Option Queen Letter

This week we took note of something rather interesting; specifically there was a great deal of chatter going around regarding the current rally. As the mortal investor begs the question of divergences seen in the recent rally a veritable chorus of gurus and talking heads responds yes, this rally was good and that yes, a new bull market hath commeth; one we mortal investors must respect. While we will agree in so much that a one-day retreat will not be viewed as a returning bear market, it must be remembered this story is not dictated by the media gurus or seers but by the tape. We merely are observers of the markets, noting past behavior and patterns that we may observe. We do not tell the market where to go or how to go; basically we observe and report thus making observations of current behavior and similarities to past behaviors.
We noted in last week’s letter that the market was primed for a retreat and further, while we knew that it was coming, we didn’t know when it was coming. This past week our dear friend Hendrik pointed to the VIX chart highlighting a 13 count using the Demark indicator. Further observation of the VIX chart showed a very clear morning star formation. As you might imagine, this event made the hairs on our neck stand at attention and indicated that within a few days it was likely some event would take the market downward. The excuse was Goldman vs. the SEC, go figure.
Perhaps the only way to stop the sort of poor behavior demonstrated by Goldman et al, is to hold them accountable for their actions beyond a fine. Give them a black mark on their record, note for all to see that they are violating the streets code of ethics and make an example out of them. This sort of punishment is frequently seen for small broker/dealers, but the big guys slide by with a slap on the wrist and a few bucks to be paid out. They never learn because they are never hurt.
More importantly, what was done to punish the banks and mortgage companies who phantomized applications, messaged the figures and awarded mortgages based on fictitious valuations to people who couldn’t afford them. What of the banks? Yes, Wall Street took full advantage of these loan obligations and packaged them into units to sell, but they weren’t the loan originators just the resellers. Where were the regulators during this loan selling frenzy and, more importantly, where are they now? The banks had to be bailed out and in effect held harmless? Wall Street was bad but they only took the mortgages and repackaged them, they did not make the loans. Oh, by the way, we are back to 3% down and you too can be a proud home owner.
Today, the banks (which were brokerage houses just a couple of years ago and banks that were always banks) are enjoying almost zero percent interest rates when they borrow from the federal government. They then loan that money back to the government via Treasuries at a profit. Banks also lend money to the public via loans at a spread of about four/six points and they enjoy charging interest rates on credit cards from about 6% to 29% (and remember, all of this on money that they are borrowing at near 0% from the government). That is some punishment for having been a party to a near collapse of the financial markets. Can we get a piece of that action?
Monday: March leading indicators are released at 10:00 and Federal Reserve Board Governor Duke speaks. IBM, Citi and Lily just a few of the earnings to be released.
Tuesday: Earnings continue with Apple, J&J, Coke etc.
Thursday: March PPI is released at 8:30, March existing home sales are released at 10:00 and the earnings parade continues.
Friday: March durable goods are released at 8:30 and March new home sales are released at 10:00
The US Dollar index rallied in the Friday session moving above the 5-day moving average which is at 80.627. We remain below the downtrend line of 81.44. All the indicators that we follow herein are uniformly issuing a buy-signal. We gapped lower in the April 12, 2010 session and stepped into that gap on Friday closing that gap. The US Dollar remains below the downtrend line of 81.44 and must close above that line to turn this chart bullish. The top of the Bollinger band is 82.37 and the lower edge is seen as 80.213. We are above the Ichimoku clouds for the daily time-frame but are in the clouds for the weekly and the monthly time-frames. Both the weekly and the monthly charts look toppy. On the upside, there is almost no resistance above 82.17 and single prints on the Market Profile chart. This tells us that should we get to that level, we will likely melt up.
The S&P 500 futures contract remains above the uptrend line which is at 1182.51. The 5-day moving average is at 1198.15. The top of the Bollinger band is at 1207.42 and the lower edge is seen at 1151.37. The stochastic indicator finally broke below the support level of 68.05 and posted the lowest level seen since mid February. This indicator continues above the neutral level but is pointing lower. The RSI also broke to the lowest level seen since February when it closed the Friday session at 57.22, which is still above neutral but pointing lower. Our own indicator is issuing a sell-signal, but the Thomas DeMark Expert indicator is going sideways at overbought levels. We are above the Ichimoku clouds on the daily and the weekly time-frames but are below the clouds for the monthly time frame. We are overbought on both the weekly and the monthly time-frames. The point and figure chart tells us that so long as we stay above 1185, we should be fine.
The NASDAQ 100 looks to be in better shape than does the S&P 500. Why you ask, look no further than the stochastic indicator and the RSI. Neither the stochastic indicator nor the RSI broke below previous levels seen in this bull run that began in February. We noted last week that “the daily stochastic breaks below 57 and the RSI breaks below 65” would be needed to make us uncomfortable. Well, the daily stochastic indicator is pointing lower but closed the Friday session at 71.13 and the RSI closed the session at 65.73. We note that the RSI is getting very close to making a new low, one not seen since the beginning of the bull run, but it isn’t there at this time. The 5-day moving average is at 2012.95. The top of the Bollinger band is at 2026.81 and the lower edge is seen at 1924.48. The uptrend line is at 1986.33. We are above the Ichimoku clouds for the daily, weekly and monthly time-frames.
The Russell 2000 looks the best of the financial indices. The 5-day moving average is at 712.72. The top of the Bollinger band is at 721.27 and the lower edge is seen at 664.87. We do have signs of exhaustion on the daily chart but we remain above the uptrend line at 709.42 and one at 707.85. We are above the Ichimoku clouds for all time-frames. The stochastic indicator, the RSI and our own indicator continue to issue a sell signal on both the daily and the weekly charts. The Thomas DeMark Expert indicator is going sideways at overbought levels. Our advice is to stay very nibble and defensive. This market and the NASDAQ 100 have out-performed the S&P 500. One reason for this underperformance to the downside is that there are no large financial companies in this small cap index or in the NASDAQ 100. This has helped keep both the NASDAQ 100 and the Russell 2000 from participating to the extent that the others did on the downside.
Crude oil closed below the uptrend line in the Friday session. The uptrend line is seen at 83.50. The 5-day moving average is at 84.59. The top of the Bollinger band is at 87.84 and the lower edge is seen at 79.23. All the indicators that we follow continue to issue a sell-signal and have room to the downside. We are above the Ichimoku clouds for the daily, weekly and monthly time-frames. The Market Profile chart shows lots of support as we retreat. On the upside, we will find ourselves in unstable areas above 87.09. Above that level, we will likely see a melt up. There should be good stability found in the 79.92 to 82.87 area.
Gold met with lots of selling in the Friday session leaving a very large bearish candle on the chart. The uptrend line has been broken. The 5-day moving average is at 1153.88. The top of the Bollinger band is at 1177.37 and the lower edge is seen at 1077.92. All the indicators that we follow herein are pointing lower with plenty of room to the downside. We are above the Ichimoku clouds for the daily, weekly and monthly time-frames. Unless and until we can close above 1164.80 we will probe the downside finding support all the way down to1086.40. The point and figure chart tells us that we need to close above 1137.80.