Option Queen Letter

Are we having fun yet?  Remember the days not so long ago when we were complaining that there was too much complacency in the markets?  Wow, how have things changed!  We have never seen the VIX at the levels seen lately and yes, we lived through the 1987 crash!  Today’s markets are different from the previous markets in that we are instantaneous and global.  Today a news item hits all the markets at the same time causing a reaction in all markets.  In the past, news items were slowly spread around the globe and that slowed down the reaction to the news–Today, instant reaction.

What is so bad about a strong US Dollar?  We can answer that in one word, exports.  As the US Dollar gains strength, our exports become more expensive.  Exports have become an important part of the US economic engine and a strong US Dollar and a slowing global economy is a double whammy on that front.   It is only a matter of time before we, here in the USA, will be blamed for the entire global slow down and recession that grows from that slow down.  We here in the USA are guilty as charged on the toxic paper front, however; we did not force others to buy our toxic debt issues, rather, it was greed and fear of missing out on the next high flyer that inspired the global response and support of those issues.  The problem of liquidity continues to plague the markets.  Yes, the banks and institutions have been replenished with cash, but many are not lending out that money and taking the safe path to making money.  In England, the banks were reinflated with the condition that the banks would again lend money to individuals and small businesses.  Here in the USA no such condition was part of the package.  Perhaps, we should copy the English model.
We should see the continuation of the unwinding of options in the early hours of trading in the Monday session.  As we approach the end of October, we are approaching a time when some of the selling pressures should be relived as mutual funds have taken their losses for the year.   As we continue to the end of the year, the usual pressure to take losses against current gains might not exact pressure on the market, insomuch as many have already taken their money off the table and have enough losses to offset any possible gains, that pressure should not be apparent in the market.  Also the January effect will be DOA this year.  There is an article of good news; as the US Dollar gains strength, commodity prices retreat and, inflation retreats.  The retreat in inflation is like a tax break for both corporations and individuals.  Those high gas prices and utility bills have begun to retreat freeing up some cash to pay down debt.
Is the bottom in?  NO!  Are we going to rally from here?  Probably, for a short while then, we will retest the lows to see if the recent low holds.  How long before the retest?  It could be two weeks or two months.   By Tuesday the 28th or Wednesday the 29th, we should have a dramatic move in the market as the downtrend and uptrend lines meet and explode!
Monday:  Fed Chairman Bernanke speaks  at 10:00, September leading indicators are released at 10:00, Fed Governor Kroszner speaks and Atlanta Fed President Lockhart speaks.
Tuesday:  duck and cover…..Lehman’s CDS payments are due, earnings season continues with Apple, CAT, PFE, DD, MMM, etc.
Friday:  OPEC meets in Vienna and the General Electric Company issues earnings.
The US Dollar index is overbought and has been overbought since the beginning of October.  The US Dollar index looks as though it is forming a pennant.  If we remove the high of 83.50 seen on October 10, 2008, we will go higher as buy-stops become elected.  All of the indicators that we follow herein are overbought.  We are getting mixed signals.  The stochastic indicator and our own indicator have just issued a sell-signal.  The Thomas DeMark Expert indicator is issuing a continued buy-signal at overbought levels and the RSI is going sideways near overbought levels.  The 5-day moving average is at 82.363.  The top of the Bollinger band is at 84.613 and the lower edge is seen at 75.419.  The weekly chart is overbought and we are seeing sell-signals from both our own indicator and the stochastic indicator.  The weekly chart looks like a pole with a pennant beginning to form.  The monthly chart is also overbought and shows that we have moved back to the levels seen from May of 2006 to February of 2007.  These levels are bounded by 82.05 on the downside and 87.08 on the high side.
The S&P 500 has taken us on a really wild ride with massive swings both to the up and downside.  This market seems to be forming a point of inflection which should be resolved by the week of the 28th or 29th.   Should the market break the uptrend line or the downtrend line, the point of inflection will not occur.  Most of the indicators are on the oversold side of neutral but are no longer at oversold levels.  The 5-period moving average is at 942.70.  The top of the Bollinger band is at 1061.16 and the lower edge is seen at 832.73. The downtrend line for the Monday session is at 999.65 and the uptrend
line is at880.88.  897.25 is the edge of the S&P comfort zone, below that level, we enter into an area which could cause a downdraft.  On the upside, a move above 1058 could lead to a quick rally to 1150. The indicators on the weekly chart are all issuing a fresh buy-signal.
The NASDAQ 100 made a fresh low for the year in the Thursday session. Friday session had some activity to the upside but by the end of the day, that gain had become a loss.  The indicators seem to be confused and are really not issuing any signals.  The 5-day moving average is at 1308.  The top of the Bollinger band is at 1764.91 and the lower edge is seen at 1153.77.  The downtrend line is at 1444.55 for the Monday session.  All the indicators that we follow are issuing buy-signal on the weekly chart.  The lows seen this past return the NASDAQ 100 to the July 2003 levels.
The Russell 2000 appears to have been the source of funds.  This small capitalization index declined more than the others in the Friday session.  We are forming a pennant which should resolve on the 28th or 29th.  The 5-day moving average is at 535.22.  The top of the Bollinger band is at 778.16 and the lower edge is seen at 451.98.  If we were to rally to a 38% retracement, we would trade at 578.70, a level we were above at one time last Monday.  The 50% level is at 614.42.  We continue to see sell-signals from both the stochastic indicator and our own indicator.  The Thomas DeMark Expert indicator is actually bending higher and the RSI is going sideways near oversold levels.  Still, this index did not make a new low this past week although the NASDAQ 100 did make a fresh 2008 low.  The stochastic indicator is issuing a sell-signal on the weekly chart.  Our own indicator and the Thomas DeMark Expert indicator are both issuing a fresh buy-signal.  We also note that under 480.20, we open the door to new lower prints.  Above 599 or so, up we go to the 656.60 area!
Crude oil gets into trouble below 69.66, however; above 77.76 we could regain the 90 area and perhaps get to the longer term downtrend line of 97.16.  Both the RSI and the stochastic indicator are issuing a fresh buy-signal on the daily chart.  The 5-day moving average is at 73.34.  The top of the Bollinger band is at 116.03 and the lower edge is seen at 64.82.  We have been trading fairly close to the 5-day moving average for the past several weeks and we would guess that so long as we are below that moving average, we will continue to trade lower.  We have noticed several occasions where we did trade above that moving average but soon returned to the downside.  We are oversold on the weekly chart but do not have any buy-signals at this time.  We have returned to levels not seen since August of 2007.  If we stay in this new trading range, we could trade as low as 57 and as high as 78.40.   We do have overhead supply which should keep the lid on any rally attempt up to the century mark.
How low can gold go?  Well, we do have good support at 739.    The indicators are going sideways at oversold levels.  The 5-day moving average is at 843.42.  The top of the Bollinger band is at 1008.40 and the lower edge is seen at 817.09.  The weekly chart shows that we are in a clear downtrend.  We need to close above 913.90 to turn this market around.  The indicators for the weekly chart are pointing lower
although they are loosing momentum.   We would be cautious with this market.  The market is oversold and will bounce higher, certainly high enough to take it back inside the Bollinger bands.  We closed below the lower edge of the Bollinger band and will rally back inside that level.

Jeanette Schwarz Young, CFP, CMT
Box 1952
One North End Avenue
New York, New York 10282