Option Queen Letter

As we move into the last week of October remember, not only is it Halloween, but it is the seasonal time when mutual fund managers take loses for the year, that is if they have any. Then we have portfolio dressing and undressing. So, get your trick or treat candies ready for the goblins and witches that visit your doorstep.
As we enter into November, we are in the last two months of the year, which, if you went long in March of 2009, has been a good year. Had you not gone long and left your portfolio alone for the entire year, it seems as though you would be approaching even for the year. For those of you who sold out at the bottom of the market and ran into cash, you are watching this rally, anticipating the next retreat for a buy. This has been the general behavior of the market, short shallow retreats leading to up thrusts in the market. While we believe that the market is not cheap, if you invest in stocks paying a good dividend and position options as a conversion, you can reap the dividend without much risk. Sometime, a conversion is called a collar. Remember if you do put this strategy into effect, sell the call for after the time the dividend is due. You must take care to collect the dividend or, that strategy will be a bust.
The trashing of the US Dollar has an immediate effect on those companies that export around the world, that is, they make money on the increased trade attributed to the declining dollar. As the US dollar drops in value, our merchandise becomes cheaper and cheaper, thus we attain a competitive advantage. Our trading partners don’t like that and will likely try to support the US Dollar rather than losing sales because of the weak dollar. It is likely that either our trading partners will support the US Dollar or trash their currency. Interesting thoughts. Another interesting thought is that insomuch as foreign funds own a great deal of US Dollars, it is likely that they will buy stuff with the US Dollars rather than sitting with low interest rates on a depreciating currency. Perhaps they will buy our stocks which will compensate them for the risk.
As we continue on in earnings season, much of the gloom and doom is being removed from this market. The companies are, for the most part, reporting better than expected earning and they are looking forward to improvement in the economy. Companies have done well during these difficult times, watching their bottom lines, and working at high efficiency. The only thing that doesn’t look good, right now, is the employment market. So far, sales jobs have returned to the market but little else is opening up. We need to see an improvement in temporary help and hours worked before we see some improvement in the job market.

Monday: Fed Chairman Bernanke speaks.
Tuesday: September housing starts are released at 8:30, September PPI (could be a problem here) and the Bank of Canada is expected to keep rates steady. Wednesday: Beige book is released at 2:00.
Thursday: September leading indicators are released at 10:00, September existing home sales are released at 10:00, and Boston Fed holds an economic conference with both Dudly and Evans (both FOMC voting member) on the panel.
Friday: Existing home sales and both Fed Chairman Bernanke and Vice Chairman Kohn speak at the Boston Fed confab.
The US Dollar index rallied in the Friday session leaving a higher low and a higher high on the daily chart. Before you go out and celebrate, it was only one candle. We would need to see this market close above 76.086 and then continue to rally to the 77.102 level before releasing any celebratory balloons. We are seeing buy signals from all the indicators that we follow and yes, we had a nine count in the Thursday session. The 5-day moving average is at 75.922. The top of the Bollinger band is at 77.689 and the lower edge is seen at 75.535. We are below the Ichimoku clouds for the daily, weekly and monthly time-frame. When we look at the longer time-frames, it is obvious that we could drop to the July 2008 low of 71.760 and then the March 2008 lows of 70.805. The bad news is that we closed at a level that opens the door to more pain for the US Dollar bulls. If we find the US Dollar index retreating rather than rallying, be very careful below 75.33 if you are long. Naturally our trading partners are not going to be thrilled with that, either as investors or competitors. As to the price of dollar based commodities, they go higher as the US Dollar goes lower. We have inflation while the rest of the positive currencies are enjoying price stability.
The S&P 500 mini futures contract closed down in the Friday session but managed to print a higher high for this rally before retreating. We do have signs of exhaustion in this market and all of the indicators that we follow herein are issuing a sell-signal. We do feel that should this market close above 1092, that there will be a continued melt up as those not long get long, and those short cover. Of further interest is the range of the Friday session which was higher than the previous session and lower than the previous session. The bears won the Friday battle printing an outside day for the session. We are above the Ichimoku clouds for the daily and weekly time-frames but below the clouds for the monthly time-frame. The 5-day moving average is at 1079.95. The top of the Bollinger band is at 1093.46 and the lower edge is seen at 1022.33. The monthly chart shows this market up for seven of the eight previous months, not bad for a recess huh?
The NASDAQ 100 is like the S&P 500 on speed. It goes higher and goes longer and does it before the others see what is happening. This index had an outside day in the Friday session. All the indicators that we follow are issuing a sell-signal. We are above the Ichimoku clouds for the daily and weekly time-frame and in the clouds for the weekly time-frame. The 5-day moving average is at1736.45. The top of the Bollinger band is at 1760.51 and the lower edge is seen at 1667.43. We believe that this index will lead the others as it has in the past. Just remember, should this index trade into the 1752.75 area, it will melt up rather than down.
The Russell 2000 shows signs of exhaustion. This index had an outside day in the Friday session. The 5-day moving average is at 615.20. The top of the Bollinger band is at 628.18 and the lower edge is seen at 582.70. This index looks as though it is rolling over to the downside. We are above the Ichimoku clouds for the daily and the weekly time-frame. The point and figure chart looks as though 618 needs to be removed to inspire a robust rally. The Market Profile chart indicates that above 622.50 there will be little if any supply holding down this market. It is also clear that should the market rally beyond that level that any shorts left in the market will duck and cover to avoid further pain.
Crude oil broke out of its trading range and probed the 78 level. There is nothing there in the way of supply, to hold this market down. Only the rally in the US Dollar will hurt the upside progress. We have been probing this area for a while and finally broke to the upside. Naturally, we are overbought but there isn’t a sell-signal to be found. We are above the Ichimoku clouds on the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The 5-day moving average is at 75.74. The top of the Bollinger band is at 77.78 and the lower edge is seen at 64.22. We are above the upper edge of the Bollinger band and will not be able to stay there. The volatility in the crude market is expanding. We believe that after some backing and filling that crude will rally further.
Gold is retreating and rolling over. All the indicators that we follow herein are issuing a continued sell-signal. We are above the Ichimoku clouds on the daily, weekly and monthly time-frames. We have sell-signals on all time frames. The 5-day moving average is at 1057.06. The top of the Bollinger band is 1077.10 and the lower edge is seen at 973.16. We saw a doji-like candle in the Friday session which indicates that this market is in transition with both bulls and bears equally matched.