The Options Queen, Jeanette Schwarz has just released her first book:
The Options Doctor: Option Strategies for Every Kind of Market (Wiley Trading)
When one looks as the major retreats of the past, similarities, suggestive of prior experience, are all but unavoidable. And, so it is with today’s market news.
What needs to be understood, in today’s world, is that subject to communications velocities, we are all global and reactions, however fortuitously measured, can occur in nano-seconds. This velocity of market’s reaction was painfully demonstrated when a rumor circulated that margin requirements were going to be raised in Shanghai and that the Chinese Government was a seller of large blocks of shares in 15 companies; the
“Asian Contagion” spread, first across Europe and then into the US, in the dark of night and, unless you’re an insomniac, you slept through it. We would suggest that a new program be installed in your trading computer, designed to shock you awake when: “Bad things happen abroad.” Perhaps a: “down 2%, shock-me” button! Perhaps, for heavy sleepers, added flashing lights and sirens might be appropriately available, at an added but justifiable cost.
A result of falling equity markets has been the increased appetite observed in the US bond market; pressing yields lower and effectively helping the ARM- borrower. How, you ask? Well, since the adjustable rate mortgage is based on interest rates, it is obvious that as those rates decline, so too do the ARM’s rate declines with it. Yes, the rates must stay low, for at least a while, for this positive result on the ARM. Will this save the sub-prime mortgage borrower? Probably not.
So let us look at the decline of February 27th. This decline and the decline in gold were, in part, attributed to the alleged increased margin requirements, with margin calls, resulting from the overnight declines seen in the Asian markets. Naturally, the calls were met with sales in assets; assets which, as it turns out, were in gold holdings and US equity holdings. We are sure that some of the holdings were also in other areas of the world. But this caused the markets here in the USA to open much lower on the 27th. This recalls for us that our world today, is indeed: a global economy. And if the Asian market falls, our markets will be directly affected. There was a time, in the not too distant past, when the USA market caught a cold, the rest of the European and Asian markets caught pneumonia and some, the emerging markets, actually died. Today, we can no longer make that boast because our markets have become global, transmitting diseases in nano-seconds.
We well remember the plunge in Hong Kong, on October 27, 1997, which sent the Dow Jones down 554 point. We remember the August 1998 Long-Term Capital crisis, which caused a bit of a melt-down. Then, beginning on April 12, and ending on April 14th, of 2000, we witnessed a Dow Jones retreat of 982 points. These are recent events, which overshadow the severity of the February 27, 2007 retreat. If we go further back, we can find even deeper retreats. What is scary, is that Friday’s retreat was deep enough to cause worry. We can understand and can justify that retreat. As we said in our morning broadcast: “Think about it, do you want to be long over the weekend? I think not. Should nothing bad happen over the weekend, rest assured that the market will rally in relief, on Monday.”
If you want to see a study in bi-polar disease, just look at the chart of the Russell 2000 for this past week. Tuesday: a severe depression, Wednesday: some joy returns; and Thursday: depression verging on suicide followed by elation and rally, Friday: we actually saw the industrials go positive; then, the sell-off began at 02:00 and carried into the close of the session. This flip flopping behavior is creating an options sellers’ heaven.
Speaking of options sellers, from our perch at the pit of the Russell indices, we noted, with extreme curiosity, the lack of “puking” of puts following the Tuesday rout. Yes, we did see market orders to buy naked puts, initially, but by Wednesday, they were paired with sales of other puts, further out in the calendar, mostly in April. Thus, these naked volatility sellers were not closing out positions but rather, simply moving them out in time. We did see a fair amount of call-buying, which indicates, that these funds were looking for a pop to the upside. Interesting stuff. We will hit bottom when we see the puts purchased “at the market” in an effort to close out positions, to get the margin clerks off their backs. We are not there at this time.
In times of depression, remember: booze always survives; so too does toilet paper and Tums. With quote from our retired Chairman Greenspan, last week “By the end of the year, there is a POSSIBLITY, but not the PROBABILITY of the U.S. moving into recession.” (We capitalized the important words to add emphasis); So, this means that it is possible that the sun will shine; if not, it is probable that it will be cloudy. Classic “forked tongue” speech. Just in case you haven’t had enough excitement, we are entering roll-over week,
The US Dollar index rallied enough in the Friday session to kiss the downtrend line at 83.92. Unfortunately, for the US Dollar index bulls, that effort exhausted the index, which retreated, into the close. The stochastic indicator is going flat at the oversold line. No matter how much I blow up the chart, the lines are simply on top of each other and not giving a signal. The RSI has a slight upward bend to it, but nothing to trade on. The Thomas DeMark Expert indicator is issuing a buy-signal and our own indicator is in agreement with that finding. We do have a six count, on the bottom. We have drawn a down-trending channel. We need to close above 83.85 in the Monday session to remove that line. On the downside, the line is at 82.76. There should be some support seen at 83.10. The 5-period exponential moving average is at 83.65. The top of the Bollinger band is at 85.09 and the lower edge is seen at 83.24. The weekly chart is not pretty for the bulls. The indicators are uniformly issuing a sell-signal. The downtrend line on the weekly chart is at 84.76. The monthly downtrend-line is at 84.12 and shows that the market has a liability to 82.05, if we can’t get above that monthly downtrend-line.
The Euro closed higher, in the Friday session, than its open, leaving us a green candle on the chart. The high of the day was below the past few days highs. This week we will haven an interest rate decision from the European Central Bank on Thursday. Most expect to see a quarter point increase in rates. Given the turmoil seen in the markets this past week, it is possible that this increase just might be tabled for a little while. A lot depends on the stability of the markets, pre-meeting. Naturally, should the ECB remain on pause, it will be very negative for the Euro. We shall see what happens. The daily stochastic indicator is issuing a sell-signal; all the indicators that we follow herein, are issuing a sell-signal, on the daily chart. The 5-period exponential moving average is at 1.32058. The top of the Bollinger band is at 1.32947 and the lower edge is seen at 1.29338. The downtrend line is at 1.3230, for the Monday session. The uptrend line at 1.3230: that is a very short-term line; the longer-term line is at 1.3038. We see a point of inflection arriving: Wednesday-Thursday, most probably: Wednesday. This is coincident to the decision from the ECB. The weekly chart is forming a rounding bottom. The weekly stochastic indicator is issuing a fresh buy-signal, at overbought levels. The RSI is telling us that this market wants to go higher. Both our own indicator and the Thomas DeMark Expert indicator, are issuing a sell-signal. So, as you can see, we have mixed signals. The monthly chart remains positive.
The S&P 500 futures contract will undergo roll-over, this week, as we roll from the March expiry to the June expiry. The roll might actually just give to the market a lift, as the pit covers the shorts and rolls them out to June. The stochastic indicator is issuing a continued sell-signal, at oversold levels. The RSI is oversold and is pointing lower. Both the Thomas DeMark Expert and our own indicator are diverging and are not issuing any signal, at higher levels than seen during the previous days of this past week. The 5-period exponential moving average is at 1408.22. The top of the Bollinger band is at 1489.99 and the lower edge is seen at 1386.61. This market looks lousy; however, the good news is, that the Friday session was an inside-day. The weekly chart adds no comfort to the depression seen this past week. We have a mechanical sell-signal on the weekly chart. All the indicators that we follow are issuing a continued sell-signal. We closed the Friday session, near the levels seen in November and December of 2007. We have given up the entire year’s gains, in one fell-week. The monthly chart shows that we are rolling over to the downside, with signs of exhaustion. All the indicators on the monthly chart are issuing a sell-signal. The Market Profile chart shows that we are in an area of single prints, which could take from 1376.40 to 1342.30-1336.10, in a quick, rapid slide; under that it gets worse. Overhead, we also have single-prints that will bring us back to1413.60 to1435.30. This will be a very interesting week.
The Russell 2000 made a marginal new low in the Friday session. We have been telling you of this important support level, at 773 with a continued liability to 768.60, for some several weeks. The stochastic indicator and the RSI are issuing a sell-signal. Our own indicator is going sideways, with a slight downside tilt. The Thomas DeMark Expert indicator is going sideways, at oversold levels. The 5-period exponential moving average is at 792.21. The top of the Bollinger band is at 842.52 and the lower edge is seen at 783.19. We expect to see a little bit of stability returning to this market, even if it is only for several days. When looking at the Market Profile chart, it shows that we closed in a very unstable area and can, either go to 745.20 or to798.10. The weekly chart shows that the decline stopped exactly where it should have stopped. The level under here, on the weekly chart, is at 748.70. The indicators, on the weekly chart, all continue to point lower and are uniformly issuing a sell-signal. The monthly chart is rolling over to the downside; all indicators issuing a continued sell-signal.
The NASDAQ 100 took another beating in the Friday session, but managed to stay above the Thursday low. The stochastic indicator and the RSI continue to issue a sell-signal, at oversold levels. The Thomas DeMark Expert indicator and our own indicator are not issuing a thing, just going sideways. The 5-period exponential moving average is at 1764.02. The top of the Bollinger band is at 1877.00 and the lower edge is seen at 1738.79. The Market Profile chart shows that we are in an area of great instability. The weekly chart shows that we should have some good support at 1701. The stochastic indicator, our own indicator and the RSI, continue to issue a sell-signal, on the monthly chart. The Thomas DeMark Expert indicator is actually tilted, slightly upward. The monthly chart is “sort-of-flat,” showing the market remaining in a range. All the indicators on the monthly chart are issuing a sell-signal.
The Continuous Commodity Index has been in retreat for the past four sessions, after printing a “life-of-contract” high, on Monday. All the indicators that we follow in these reports, are issuing a unified sell-signal. The downtrend line for Monday is at 408.88 and the very shallow uptrend line, is at 406.17. The longer-term uptrend line is at 402.21. The long-term uptrend line is at 394.30. The weekly chart doesn’t look that bad. The stochastic indicator is issuing a sell-signal, as is the RSI. The weekly chart further shows that we probed above the top edge of the Bollinger band, although we did close the week below that level. The monthly chart looks fine. The indicators on this chart are issuing mixed signals, with some pointing higher and some issuing a sell-signal.
For the past two trading sessions, we have seen aggressive buyers appear in the closing minutes of trade, lifting the market at the end of the day. The daily chart shows that the market is in a definite uptrend, with the support seen at 17.45 for the Monday session. The RSI is nearing overbought levels, and is going sideways. The stochastic indicator is overbought on the fast line, going sideways and pointing higher, on the slow line; this action views the stochastic indicator as curling over to the downside. Our own indicator continues to issue a buy-signal, but is rolling over to the downside. The Thomas DeMark Expert indicator continues to issue a buy-signal. When you look at the market profile chart you will note, that we closed in the single-print area of instability. The 5-period exponential moving average is at 17.78. The top of the Bollinger band is at 18.24 and the lower edge is seen at 16.74. The weekly chart shows that the market is continuing on its uptrend, but could be getting a bit toppy. We are nearing some tops: at 18.50, seen in March of 2005 and 20.08, seen in May of 2003. If we go farther back, we will find higher levels. Further when looking at the monthly chart, it looks as though we could go higher.
May sugar opened the pit session at 11.13 and rallied to 11.48 in the pit and 11.49, electronically before retreating in the final moments. The daily chart shows that the market rallied aggressively higher and closed higher on the day. The stochastic indicator continues to issue a buy-signal, but is getting overbought and is curling over to the downside. The RSI is pointing higher and continues to issue a buy-signal. Both the Thomas DeMark Expert indicator and our own indicator are issuing continued buy-signals. The uptrend line for the Monday session is at 10.57. The 5-period exponential moving average is at 10.86. The top of the Bollinger band is at 11.03 and the lower edge is seen at 10.17. We just might have an evening-star formation on the chart. The key will be if we open lower and do not trade above 11.12. Should we open higher, or at the level we closed on Friday, it will not be an evening-star formation. If it is an evening-star formation, it is a very strong sell-signal. The weekly chart looks as though May sugar is trying to head for the upper part of the trading range: at 12.39, 12.47 and 12.72. The weekly indicators continue to issue a buy-signal. There is a gap on the chart from 11.58 to 11.69. We would expect to see some resistance at the lip of the gap, at 11.58. Should we step into the gap, expect a first-time probe, leading to an eventual closing of that gap.
May coffee must stay above 114.30. If it doesn’t, it will certainly go to 109.50 on the next retreat. We are concerned with the coffee chart because these last two days have seen very steep retreats. All the indicators that we follow herein are issuing a continued sell-signal; and none is at oversold levels. This means that there is more room to the downside. The 5-period exponential moving average is at 117.01. The top of the Bollinger band is at 121.48 and the lower edge is seen at 114.57. The low of the session was 115.00, seen on the close. The daily chart shows us that May coffee needs to stay above 114.30. We are getting oversold; enough to expect to see a bounce; but nothing on the chart tells us that it will happen. The weekly chart clearly shows us that we do have a downside liability. The stochastic indicator is oversold on the weekly chart, but continues to issue a sell-signal. The RSI is pointing lower, as is our own indicator. The Thomas DeMark Expert indicator has stopped trending and is going sideways. The monthly uptrend line is at 114.00; and we need to stay above that level to hope for a bullish resolution of this pattern.
May Frozen Concentrated Orange Juice made a “life-of-contract” high of 206.50, this past week. The market looks as though it is consolidating from the new, ‘life-of-contract’ high, seen in the Thursday session. Both the RSI and the stochastic indicator are extremely overbought, and both are going sideways. Our own indicator and the Thomas DeMark Expert are both going sideways. The 5-period exponential moving average is at 202.54. The top of the Bollinger band is at 206.50 and the lower edge is seen at 179.22. The rally seen in May Frozen Concentrated Orange Juice has been remarkable. We remain far above the uptrend line at 199.57, for the Monday session. The weekly chart is definitely bullish. The indicators have more room to the upside and are all pointing higher. The monthly chart shows signs of exhaustion, but that has been the case for months. The only concern that we have with this chart, e.g., the dailychart, is that we appear to have a doji-like candle, which may tell us that we might be changing directions, from up to down. We are certainly overbought enough to support that view-point.
May cotton looks as though there will be a point of inflection on Monday, into early Tuesday. The uptrend line is at 53.70 for the Monday session and the downtrend line is at 53.88 for the same session. The stochastic indicator continues to point higher; however it is at overbought levels. The RSI is going sideways at neutral and the Thomas DeMark Expert indicator is issuing a sell-signal. Our own indicator will issue a sell-signal in the Monday session. The 5-period exponential moving average is at 53.61. The top of the Bollinger band is at 55.06 and the lower edge is seen at 51.57. We have an 8-count on the top of the chart, which is beginning to warn us of a possible retreat. The weekly chart has yielded a doji-like candle. The indicators are mixed, some pointing mildly higher and others going sideways. None of the indicators are issuing a sell-signal and none are overbought; most are neutral. The monthly chart supports the findings of the weekly chart.
Crude oil retreated in the Friday session. The uptrend line is at 60.68-60.74. The indicators are uniformly issuing a sell-signal from overbought levels. The 5-period exponential moving average is at 61.53. The top of the Bollinger band is at 62.57 and the lower edge is seen at 57.09. The chart looks as though crude is beginning to roll over to the downside. The weekly chart looks as though this market could go higher. The indicators are uniformly pointing higher, and we do see some reason to believe that we will revisit 64.00. The monthly chart shows that this market is forming a bottom, with an 11-count on the bottom. The indicators are uniformly pointing higher on the monthly chart. The Market Profile chart supports these findings.
Natural gas has been in a decline for the past week. The indicators are getting oversold, but none are issuing a buy-signal. The 5-period exponential moving average is at 7.360. The top of the Bollinger band is at 7.969 and the lower edge is seen at 7.109. The chart looks as though the market is trying to stabilize. The weekly chart looks as though Natural Gas is trying to make a rounding-top. The indicators on the weekly chart are uniformly pointing lower. The Market Profile chart tells us that if we go much lower, we will slide to 6.765; on the other hand, if we go higher, we could rally to 7.590 to 7.646. The monthly chart is not helpful and shows that we are forming a pennant and, that there will be a resolution of the direction within the next month.
Gold dropped 21 dollars in the Friday trading session. The indicators are all, uniformly, issuing a continued sell-signal and are approaching oversold levels. We should find support at 641.00. The 5-period exponential moving average is at 664.90. The top of the Bollinger band is at 693.50 and the lower edge is seen at 647.10. In Friday’s session we did see increased volume on the sell-off. We do have two indicators of exhaustion on the weekly chart. The indicators are uniformly issuing a sell-signal. The monthly chart looks okay. The indicators on the monthly chart are mixed, with the Thomas DeMark Expert indicator issuing a buy-signal and the others, issuing a sell-signal. We think that gold is entitled to a retreat, but that it will find support at 641.00 and at 626.40.