Option Queen Letter

What is the market going to do for the coming year? The belief that all is well and that we are out of the woods regarding the recession, could be true and then again they might just be a pipe dream. All we see is a jobless recovery bordered by restricted lending by banks and increased saving from the consumers–does this sound familiar? Well it should as this is the third jobless recovery our economy has had. People continue to live in fear of not being able to make their bills and, because of that fear won’t spend money easily–this will hurt the very fragile recovery. A great deal of the recovery depends on consumer spending. Here in the North East, we are just getting our winter utility bills which reflect the colder weather. Certainly, some of these bills will restrain the ability for the consumer to spend. We have seen a new trend, people flocking to malls for the heat so that they don’t need to heat their homes to stay warm. Now that is scary.
This week we begin with earnings season with Alco beginning the parade. We expect earnings to be okay, but what won’t be okay is cash flow from current business. Most of the earnings are coming from cut backs in costs rather than increased production. While the headline number might be good, dig into the number and look for cash from operations to discover if this recovery is flowing to the bottom line.
Monday: St Louis fed President speaks.
Tuesday: November international trade is released at 8:30, Crop report is released and Tiffany released its holiday sales.
Wednesday: The beige-book is released at 2:00, and the European Central Bank issues its interest rate decision.
Thursday: December import prices are released at 8:30, December retail sales are released at 8:30, November business inventories are released at 10:00 and INTEL reports its earnings.
Friday: December CPI is released at 8:30, December industrial production and capacity utilization is released at 9:15, January Michigan Survey is released at 9:45-10:00, and Richmond Fed president Lacker speaks.
The US Dollar index declined under the weight of the dreary “jobs” report released in the Friday session. The chart shows that Friday was an outside day. The candle is a bearish looking candle. So long as the US Dollar index stays above 77.39 we will remain constructive however; should the US Dollar close below 77.39, the door will be open to 76.658. Naturally, as the US Dollar retreats we find dollar based commodities increasing. Crude oil has been increasing even with the strong US Dollar and this current weakness will be a positive boost to crude oil. All the indicators that we follow continue to issue a sell-signal for the US Dollar index. The indicators show that there is plenty of room to the downside. The weekly chart looks as though we have made a top and will go lower. We have an outside week on the chart. All the indicators that we follow are issuing a sell-signal on the weekly chart. The downtrend line is at 78.467 and to reverse the current trend of the market, we would need to close above that line. We are above the Ichimoku Clouds on the daily time-frame but are below the clouds for both the weekly and the monthly time-frame. The 5-day moving average is at 77976. The top of the Bollinger band is at 79.115 and the lower edge is seen at 76.405.
The S&P 500 has been up for the entire first week of trading in the New Year. That said, we have signs of exhaustion and we seem to be climbing the upper edge of the Bollinger band. The upper edge of the Bollinger band is 1141.53 and the lower edge is seen at 1093.85. The 5-day moving average is at 1127.83. We are overbought as measured by all the indicators that we follow, all of which continue to issue a buy-signal. Naturally, we are above the Ichimoku Clouds on the daily and weekly charts but are below the clouds for the monthly time-frame. When we apply Fibonacci retracements on the monthly chart, we are slightly above the 50% level. The indicators on the weekly and the monthly time-frames are extremely overbought and continue to point higher. When we look at the Market Profile chart we are in the single print area which tells us that there is no overhead supply to work through and that we are in an area of high instability. There are two things that can happen now, either we melt up or we go back to 1127.04 or so where we will find some stability. These certainly are interesting times.
The NASDAQ 100 rallied in the Friday session and closed at a higher level than the open leaving a green candle on the chart. The NASDAQ 100 is grossly overbought as measured by the indicators that we follow. All the indicators continue to issue a buy-signal. The 5-day moving average is at 1877.83. The top of the Bollinger band is at 1917.39 and the lower edge is seen at 1769.77. Naturally, we are above the Ichimoku Clouds for the daily and the weekly time-frames but we are in the clouds for the monthly time-frame. We remain overbought on all time-frames. The chart tells us that we can continue higher. The market profile chart shows us that we are in an area of instability.
The Russell 2000 is grossly overbought, but without any signs of an impending sell-off. The 5-day moving average is at 634.25. The top of the Bollinger band is at 650.12 and the lower edge is seen at 594.61. We are above the Ichimoku clouds for the daily and weekly time-frames. We are overbought on all time-frames. The uptrend line for the daily chart is at 632.20. We wouldn’t be surprised to see a further push to the upside. It seems as though the bulls have more energy left. We do see some resistance at 644 or so.
Crude Oil left a doji candle on the chart for the Friday session. Remember a doji indicates a transition and, perhaps a change of direction. Crude oil is overbought as measured by all the indicators that we follow herein. The 5-day moving average is 80.90. The top of the Bollinger band is at 85.67 and the lower edge is seen at 67.22. Crude oil has been rallying in spite of a strong US Dollar. As we said last week, it looks as though there is real demand for the product. We are above the Ichimoku Clouds for the daily, monthly and quarterly time-frames but we are in the clouds for the weekly time-frame. We are overbought on all time-frames. It would not be surprising to see some consolidation and perhaps a retreat before the next run to the upside.
It would seem that all the commodities that we follow are overbought, gold is not. Gold closed higher in the Friday session but remains inside the Ichimoku Cloud for the daily time-frame. We are above the Ichimoku Clouds for the weekly and the monthly time-frames. Gold differs from the other commodities in that it is not overbought on all time-frames but is overbought on the daily time-frame. Actually, we are getting a buy-signal on the weekly chart. The Bollinger bands indicate that we will be moving into a period of higher volatility. We remain cautiously bullish on gold.