to October crude oil, this week. The chart of crude oil emphasizes how steep the recent retreat has been. The stochastic indicator, as well as all of the indicators followed herein, is issuing a buy-signal. The candle seen in the Friday session is a long tailed, small-bodied candle, which illustrates that the downdraft is becoming a bit “long in the tooth.” We wouldn’t be surprised to see a rally back to the 75.25 area. The 5-period exponential moving average is at 73.09. The top of the Bollinger Band is at 78.87 and the lower edge is seen at 71.98. The weekly chart shows more downside liability to the 70.01 area. For now, we believe that there will be a bounce within a day or so.
October natural gas has a doji-like candle on the chart. We seem to be trying to defend this area. The stochastic indicator, as well as all the other indicators, are grossly oversold, and just issuing a weak buy-signal. The 5-period exponential moving average is at 6.987. The top of the Bollinger Band is at 8.227 and the lower edge is seen at 6.505. The downtrend line for Monday is at 7.125. So long as 6.78 is not removed, we will be bullish natural gas, on a short-term basis, but we would require it to close above the downtrend line for longer than a “dead cat bounce” reaction.
Oh dear, poor gold, nobody likes it any more! We do, well so long as it stays above 6.15, we will. The stochastic indicator, along with all the other indicators followed herein, is issuing a buy-signal. The 5-period exponential moving average is at 631.90. The top of the Bollinger Band is at 670.10 and the lower edge is seen at 619.50. The weekly chart doesn’t look all that good. We are getting a mechanical sell-signal, based on last week’s performance. The indicators are uniformly issuing a sell-signal and we are below the downtrend line and below the uptrend line. The monthly chart is confirming the findings of the weekly chart. This week will give us more information on the yellow metal.
NYA CASH (8379.93)
Resistance 8282 8290 8322 8361 8390 8400 8422.24 8438.02 8478.49 8494.40 8512 8526.76 8580 8598 8634.88(H)
Support 8325.51 8296.03 8236 8209.66 8190 8163.26 8140.11 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 (706.26)
Resistance 688 690 694.50 696.71 700.64 703.79 706.22 710.69 714.97 717.19 719 722.86(H)
Support 703.79 701.53 697.41 694.50 690 688 686.50 684 681 678.33 675.65 672.40 670.69 667.14 665.05 663.18 661.28 658.23 656.20 653.80 650.61 647 644.67 641.46 638.70 635.58 633.87 631 628.46 624.98 621 619.20 617 614.25 611.70 609 607 604.665 602.50 599.39 595.70 593.40 590.58 588 585.27 582 579.24
Russell 1000 Value (747.86)
Resistance 748.74 (H)
Support 744 741.51 739.24 735.58 733.51 730.19 727.53 725.26 722.96 720 718 715.11 713.53 710 708.98 705.80 703.39 701.38 700.34 697.65 695.98 693.38 690.61 687.26 684.85 683.16 679.76(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 (509.23)
Resistance 510.32 513.71 516 520.25 522 525 527 530 532 534.43(H) 536 539
Support 508 505.43 503 500 498 496 493 496 493.36 490.56 488.57 485 481.43 477 475 471 468 464 462 460.87 457.82 455 450.31 445.34 443.88 442 440 438 436 434 432 429 427 425 423 421 418.68 416 414 412 410
TO A0 (Russell 2000 cash) (711.68)
Resistance 714.32 716.06 718.52 720.32 723 725.08 729.55 731.14 735 737.45 739.75 742.40 746.09 749.70 753 755 758.12 761 764 767 772.12 774.71 776 779 781 784.62(H)
Support 709 706.61 704.40 700 697.81 693 690 686 682 679.04 676.39 673.22 671.94 669.05(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 (1302.30)
Resistance 1306.59 1313.92 1319.85 1326.53(H)
Support 1296 1293.57 1285.25 1278.90 1268.20 1265.48 1262.08 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 (15.76.46)
Resistance 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 1562 1557 1539.59 gap to 1534.78 1508.94 1494 1486.74 1479.69 1451.88 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 (84.98)
Resistance 85.02 85.18 85.25 85.39 85.49 85.55 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 84.92 84.89 84.66 84.56 84.42 84.38 84.23 84.16 84.17 84.08 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)
by Jeanette Schwarz Young, CFP, CMT
Box** 1952** c/o New York Board of Trade
One North End Avenue
New York, New York 10282