Option Queen Letter

Gridlock, Gridlock, Rah Rah Rah!
Gridlock can be a good thing. A lame-duck President can also be a good thing. Why? Because no more damage will be done; spending will be vetoed (finally President Bush will be able to exercise that power he has ignored); tax cuts will be on the cutting block, the war in Iraq will come to a close (because we think the Republicans got the message on election night that the war is not a “good thing.”) and life will go on. How does it all affect you?

Not much; we continue to feel the bite of inflation on our earnings. True, gasoline prices are down, but summer driving season is over. This week, the Continuous Commodity Index made a new high! What does that mean for you: Well, it means that the prices of agriculturals, metals, softs, and energy are all getting more expensive.
FAIRY TALES FOR ADULTS
Yet, Goldilocks is enjoying her porridge with the bull family; the bears were locked out of the party. Unfortunately, the bears will make their way back home and go through the process, in the courts, of evicting the three bulls from their house and sending Goldilocks to the wolves.
Before you hyperventilate, some of the increases in the costs in this equally-weighted index of 17 commodities, previously called the CRB and is now called the Continuous Commodity index, enjoyed an additional appreciation in price, due to the weak US Dollar. These commodities are priced in dollars and, as the US Dollar decreases in value, the commodities increase in value. Basically, the values of these commodities becomes more expensive for the American buyers, but remains at a flat level for the foreign buyers, who are buying these products with their strong currency. We frequently see the use of such arbitrage in the cocoa market which trades in the USA on the New York Board of Trade and also, trades in London. Naturally, in the USA our product is priced in dollars; in the UK, the product is priced in Pounds Sterling. Thus, when the US Dollar is strong, NYBOT cocoa is sold and UK cocoa is bought, taking advantage of the weak sterling and strong dollar. Ideally, the arbitrageur is looking for price lags, or miscalculations that will give that trade an advantage. This way, the arb is short one and long the other, taking advantage of the mis-pricing that was found. This trade is usually seen in cocoa rather than in sugar, or in coffee, both of which trade in London, as well. Perhaps the reason for the preference for cocoa is that it is the same product. Both with sugar and coffee, we are not trading exactly the same products. Sugar in London is refined, okay, no snide
remarks on that, and coffee in London is Robusta, while in New York, at the NYBOT, it is Arabica. There are hedges between the like commodities, but they are just hedges; in cocoa it is truly a currency-influenced trade.
BI-POLAR MARKET WITH A RUMMY RALLY
This is an options expiration week and, as such, we would expect to see a bit more on the volatility unless, the majority of the options have already been adjusted for the expiration. It would have been prudent to have flattened before the election and, at worst, shortly after the election. We have a feeling that is exactly what caused some of this past week’s gyrations. If so, it will lead to a very dull options’ expiration week. We do have the economic data to help light a fire under the market, but is it enough to reignite the bull or flush out the bear? We frankly feel that the market is really over-cooked on the upside and has priced perfection into the mix. The Rummy rally seen last week, just pushed it further to the euphoric side of its bi-polar behavior. As with the disease, it is difficult to say, when the high will wear off, but as with bi-polar disease, we know the genius produced in these states can be very dangerous.
DATE BOOK
Tuesday: October PPI and October retail sales released at 08:30; at 10:00 we have September business inventories. Hold on to your hats, the minutes of the October meeting of the FOMC are released at 02:00, and we have St. Louis Fed President Poole speaking.
Wednesday:Markets in Brazil are closed, and FRB manufacturing survey for November is released at 08:30.
Thursday: October CPI is released at 08:30, real hourly wage earnings for October are released at 08:30, the Bank of Japan releases its interest rate decision, the European Central Bank releases its interest rate decision, October industrial production and capacity utilization release is at 09::15, Philadelphia Federal Reserve Survey is released at high noon, St.Louis Fed
President Poole speaks, Fed Governor Bies and Fed Governor Kroszner speak.
Friday: October housing starts and building permits are released at 08:30 and Cleveland Fed President Pianalto speaks.
SENTIMENT INDICATORS
The put/call ratio went back to a mighty bullish, with a reading of 145/100; up, from last week’s bullish 125/100. The VIX continued its decline; closing the Friday session at 10.79, down from the previous week’s 11.16, up slightly from last month’s 10.75, but lower than last year’s 11.63.
The US Dollar index began its slide in the early hours of the Friday overnight European session; printing the low at about 04:00 in the morning, EST. The market rallied in the New York session and managed to remove the lion’s share of the day’s losses by the closing bell. This action left a hammer candle on the chart, which gives some relevant hope back to the bulls.
The stochastic indicator is issuing a buy-signal, from very oversold levels. The other indicators, the RSI, the Thomas DeMark Expert and even our own indicator, continue to issue a sell-signal. The 5-period exponential moving average is at 85.11. The top of the Bollinger band is at 86.94 and the lower edge is seen at 84.51. It is interesting to note, that the low of the session was at 84.55, just a shade higher than the lower band. The weekly chart shows that the US Dollar index closed below the downtrend line. The weekly indicators are uniformly issuing a sell-signal. When looking at the monthly chart, it looks as though this has been nothing more than a continuation of the range trading we have seen for months.
The monthly indicators are very mixed. So what does that say about the US Dollar index? The US Dollar is oversold, by most measures, giving us some mixed signals but approaching levels where it will defend itself. We will see a relief rally within the next day or so, but that does not change the trend’s direction which, is decidedly to the downside.
The high flying Euro continued its ascent in the Friday session, but failed. The probe to the upside was met with selling. We were not surprised to see this, especially, with a weekend in front of the Friday US Dollar monthly chart; the monthly chart of the Euro shows range-bound trading with nothing remarkable to report. We will have the Bank of Japan, issuing their interest rate decision and also, we will see the European Central Bank’s decision, this week. Certainly, the European Central Bank’s decision will have a large impact on the Euro. Should the bank remain on pause, it could mean a hair-cut for the Euro.
The S&P 500 daily chart looks as though it is curling over to the downside. This is an options expiration week and we expect that there will be some adjustment to positions, before that expiration. On Friday, the index closed, just cents from the 5-period exponential moving average, 1384.61. The top of the Bollinger band is at 1395.06 and the lower edge is seen at 1366.32. Should the S&P 500 manage to rally above 1395.20, it surely will go for the round number at 1400 and beyond; however; should the index close below1365.60, grab a parachute for the ride down to 1336.00 and 1321.20.
The stochastic indicator is nearing overbought levels, but is curling over to the downside and will issue a sell-signal in the next session or two. The Thomas DeMark Expert indicator is overbought and is going sideways. The RSI is on the overbought side of neutral, going sideways and our own indicator is going sideways.
The weekly chart looks similar to the daily chart, but is more overbought than is the daily chart.
The stochastic indicator, the RSI and our own indicator are all overbought; all continue to issue a feeble buy-signal. The Thomas DeMark Expert indicator is flat-lining, at neutral. The monthly chart looks toppy. The stochastic indicator and the RSI are both grossly overbought and are issuing, nothing. The Thomas DeMark Expert indicator is overbought and pointing higher; however; our own indicator is issuing a sell-signal! All of this leads to the conclusion that the market is overbought and will get a hair-cut.
The foot-note is, that if 1396.06 is removed, expect a small explosion to the upside. The other foot-note is: if 1365.60 is removed, an equal explosion will be seen, but to the downside.
The NASDAQ 100 has been a stellar performer in the past few months, outperforming the other indices. As a result of all of this euphoria, the market has gotten itself extremely overbought. The stochastic indicator is issuing a continued buy-signal, from overbought levels. Our own indicator is also issuing a continued buy-signal, as is the RSI. The Thomas DeMark Expert indicator is grossly overbought and continues to issue a buy-signal. The 5-period exponential moving average is at 1750.30. The top of the Bollinger band is at 1764.27 and the lower edge is seen at 1704.95. The NASDAQ 100 is overextended to the upside; it cannot remain at these overextended levels. Expect to see a retreat or consolidation, beginning immediately. The weekly chart is overbought on all of the indicators except the Thomas DeMark Expert indicator which, is at neutral, giving no signal.
The other indicators continue to issue a buy-signal. The monthly chart shows that the conditions are overbought on all the indicators. All, but the Thomas DeMark Expert indicator, are rolling over to the downside. We have what could be a hang-man candle, on the monthly chart; we shall see. The level you don’t want to see broken on the downside is: 1701.00.
The Russell 2000 recovered from the post-election hangover in the Friday session. The stochastic indicator, our own indicator, the RSI and the Thomas DeMark Expert indicator, all are issuing a continued buy-signal, some nearing and some, at overbought levels. The 5-period exponential moving average is at 768.54. The top of the Bollinger band is at 781.72 and the lower edge is seen at 754.18. If the Russell 2000 can not remove the 780.40 level, expect it to retest the 748.70 level; should it break that number, on a closing basis, you will see a rather speedy retreat to the 716.60 area. The weekly chart looks much like the daily chart, only that the indicators are even more overbought on the weekly chart than the daily chart, but continue to issue a buy-signal. The Russell 2000 has a 13 count on the monthly chart. This indicates that we are overbought and that the market will retreat. The stochastic indicator is overbought and has curled over, but continues to issue a buy-signal. The RSI is going flat, at overbought levels; our own indicator looks as though it could soon issue a sell-signal. The Thomas DeMark Expert indicator is issuing a continued buy-signal, at overbought levels. The uptrend line for the monthly chart is 760.72.
The Continuous Commodity index made a fresh high in the Thursday session, thereafter, fainted in the Friday session, removing all the gains seen in both the Wednesday and Thursday sessions. All the indicators that we follow, herein, are issuing a sell-signal from overbought levels. The 5-period exponential moving average is at 395.52. The top of the Bollinger band is at 400.33 and the lower edge is seen at 374.82. We note that the high of the Friday session, pierced the upper Bollinger band and could not stay there. This is a good example of what happens at extreme levels; the market simply reverses course. The uptrend line is at 391.12 for the Monday session. Remember, this analysis is on the cash not the futures.
On the weekly chart, we see the Continuous Commodity index, touching the upper Bollinger band and backing away from that line. The stochastic indicator on the weekly chart looks as though it will issue a sell-signal. The RSI is going sideways, as is our own indicator. The Thomas DeMark Expert indicator looks as though it has a downward tilt to it. The monthly chart looks as though this index can go higher. The indicators, three of which are overbought, continue to issue a buy-signal. The Thomas DeMark Expert indicator is not overbought and is issuing a buy-signal. Looks like higher prices may be seen after a little sideways action to consolidate some of the recent gains.
March cocoa had an outside day in the Friday session. Perhaps, some of this behavior can be attributed to the December options that expired on Friday. We will see the effects of the unwinding of the futures positions, in the Monday session. The stochastic indicator is overbought and is issuing a sell-signal. Our own indicator is in agreement with that finding.
The RSI is pointing lower, but the Thomas DeMark Expert indicator is overbought and issuing: nothing. The 5-period exponential moving average is at 15.48. The top of the Bollinger band is at 15.73 and the lower edge is seen at 14.39. This past week we had a solid run to the upside and it would seem prudent for some profits to be removed from the trade, especially in front of a weekend. The weekly chart continues to look very healthy. All the indicators are issuing a unified buy-signal and only one is at overbought levels, the rest are near neutral levels. We would expect to see some backing and filling and then another run to the upside.
March coffee saw some profits removed, in the Friday session, after a solid week of gains. The stochastic indicator, the RSI and our own indicator, are pointing lower, issuing a unified sell-signal. The Thomas DeMark Expert indicator is going sideways, at neutral. The 5-period exponential moving average is at 119.47. The top of the Bollinger band is at 122.69 and the lower edge is seen at 102.55. We have noticed the expansion of the Bollinger bands, indicating that the market is getting more volatile. We have been clinging to the upper edge of the Bollinger band for about two weeks. It seems that this product is entitled to a rest, after such a vigorous rally. The weekly chart looks as though we could continue a bit higher.
The stochastic indicator is issuing a sell-signal, but all the other indicators are issuing a continued buy-signal. The monthly chart also shows more room to the upside. The uptrend line for Monday is at 118.97. We feel much of the upside action in the Thursday session and in the early Friday session was options- related. We should see some of the futures positions unwound early in the Monday session, and then, it will be back to normal trading for a while.
January Frozen Concentrated Orange Juice is going nowhere fast. In the mean-time, we are removing the overbought condition of the market with this sideways trading. The indicators are back to neutral levels, except the Thomas DeMark Expert indicator which is at oversold levels, but they continue to issue a unified sell-signal. The Bollinger bands are getting very narrow, which indicates that a move is afoot. The 5-period exponential moving average is at 196.20.
The top of the Bollinger band is at 200.08 and the lower edge is seen at 191.73. If you are long, your first alarm should be set for 192.60 the second alarm set at 190.50. Should we see a break below 190.50 we would expect to see a rather speedy retreat to 182.00. This would not be construed as negative, merely a correction. The weekly chart seems to be rolling over a bit. All the indicators are overbought and all but the Thomas DeMark Expert indicator, are issuing a sell-signal. Even the monthly chart has a toppy look to it.
December crude oil seems to be in a narrow trading range, from 62.75 to 57.05. The uptrend line for Monday is at 59.78. The stochastic indicator is issuing a sell-signal, as is our own indicator. The RSI is also pointing lower. The Thomas DeMark Expert indicator is going sideways, at overbought levels. The 5-period exponential moving average is at 59.84. The top of the Bollinger band is at 61.76 and the lower edge is seen at 57.67. There is nothing remarkable about this chart which looks to be really stuck in the mud. The weekly chart clearly shows this dull behavior trading range. The indicators on the weekly chart are oversold and show slight divergences, which would be positive for the market. The monthly chart has a doji candle. This candle, along with the oversold indicators, are all pointing to a possible buy-signal; telling us that the market could be ready to change directions from down to up. We shall see.
December natural gas really looks both dull and range-bound. The stochastic indicator is issuing a sell-signal, from a neutral level. The RSI is at neutral and pointing lower. Our own indicator is issuing a sell-signal and the Thomas DeMark Expert indicator is also issuing a sell-signal. There is nothing exciting about this chart. The 5-period exponential moving average is at 7.809. The top of the Bollinger band is at 8.258 and the lower edge is at 7.414. The Bollinger bands have been flat for weeks. We know that the volatility will return, but when is the more important matter. The weekly chart highlights the narrow range of this market. We have some divergences in the indicators, telling us that we could be getting ready for a rally. The monthly chart tells us that the indicators are oversold and issuing a buy-signal.
December gold has a doji candle on the chart, indicating that we could be in transition and might see a retreat. The stochastic indicator is overbought and is issuing a sell-signal. The RSI is also issuing a sell-signal, as is our own indicator. The Thomas DeMark Expert indicator is issuing a buy-signal. If long, you don’t want to see a close below 614.50; if short, you want to see a drop below that number. The 5-period exponential moving average is at 627.80. The top of the Bollinger band is at 641.40 and the lower edge is seen at 576.20. The weekly chart has a doji candle, as does the daily chart of December gold. The indicators uniformly continue to issue a buy-signal. The monthly chart looks positive. The indicators on the monthly chart are uniformly issuing a buy-signal. Looks like gold just might make more progress to the upside, after it takes a little rest here. Short-term, we expect to see gold back and fill a bit; then, make another run to the upside.
NYA CASH (8827.98)
Resistance 8845.31 8872.63(H)
Support 8800.19 8779.87 8747.44 8716.76 8708.11 8684.79 8675 8653.57
8634.88 8610.73 8598 8580 8573.26 8534.32 8499.67 8469.65 8468.97
8449 8424.56 8400 8386 8363.45 8344.67 8311 8294.64 8275.84 8268.97
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 (749.56)
Resistance 750 753.47(H)
Support 746.61 743.68 739.86 737.77 733.82 731.46 728.59 726.08 722.35
718.67 715.95 712.54 709 707.55 704.41 701.86 697.41 694.50 690 688
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 (789.63)
Resistance 790 792.89 793.19(H)
Support 787.28 785 782.81 780 778.02 776.30 773 770.53 767.82 765.05
762 759 756 754 751.62 748.55 745.14 744.82 742.95 739.24 735.58
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 (543.19)
Resistance 543.72 546.50(H)
Support 541.01 539.41 536.02 534.10 532 530 527 522 520 517 515.62
514.04 511.07 508.41 505.90 503.53 501.78 498 496 493 496 493.36
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) (769.15)
Resistance 770 772.12 774.71 776.02 779 781 784.62(H)
Support 768.32 765.84 761.33 755.69 752.73 749.70 747.08 743.38 740
738.25 735.26 733.18 729 727 725 721 718.63 714 711 708.54 706.61
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 (1380.90)
Resistance 1381.95 1389.45 1454 1530.89 1552.87(H)
Support 1375.60 1371.68 1364.30 1360.98 1344.21 1340.28 1335.64
1329.35 1324.65 1314.78 1311 1306 1298.92 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 (1751.11)
Resistance 1761.46 1762.95(H)
Support 1741.35 1736.39 1728.35 1712 1703.98 1695.21 1693.19 1676.63
1666.03 1650 1645.20 1622.37 1617 1611 1601 1589 1581 1589 1574.71
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 Z6 (84.88)
Resistance 84.90 84.95 85.03 85.10 85.19 85.24 85.32 85.37 85.43 85.54
85.61 85.68 85.75 85.82 85.88 85.90(I) 85.97 86.06 86.11 86.17 86.35
86.49 86.52 86.60 86.68 86.88 86.99 87.08 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 84.87 84.74 84.70 84.68 84.55 84.42 84.28(I) 84.16 83.95(I)
83.85(I) 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
www.OptnQueen.com