Option Queen Letter

“But median earnings failed to keep pace with inflation for a second straight year. Even as the economy has continued to grow recently, some workers have accepted outright pay cuts, men have dropped out of the labor force, and debt has kept rising relative to income” (This is a quote from a David Leonhardt article written for the New York Times, published on Sunday September 3, 2006.) Of course, in the face of dropping home values, this can percolate into a big problem. Remember, the Fed doesn’t see inflation. Perhaps not, but how about STAGFLATION?

As we all know, globalization has put our workers incomes into competition with workers around the globe. If it is cheaper to get technical support on a Hewlett-Packard problem in India, then that is where your questions will receive an answer’?’ If Canada is cheaper, Canada gets the vote. Not that there is anything wrong with globalization, there isn’t, but one must look at the cause to understand why our American workers just can’t compete with some foreign workers. Yes, the bar-maid will always be local; there is as yet, no way to import a cyber-bar-maid, ( the “as yet” part is real; one day there will be a way) and this keeps the local hamburger flippers, government workers, and employees of their ilk, safe from wage compression. Just look at the garment industry, which once operated many factories here in NYC, wherein masses sewed, cut, etc, all assembled to produce much of the pride attributed in the familiar jingle “Look for the union label”, or the MADE IN USA campaign? These jobs have gone to the cheapest and most efficient producers of finished goods, and for the most part, it isn’t here in the USA. Now, just to be clear, we are believers in the Reagan “Free Trade” approach. So, while our blue-collar workers are taking pay cuts, our health-care system keeps cranking out price increases. When did you ever see college tuition go down? But college tuition is nothing, when you look at the cost increases associated with health-care, drugs, insurance, real-estate taxes, etc? Actually, your education is worth every penny you pay for it because it will provide you with a way to pay all those other bills, by way of your acquired skills.
We need to educate our children in grade school, that only through achieved education can they hope to get ahead, alternative to a skill competence, e.g., carpentry, plumbing, electrical work, handy-man, auto- repair, etc. These skilled occupations, while necessary, do not require a college degree. These jobs will not telecommute, but they do require a skilled person to deliver the service. We have noticed lately that these jobs costs have escalated, almost as quickly as health care. This country has turned into a service economy. We produce things which we absolutely can’t import. There are other jobs which have kept up with inflation and they are Government, state and local jobs. The benefits are fabulous, the pay isn’t bad and the hours are usually good, as well.
We are now entering the well-publicized “worst month of the year, September.” Somehow, when everybody thinks something is going to happen, it doesn’t. The S&P 500 is approaching the May highs. Yes, it is some distance away from that level, but hey, we have time. What is more pronounced about this recent move is that it has been very tedious. True, we broke to the upside on Friday, on low, pre-holiday volume, but we haven’t really moved out of the trading range in which we have found ourselves since May. We are currently at the upper end of that trading range. Our thoughts are: what if the market continues going sideways, stuck in a trading range. Since most expect to see a hardy decline, will they buy the non-decline and thus, push the market to a level from which it will take a spill? That scenario seems to be more likely than to see a quick retreat, just because it is September. Yes, the economy isn’t the performer that it is advertised to be; actually, corporate profits will begin a retreat from their robust recent run-ups. We are hearing more and more sound-bites about that from these companies. We do have an election and perhaps the spectre of Democrats in charge, will be enough to scare the markets that are aware of the tax hikes that will surely follow such an election. There is too much uncertainty to state anything with certainty. Perhaps the fall in October will match that of 1987; this, a more likely event than a September spill, so let’s go for an October Ooops!
Tuesday: Semiconductor book-to-bill is released after the close and Challenger, Gray & Christmas release the August “Job Cut” at 07:30. Wednesday: 2nd quarter productivity is released at 08:30, Mortgage bankers index, ISM non-mfg for August is released at 10:00 and the Beige Book is released at 02:00. Thursday: July wholesale trade is released at 10:00 and San Francisco Federal Reserve President Yellen speaks. Friday: July consumer credit is released at 03:00.
The put/call ratio became more bullish this week with a reading of 180/100 up from the already bullish 170/100. The VIX continues its decline closing the week at 11.96 down from the previous week’s 12.31, last month’s 14.34 and last year’s 13.57. Something must be said here regarding this really low VIX. We are either starting a new era of non-worry, or we are feeling so complacent, that something is bound to happen. We vote for the latter thought.
The US Dollar index was not happy with the reading released, showing that growth of jobs is moderating. This is yet another prop under the FOMC’s decision to pause and, another validation that the pause was called for. We have another FOMC meeting on September 20. Consensus is that this will also be a pause- meeting. Without the probability of a Fed rate hike, the US Dollar is losing one of its value points. Trichett has indicated that the European Central Bank is on an anti-inflation hunt and even Japan seems to be keen about keeping inflation in check. While these foreign bankers see inflation, we here in the USA see none; that is, unless you have to eat, pay insurance, pay for health care, tuition, utilities, real-estate taxes or need to get something fixed. While it is true that the computer is cheap, as is clothing; excluding ‘designer’ of course; when was the last time you could get a dress or a sweater to fix your plumbing problem? The chart of the US Dollar index is consolidating. Yes, it poked its head above the downtrend line, but must have seen its shadow, and quickly retreated. We are seeing high highs and higher lows, which, is a good thing. The chart simply doesn’t look all that good. We are trapped in a narrow range, seemingly unable to break, either above or below well-defined levels. On the upside, the level is at 85.57 and on the downside, 84.17. We have a point of inflection in the US Dollar index, which will occur on Thursday. Expect to see an aggressive move on that date. The stochastic indicator is issuing a sell-signal, as are all the indicators we usually follow. The rub is that none of these indicators are at overbought levels. The most overbought is the stochastic indicator, which is just above neutral. The 5-period exponential moving average is at 84.95, a level at which it has been for days. The top of the Bollinger Band is at 85.52 and the bottom edge is at 84.31; not much change in these numbers, either. The weekly chart clearly shows this coiling range. The indicators are all issuing a sell-signal. Even the monthly chart shows the coil. Something’s got to give and will give soon, on this one.
It stands to reason that if the US Dollar index is coiling, so too is the Euro, which, in fact it is. The chart looks more like a trading range than a coil. The Euro has broken above the downtrend line, although it had a failure in the Thursday session. The stochastic indicator and all the others that we follow, are issuing a uniform buy-signal. The 5-period exponential moving average is at 1.28337; this level has been fairly stable for a number of days. The top of the Bollinger Band is at 1.29118 and the lower edge is seen at 1.27472. These bands have been flat, also illustrating that we are in a trading range and that the volatility of this market has disappeared. Perhaps, now that summer is over, and the trading desks both here and around the world are repopulated, we will make a move and return to a more normal volatility. The weekly charts illustrate that last week was an inside week for the Euro. Even those weekly charts are issuing a continued buy-signal. The monthly chart looks like a pennant. We shall see which way it breaks; our guess: it will be to the upside.
The S&P 500 is range-bound, currently with an upside bias. We have been overbought for the past 3 weeks and remain in that condition. The stochastic indicator and the other indicators, all are issuing a continued buy-signal; here is the new part: they all are exceedingly overbought, at very difficult levels to maintain. What do we mean by that? Well, it is difficult to make further progress to the upside until some of the overbought conditions are relieved. Now, this can be accomplished in one of two ways: either you stay where you are and burn the overbought condition off, rather like burning off moisture on a cloudy day, or you can retreat, removing the conditions as well, even as showers lead to sunshine. When we are as overbought as we currently are, the upside progress seems to be both limited and difficult to complement. The 5-period exponential moving average is at 1306.66. The top of the Bollinger Band is at 1320.00 and the lower edge is seen at 1267.39. We do have a 9-count on the chart, indicating that this rally is long in the tooth. The weekly chart looks as though we could be entering a resistance area. The stochastic indicator and the others are overbought, but continue to issue a buy-signal. We wouldn’t be surprised to see a little give-back in this coming week. We did not say crash; we said, ‘give-back’, say to the 1291-1292 area.
The NASDAQ 100 enjoyed a mediocre rally in the Friday session, with a disappointing failure on a push- the-highs. The stochastic indicator is issuing a sell-signal, along with the Thomas DeMark Expert indicator. Both the RSI and our own indicator are issuing a continued buy-signal. The 5-period exponential moving average is at 1581.26. The top of the Bollinger Bands is at 1620.15 and the lower edge is seen at 1477.74. The weekly chart is overbought by most measures and is entering a very important level of resistance. As with the S&P 500, we continue to believe that some of the overbought condition must be removed, before further progress to the upside can be made.
The Russell 2000 futures made its high in the Friday session, at 01:00 and drifted lower for the rest of the day. This index was a bit of a disappointment in that Friday session, with only a 60 cent gain on the day. The stochastic indicator and or own indicator are both issuing a sell-signal. The Thomas DeMark Expert indicator is simply overbought and staying there, going sideways. The RSI is hugging the overbought line and not indicating anything. The 5-period exponential moving average is at 718.07. The top of the Bollinger Band is at 729.10 and the lower edge is seen at 678.16. We do have a doji-like candle, which tells us that there is a change of direction in the wind.
The continuous Commodity Index made little progress to the upside in the Friday trading session, but managed to stay above the short-term and medium-term uptrend line. The stochastic indicator is about to issue a sell-signal, as is our own indicator. The RSI has already issued a warning, however the Thomas- DeMark Expert indicator is issuing a continued buy-signal. We are getting mixed signals on this one, but we are inclined to believe that further progress to the upside will be seen. The 5-period exponential moving average is at 387.44. The top of the Bollinger Band is at 397.83 and the bottom edge is seen at 377.82. The weekly chart looks like this is a range-bound market, with an upside bias. The monthly chart verifies that finding.
December cocoa enjoyed another upside day in the Friday session. The stochastic indicator is issuing a continued buy-signal, from oversold levels, as is the RSI and our own indicator. The Thomas DeMark Expert indicator is going sideways, at neutral levels. The 5-period exponential moving average is at 14.92. The top of the Bollinger Band is at 16.33 and the lower edge is seen at 14.50. We are in an area of resistance and should find some difficulty, as we approach the area from which our breakdown occurred… We have definitely broken above the short-term downtrend line, but we continue to be below the medium-term downtrend line. The indicators are certainly friendly to an upward move, but the chart is telling a different story. The weekly indicators are painting a slightly different picture; while they agree with the buy-signals seen on the daily chart, they clearly show the damage done to the chart on the sell-off seen early last week. If cocoa can get above 15.15 on a closing basis, it will have another chance for a run to the 16.02 level.
December coffee seems to be trying to hammer out a bottom. While we are making little progress to the downside on pushes, we are making equally little progress to the upside. The stochastic indicator is issuing a sell-signal, at oversold levels. Our own indicator is in agreement with this finding, but seems to be going sideways. The Thomas DeMark Expert indicator is issuing a very mild possible buy-signal and is at extremely oversold levels. The RSI is dead neutral, saying nothing at all. The 5-period exponential moving average is at 107.98. The top of the Bollinger Band is at 113.10 and the lower edge is seen at 104.93. We must add that these numbers are very important numbers because, should December coffee close below 104.55, we would get a sell-signal; on the other hand, a close above 114.20, would cause us to believe that a move to 121 is both possible and probable. The weekly chart highlights the importance of these numbers.
November Frozen Concentrated Orange Juice has been on an upside tear for weeks. The relentless rally suffered its first major set-back on Thursday and Friday. We closed below the short-term uptrend line and below the downtrend line. The stochastic indicators, as well as all the indicators we speak of, are issuing a unified sell-signal. So, where can we go from here? The first level of support will be seen at 176.80. The 5-period exponential moving average is at 181.93. The top of the Bollinger Band is at 190.49 and the lower edge is seen at 169.37. The weekly chart has a bearish engulfing candle, obviously not a positive. The stochastic indicator, et al, is issuing a sell-signal. Before you run out and short FCOJ, remember, this is hurricane season and, unless you have some insider knowledge about the storms this season, this could be a dangerous market to short. On the other hand, should you be one of the lucky ones to be long, either future of call options, you might consider banking some of your profits and let the rest ride.
October crude oil had another bad day on Friday, when it gave up 1.07 on the day. This market has been oversold for some time now. The stochastic indicator is issuing a continued sell-signal. Our own indicator is about to issue a sell-signal and the RSI is pointing to lower numbers. The Thomas DeMark Expert indicator is issuing a continued sell-signal, from extremely oversold levels. All the indicators are at extremely oversold levels and have been there for several weeks. The weekly chart tells us that we have a continued liability to the 64.50 area. The stochastic indicator is oversold, as is our own indicator; both issuing a continued sell-signal. The Thomas DeMark Expert indicator is issuing a buy-signal, from oversold levels. The velocity on the downside seems to be slowing; thus, we might see a bounce fairly soon.
October natural gas plunged last week when Ernesto removed any threat of damage to the Gulf. The retreat was a huge one, leaving a very large red candle on the weekly chart and a drop to levels not seen since January 2005. We have a doji-like candle on the chart, as a result of the Friday session. The stochastic indicator, RSI, our own indicator, and Thomas DeMark Expert indicator are all oversold. Our own indicator is issuing a buy-signal. We seem to be getting some support at these levels. The 5-period exponential moving average is at 6.304. The top of the Bollinger Band is at 7.943 and the lower edge is seen at 6.012. Obviously, we closed below the lower band on Friday, which is generally enough to cause a bounce. Both the weekly and the monthly charts show that we are extremely oversold.
December gold has enjoyed a 3-day rally, after finding support at the 615.50 area. The stochastic indicator is issuing a continued buy-signal, but is curling over to the downside. The RSI is telling us nothing and remains at neutral levels. The Thomas DeMark Expert indicator is issuing a buy-signal. Our own indicator is also issuing a buy-signal, but is beginning to curl over to the downside. There is an important downtrend line at 639.40, which needs to be removed to re-establish a bullish viewpoint. The weekly chart looks okay, but shows the need to cross over the downtrend line. The indicators are issuing a buy-signal on the weekly chart. The monthly chart looks like a pennant, with a possible resolution to the upside.
NYA CASH (8435.68)
Resistance 8443.42 8478.49 8494.40 8512 8526.76 8580 8598 8634.88 8651.74(H)
Support 8422.24 8401.14 8388.68 8335.81 8318.03 8303.73 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 7824.41 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 (711.25)
Resistance 711.92 714.97 717.19 719 722.86(H)
Support 709 706 703.79 701.57 697.41 694.50 690 688 686.50 684 681 678.33 675.65 672.40 670.69 667.14 665.05 663.18 661.28 658.23 656.20 653.80 650.61 647 644.67 641.46 638.70 635.58 633.87 631 628.46 624.98 621 619.20 617 614.25 611.70 609 607 604.665 602.50 599.39 595.70 593.40 590.58 588 585.27 582 579.24
Russell 1000 Value (752.08)
Resistance 752.57(H) 755
Support 749.03 748.74 746.33 745.74 744.82 742.95 739.24 735.58 733.51 730.19 727.53 725.26 722.96 720 718 715.11 713.53 710 708.98 705.80 703.39 701.38 700.34 697.65 695.98 693.38 690.61 687.26 684.85 683.16 679.76(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 (513.55)
Resistance 514.27 516 520.25 522 525 527 530 532 534.43(H) 536 539
Support 511.07 508 505.19 503.53 501.78 498 496 493 496 493.36 490.56 488.57 485 481.43 477 475 471 468 464 462 460.87 457.82 455 450.31 445.34 443.88 442 440 438 436 434 432 429 427 425 423 421 418.68 416 414 412 410
TO A0 (Russell 2000 cash) (721.56)
Resistance 724.79 725.05 729.55 731.14 735 737.45 739.75 742.40 746.09 749.70 753 755 758.12 761 764 767 772.12 774.71 776 779 781 784.62(H)
Support 718.71 714.32 711 708 706.61 704.40 699.24 696.41 693 690 686 682 679.04 676.39 673.22 671.94 669.05(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 (1311.01)
Resistance 1312.03 1319.85 1326.53(H)
Support 1306 1303.80 1295.09 1293.57 1289.49 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 (1589.47)
Resistance 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 1581.91 1570.34 1557.70 1548.07 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 (84.89)
Resistance 84.92 85.27 85.32 85.39 85.49 85.55(I) 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 84.81 84.66 84.56 84.42 84.38 84.23 84.16 84.17(I) 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)
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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