Option Queen Letter

Most gurus and financial experts expect to see another rate cut this
coming Wednesday, when the FOMC releases its interest rate decision and
statement. While 25 basis points seem to be baked into the market cake
already, the possibility of a 50 basis point cut is certainly within
the realm of possibilities. That, along with the end of the month
portfolio dressing and undressing, should make for a very interesting
Wednesday afternoon. Our concern is that this august group of FOMC attendees might forget
that a weak US dollar can have a very negative effect in the long-run.

The US dollar has been under considerable pressure and this
additional pressure may just be the stimulus for a final capitulation
and a bottom for the US dollar. Also, we are extremely concerned about
the resulting inflationary spiral on which we’ll be embarking. It will
be comparable to a roller-coaster that is “on the move,” and impossible
to halt, until it self-slows down.

So what does a FOMC interest rate cut tell us? Well it does tell us
that things here are so bad that the FOMC fears a recession and an
economic downturn so severe, that it willing to live with inflation.
The problem is that this sort of inflationary spiral, once it begins,
is hard to halt. While we may be in a recession or, entering one,
countries like China and India may not be affected by our problems.
While it is true that the Chinese do depend on exports to our shore, we
are not their only trading partners and they will survive, even if we
slow down. In the past, when the US caught an economic cold, the globe
caught pneumonia. Today, we are not the force we were in the past, and
we need to remember that fact. By Halloween, Wednesday, we will have
either a trick or a treat….well, perhaps a bit of both, this time
around.

Another important point is, that while the market seems to crave
lower short-term interest rates, stimulated by an accommodative FOMC,
this action will not help the credit crisis, which is upon us. The FOMC
controls short-term rates, but the market will seek its own level,
regarding longer-term debt. There is yet another question to be
answered and that is: where are the buyers of lower yielding
treasuries, based in a declining US dollar, coming from? We have an
additional concern; with the flows of investment dollars away from US
dollar-based corporate debt securities. Another question is: are banks
going to lend money? and, at what rate, will they make those loans. It
seems that our global partners are not interested in lending money to
our corporations, thus, we are now seeing a net outflow of capital away
from our shores.

It is easily understood that the global economy has kept prices low,
however, with the softness demonstrated in the US dollar, some of these
price savings are beginning to disappear, as global-workers who are
paid in US dollars, will demand more of the depreciating currency.
Naturally, this cost push will flow to the bottom-line and be passed on
to the consumers, wherever they are.

Onto Putin and his new push to cause chaos in Russia. Yes, he is
trying to control prices of foods which, in the past, has lead to
shortages in the market and a dependence on the government, for all
things necessary for living. This seems a likely return to the old,
communist rule objectives. First, starve the public with shortages and
inefficiencies, so that they’ll demand the return of ‘good-ole’,
communist rule.

Monday: The Supreme Court hears the “Klein case”,
relating to the PTech index and the mischief in the options prices that
put a clearing-firm out of business.

Tuesday: October consumer confidence is released at 10:00AM.

Wednesday: 3rd quarter GDP is released at 08:30,
October Chicago PMI is released at 09:45, September construction
spending is released at 10:00 and at 02:15, the FOMC announces its
interest rate decision and makes a short comment.

Thursday: Challenger, Gray & Christmas releases
its monthly report on job cuts, September personal income and
consumption is released at 08:30 and October ISM is released at 08:30.

Friday: October non-farm payrolls and unemployment are released at 08:30.

The US Dollar index printed another new low in the Friday session,
but as with the other lows recently seen, this low was a gradual,
effortless blip, lower without excitement, or any real volume. It is
almost as though a new low is nothing special to note and, just another
trade. This ho-hum attitude is somewhat unsettling. We closed below the
lower Bollinger band in the Friday session, which should, at the very
least, lead to a bounce in the Monday session. On a very short-term
basis, we can draw a downtrend line for the last 5-days of trading,
which gives us a very steep line at 77.083 for the Monday session. We
can draw a less-steep line, which gives us 77.805 for Monday and an
even less-steep line, which is a longer line, which yields 78.338, for
the Monday session. The indicators all continue to point lower, with
only the stochastic indicator, at extremely oversold levels. The
5-period exponential moving average is at 77.458 for the Monday
session. The top of the Bollinger band is at 78.814 and the lower edge
is seen at 77.079. The downtrend line on the weekly chart is at 78.771
for the week ending this coming Friday. The stochastic, our own
indicator and the RSI, continue to issue a sell-signal on the weekly
charts. The Thomas DeMark Expert indicator is issuing a buy-signal. The
monthly chart is giving us much the same readings, as are the other
time-frames. There seems to be a noticeable slowing of the downdraft in
the monthly chart….well, so far, there is. We continue to believe that
there are too many US Dollar index bears and that the boat will
eventually tip over, spilling the bears into the drink. Unfortunately,
the shorts are happy the bears are happy and nobody seems to be in a
rush to cover or trade a possible bounce. Until that happens, we are
afraid that the same old drift to lower, will continue. Additionally,
we have the FOMC meeting, adding some extra weakness to this index.
Perhaps once the rate cut is done, the market will have a relief-rally.

The Euro continued the rally in the Friday session, yielding a scary
15-count! The stochastic indicator is overbought and continues to issue
a buy-signal. The RSI is overbought and agrees with the stochastic
signal. Our own indicator is issuing a buy-signal. The Thomas DeMark
Expert indicator is issuing a sell-signal, from a neutral level. The
5-period exponential moving average is at 142.860. The top of the
Bollinger band is at 143.746 and the lower edge is seen at 140.751.
Please note that this market has closed above the upper edge of the
Bollinger band and, likely, will retreat from that level. Should we gap
down, we could be setting-up for a decent sell-signal. The weekly chart
of the Euro is exhausted, with a 14-count. The RSI and the stochastic
indicator are both overbought, but continue to issue a buy-signal. The
Thomas DeMark Expert indicator is issuing a sell-signal, from
overbought levels and our own indicator is going sideways, with no
signal at this time. The monthly chart also has signs of exhaustion and
is grossly overbought, as measured by the indicators. All are showing
toppy exhaustion, but have not issued a sell-signal. The question is:
how high can the Euro go? We believe that we are very close to the
upper edge and that most of the money on the upside, has been made. Of
course, we are not willing to sell the Euro either, rather, we will
wait and see where the trade takes us.

The Canadian dollar is another toppy chart to look at, with a
10-count and a doji candle, from the Friday session. The indicators
are, uniformly issuing, a continued buy-signal; all at overbought
levels. The 5-period exponential moving average is at 103.18. The top
of the Bollinger band is at 104.35 and the lower edge is seen at 99.94.
The weekly chart is exhausted with a 9-count. The indicators here are
mixed; the Thomas DeMark Expert indicator and our own indicator are
both issuing a sell-signal, while the stochastic indicator and the RSI
are at overbought levels and not issuing anything, just going sideways.
The monthly chart looks very similar to the weekly chart, with
overbought and bullish readings from the RSI, stochastic and our own
indicator and, a sell-signal from the Thomas DeMark Expert indicator.
The first level of support on a retreat, will be at 99.18, then at
96.55 and further, at 94.21.

The Australian dollar has a 12-count and is overextended to the
upside. The stochastic indicator, the RSI, and our own indicator are
all overbought and continue to issue a buy-signal. The Thomas DeMark
Expert indicator is overbought and is issuing a sell-signal. The
5-period exponential moving average is at 89.824. The top of the
Bollinger band is at 90.967 and the lower edge is seen at 87.610. The
weekly chart demonstrates the huge rally seen in this past week’s
trading. All, but the Thomas DeMark Expert indicator which is issuing a
sell-signal, are issuing a continued buy-signal, at overbought levels.
The monthly chart is telling the same story, but, in this time- frame,
all the indicators are pointing higher. We did close above the monthly
upper edge of the Bollinger band and, either we retreat or, the
volatility increases, expanding the upper Bollinger band.

The US Dollar-Pound Sterling, has a doji candle and a 10-count on
the chart. The stochastic indicator, our own indicator and the RSI are
all going sideways. The Thomas DeMark Expert indicator is issuing a
sell-signal. We do have signs of exhaustion. The 5-period exponential
moving average is at 204.268. The top of the Bollinger band is at
205.067 and the lower edge is seen at 202.333. This trade has a
spill-over effect on Robusta coffee, traded in both US Dollars and in
Pound Sterling and, cocoa. These commodities offer an arbitrage
opportunity for the trader, because of the currency differentials. The
weekly chart is also exhausted and is grossly overbought. All the
indicators that we follow herein, are issuing a continued buy-signal,
at, overbought levels. We have what looks to be a hangman on the chart,
in this time-frame. The monthly chart is warning us that we are
overextended and will have problems, with a further upside-push. Our
own indicator and the Thomas DeMark Expert indicator are issuing a
sell-signal; the others remain on: buy.

The US Dollar-Yen trade has an 8-count on the bottom and looks to be
trying to stabilize. The stochastic indicator, our own indicator and
the RSI are all issuing a buy-signal, at oversold levels. The Thomas
DeMark Expert indicator is going sideways, at neutral. The 5-period
exponential moving average is at 113.522. The top of the Bollinger band
is at 117.393 and the lower edge is seen at 112.856. The weekly chart
has a doji candle on it and, should we gap open, higher this week and
close that gap, will issue an important buy-signal. Yes, it is too
early to say, at this time, but the possibility does exist. The
indicators are saying the opposite, with a sell-signal from all that we
follow herein. If we can close above 116.05, without removing 111.910,
we could be setting up for a nice rally.

The US Dollar-Swiss Franc seems to be in search of a bottom. The
indicators that we follow are, for the most part, issuing a continued
sell-signal. The downtrend line for the Monday session is at 116.707.
The 5-period exponential moving average is at 116.649. The top of the
Bollinger band is at 118.322 and the lower edge is seen at 115.905. The
weekly chart is showing an oversold market. This week should be a
telling week and, so long as we don’t remove the 115.630 level seen
during the week of September 28, we could see a good rally, taking us
to the 117.940 level. The monthly charts are verifying this
interpretation.

The S&P 500 rallied in celebration of Friday and the end of a
week of good earnings. Four of the past five days have been celebratory
efforts, taking the market back to the congestion area, seen during
September. We certainly are within but a few puffs, to the upside. The
indicators are uniformly issuing a continued buy-signal, with plenty of
room to the upside. The 5-period exponential moving average is at
1525.68. The top of the Bollinger band is at 1589.37 and the lower edge
is seen at 1508.42. This past week removed most of the downside damage
done in the Friday the 19th session. We have now closed above the
downtrend line, on the daily chart. With the end of the month upon us
and the FOMC announcement, we may see a probe to the upside. On the
other hand, there is a gap on the chart below us from 1481.00
to1485.20, which is a triple-bottom. The Fibonacci 50% retracement
number is 1480.90, just below that gap……. hmmm. We are inclined to
believe that should there be a break to the upside, we will have a good
opportunity to sell then and then, look for a decent decline to the gap
and the 50% retracement number. The indicators on the weekly chart are
issuing a buy-signal; only the Thomas DeMark Expert indicator is
issuing a sell-signal. The monthly chart looks toppy and the indicators
seem to be in agreement with that finding, issuing a sell-signal. Be
careful this week, it could be like a roller-coaster so, don’t forget
to fasten your seat-belts.

The NASDAQ 100 has a triple-top and, on the next try higher, will,
no doubt, remove the old highs. We seem to be having trouble gaining
enough steam and we are overbought. The indicators are all issuing a
continued buy-signal, at overbought levels. The 5-period exponential
moving average is at 2197.45. The top of the Bollinger band is at
2232.42 and the lower edge is seen at 2119.47. The weekly chart has
signs of continued exhaustion. The stochastic indicator, the RSI, and
our own indicator are uniformly overbought and are issuing a
buy-signal. The Thomas DeMark Expert indicator is issuing a
sell-signal. The weekly chart shows that we are expanding both the
upside and the downside. The monthly chart is also extremely
overbought. The stochastic indicator, our own indicator and the RSI,
all continue to issue a buy-signal, at grossly overbought levels. The
Thomas DeMark Expert indicator is issuing a sell-signal.

The Russell 2000 has broken the downtrend line and is now poised to
regain some momentum to the upside, playing catch-up to the other
financial indices. The indicators are all issuing a continued
buy-signal. The 5-period exponential moving average is at 818.14. The
top of the Bollinger band is at 858.93 and the lower edge is seen at
803.85. The weekly chart shows that we are back into the upside
congestion area. The stochastic indicator, the RSI and our own
indicator are all issuing a buy-signal. The Thomas DeMark Expert
indicator is issuing a sell-signal. The uptrend line for this coming
week is at 795.43, a number we must stay above. The monthly chart shows
that we are nearing the old highs and that we could make a renewed
effort to print a new high. Frankly, we are a little bit more skeptical
of that event occurring, although, given the FOMC meeting, the end of
the month window-dressing and Halloween, it certainly is possible.

The continuous commodity index rallied in the last two days of the
week, taking it back within a stone’s throw of a new high. The
indicators are uniformly issuing a buy-signal, none at overbought
levels and all, with plenty of room to the upside. The 5-period
exponential moving average is at 446.98. The top of the Bollinger band
is at 454.37 and the lower edge is seen at 437.80. The weekly chart has
signs of exhaustion, but then it has been exhausted for the past eight
weeks, without a real retreat. The indicators in this time frame are
more confused. The stochastic indicator is overbought and could issue a
sell-signal, by Friday. The Thomas DeMark Expert indicator is issuing a
sell-signal; our own indicator is in agreement with that signal. The
RSI is simply going sideways, just below the overbought line. Looking
at the monthly chart is a bit more disquieting, in that we have a doji
candle, which tells us that we are at a point where we could change
directions. To further scare us, there is a 15-count, which alerts us
to the extremely overbought condition in which we find ourselves. Would
we go long at this juncture? No. But we sure wouldn’t short this index.

March sugar ran to the upside on Friday, scared itself, and
retreated to close, near the lows of the day. The stochastic indicator,
our own indicator and the RSI are all issuing a sell-signal. The Thomas
DeMark Expert indicator is issuing a buy-signal, at overbought levels.
We need to stay above 10.15 on Monday, to maintain the uptrend line.
The 5-period exponential moving average is at 10.16. The top of the
Bollinger band is at 10.32 and the lower edge is seen at 9.65. We had a
huge range in the Friday session, expanding both the upside and
downside. The weekly chart shows that we are trying to probe the 10.79
and 10.85, resistance levels. We have closed above the longer downtrend
line. The indicators are curling over to the downside but have not
issued a sell-signal. The monthly chart tells us that March sugar needs
to stay above 9.68, or risk a return to a lower level.

Friday December cocoa enjoyed a very robust rally. The market opened
the day at the lower levels and rallied higher in the early session,
triggering some buy-stops which, in turn, triggered more buy-stops. The
market drifted lower after the initial buy-stops were executed;
however, by the end of the session, regained some steam to the upside.
The buy-stops carried the market to 19.40, filling the orders at these
higher levels. Locals sold into this rally, scalping. All the
indicators that we follow in this report are issuing a buy-signal. The
5-period exponential moving average is at 18.52. The top of the
Bollinger band is at 19.58 and the lower edge is seen at 17.76. This
rally looks as though it can lift the market to the recent high of
20.50. The weekly chart shows a 13-count on the bottom. We do have
signs of exhaustion. The indicators are uniformly issuing a buy-signal,
for the weekly time-frame. The monthly chart is in agreement with the
weekly chart.

December coffee ended a bad week, with a rally in the Friday
session. We do have a 9-count on the bottom. All the indicators that we
follow herein are issuing a fresh, buy-signal. On a very short-term
basis, we need to see a close above 122.27. The uptrend line is at
118.35 for the Monday session. The 5-period exponential moving average
is at 122.60. The top of the Bollinger band is at 142.70 and the lower
edge is seen at 118.47. So, we see the importance of the 118 area. The
weekly chart is a bit more disturbing and shows that we have more room
to the downside. The indicators are uniformly issuing a continued
sell-signal. The uptrend line on the weekly chart is at 118.46, a level
above which that it needs to close. Clearly, that level is important as
the number keeps reoccurring.

Friday’s session for Frozen Concentrated Orange Juice was a day when
we saw the result of a point of inflection. When the downtrend line and
the uptrend line meet, they form a point of inflection, which is
generally chaotic for the market. One should not fight the trend of the
market on days of inflection. The magic number for FCOJ was 143, and
change. The market could not stay above that number and it retreated.
The Friday session left a huge red candle on the chart, the result of a
point of inflection. The stochastic indicator, our own indicator and
the RSI are all issuing a continued sell-signal. The Thomas DeMark
Expert indicator is issuing a buy-signal. The 5-period exponential
moving average is at 143.93. The top of the Bollinger band is at 156.60
and the lower edge is seen at 127.77. We believe that there is more
room to the downside and that we will retest the 135 area. The weekly
chart is more bearish than is the daily chart. All the indicators that
we follow herein are issuing a solid sell-signal. The best news we can
give you is that on the weekly chart, we remain above the uptrend line.
We would not be surprised to see FCOJ test the 127 to 125 level; below
there, of course, the lows.

December cotton is trapped in a trading range from 62.15 to 65. 65.
Until and unless December cotton can break either of these levels, it
will remain in this tight range. The stochastic indicator, our own
indicator and the RSI are all issuing a buy-signal. The Thomas DeMark
Expert indicator is issuing a sell-signal. The 5-period exponential
moving average is at 64.63. The top of the Bollinger band is at 65.67
and the lower edge is seen at 62.30. The uptrend line for Monday is at
63.65. The weekly chart seems to be forming a pennant. The indicators
are mixed, with the stochastic indicator issuing a buy-signal and all
the others that we follow, issuing a sell-signal. At the moment,
looking at all the time frames, we are inclined to stand aside until
the picture becomes clearer.

Crude oil is approaching the $100 level, which we though unheard of,
last year, when it was trading at $49.90 and $52.00 per barrel. The
indicators continue to point higher, but these indicators are losing
steam and are grossly overbought. The 5-period moving average is at
88.14. The top of the Bollinger band is at 91.75 and the lower edge is
seen at 75.81. We closed the session slightly above the upper edge of
the Bollinger band and we will either expand the Bollinger band or,
retreat. We believe that a pull-back will be seen before the next run
to the upside is felt. The weekly chart is also overbought but the
indicators continue to point higher. The monthly chart is telling the
same story, overbought, but, going higher. If the world is awash in
crude, why is it going higher? Obviously, there is some political risk
in the mix and the oil platform disasters, that we saw last week, in
the Gulf of Mexico; then the sanctions against Iran aren’t helping and,
to add to the mix of problems, Alberta’s Premier’s decision, regarding
the royalties to be paid by the oil companies, virtually ends any
exploration and production, not already in progress. Whew! So, now
what? It isn’t going to get that much worse, but maybe crude wants to
print the $100, before taking a well-deserved rest and retreating. Back
to, say $78.40 and then, $68.09. Would we fight this trend? No, not at
the moment, but we may start looking for some longer-term puts.

December gold traded higher in the Friday session, leaving a large
green- candle on the chart. The indicators are all overbought, but
continue to issue a buy-signal. The 5-period moving average is at
769.44. The top of the Bollinger band is at 782.40 and the lower edge
is seen at 730.30. We closed the session above the upper edge of the
Bollinger band, an area where we can not stay; therefore we expect to
see a retreat from this level. The weekly chart continues to look good,
but we are grossly overbought. It really looks as though the few shorts
that are out there, are being choked to death with the bulls keeping
the pressure on the upside. We would like to buy this market but will
wait until the market retreats, which, it will. We look at 759.90 area
as a good place to start to nibble.

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