Option Queen Letter

Are we all having fun yet? Don’t you just love the volatility? As an option seller, we do. If you are a call writer this environment is your dream. As a put sell, you have to love those premiums.
Fat finger……we don’t think so. Most systems will not let you enter orders in the billions without a second review like to say “is this what you really want to do?” Good excuse… but it’s only slightly better than “my dog ate my homework” in its credibility. Part of the reason for the free fall in the Thursday session can be attributed to mob mentality. The original stops placed in the markets caused, upon their election, a whoosh to the downside but then computers, or quants, noticing the downdraft piled into the trade accelerating the downdraft further. This was further complicated by NYSE stocks that were electronically halted compelling the market makers on the NYSE floor into action to make an orderly market, a slower market but orderly nonetheless. This caused some of the electronic sellers, looking for an exit, to abandon their NYSE platform and place those exit trades on the NASDAQ which, took full advantage of the situation and accommodated the trades.
A major problem causing this market meltdown is the extinction of trading floors, where some of this craziness was controlled. Machines just trade because of triggers, people actually think. True we can teach machines to think but they have difficulty reversing and adjusting as fast as the human can. The swings on Thursday are proof of this. The computers sold bought sold and when it was all over, a plunge of nearly 1000 points was reversed and the market gained back about 600 points by the end of the session. We need to obliterate trading halts or have all exchanges, including NASDAQ respect the same trading halts. On another front this Thursday accident speaks volumes to the value of the trading pit and the exchange floor market makers. When standing in the pit, you know who is selling and you know who is buying. True there are shenanigans always but they are a small price to pay for true price discovery and a true auction market. Electronics certainly have their place but to the credit of the people in the ring and on the floor that trade and fill our orders, the execution might be a tad slower but the results will be less chaotic. We have been both an electronic trader and pit trader. Both work well together but not to the exclusion of the other. Both should have the same rules of the road. We know that many who bought the Thursday low of the market had their fills canceled. This is another question which needs to be sorted out. If we cancel trades in this manor why would buyers step in? Wouldn’t they be afraid of a subsequent cancellation and thus not provide the bid that the market needs to stabilize. If we remove those bids, where would the market stop if it would stop before a limit trading halt would be enforced? These are good questions and ones that need to be answered. The answer is a level playing field with uniform rules for all, not just for NYSE or whatever exchange has made a rule but for all exchanges.
We are sure that you would like to know where the market is going to go next week. Monday’s have been up days in the market because the world survived the weekend and nothing major happened to cause the markets to blow up. That said, a relief rally appears and the all clear signal is sounded. This week, we don’t expect to see a repeat of last week’s craziness. We do expect to see a rally to at least 1117.03 and more probably 1136.12. The markets will remain nervous and the monthly expiration of options will add some increased concern. That said, we expect to see calmer waters in a sea of manic behavior.
Monday: the Bank of England releases its interest rate decision.
Tuesday: March wholesale inventories are released at 10:00.
Wednesday: March international trade is released at 8:30.
Friday: options expire at the end of the day, April retail sales are released at 8:30, April industrial production / capacity utilization are released at 9:15, May Michigan sentiment is released at 9:45 – 10:00 and March business inventories are released.
The US Dollar index retreated in the Friday session removing some of the excesses seen in the Thursday session leaving an inside day on the chart with signs of exhaustion. We are grossly overbought as measured by the stochastic indicator, the RSI and our own indicator. The Thomas DeMark Expert indicator is flat and slightly above neutral levels. The chart shows that the US Dollar index is forming a pole, the question is will the pole resolve into a bear or bull flag, or perhaps a pennant. In other words, the future direction is not clear from the recent trades. We would expect to see the US Dollar retreat in the coming sessions. A return to 82.87 and the uptrend line at 82.380 is likely. The 5-day moving average is at 83.945. The top of the Bollinger band is at 84.691 and the lower edge is seen at 79.325. During this past week we saw the US Dollar index trade above the upper Bollinger band for four of the five trading days. Friday, the index closed just below the upper Bollinger band. We are above the Ichimoku Clouds for all time frames. Euro fear is a wonderful thing for the US Dollar bulls. Remember as the dollar rallies, dollar based commodities will decline, making commodities more expensive for importers. Likely this will all smooth out. We have gotten used to seeing these sorts of extremes. This time is not different just the location is different.
The S&P 500 futures retreated this past week. The Thursday hysteria neared the February low of 1040.75 and came within a cat’s whisker of electing the circuit breaker trading halt. The Thursday low was 1056. The action in the Friday session was far more subdued than the Thursday session and left a resulting inside day on the chart. We are oversold by all the indications and measures that we follow, yet we are getting mixed signals. Our own indicator is curling to the upside and could, in the next session, issue a buy-signal. The Thomas DeMark Expert indicator is flat at the oversold line, the stochastic indicator is curling over and could issue another sell signal at slightly above oversold levels. We expect to see the S&P 500 futures trade to the 1117.03, 1136.12 and possibly 1155.21 levels. Things are not going to return to the upside until some of this fear is worked off. We below the Ichimuko clouds for the daily and the monthly time-frames and remain above the clouds for the weekly time-frame. The 5-day moving average is at 1152.90. The top of the Bollinger band is at 1241.05 and the lower edge is seen at 1132.81. This should be a very interesting week.
The NASDAQ 100 retreated in the Friday session with a lot less volatility than seen in the Thursday session leaving an inside day on the chart. The indicators that we watch are giving us the same signals as that seen in the S&P 500 futures contract. The signals are mixed some showing that we will likely rally and some saying that we will not. It is our opinion that we will try to stabilize this week and we will likely rally into options expiration. Resistance will be found at 1855.39, 1894.12 and at 1932.85. The 5-day moving average is at 1937.90. The top of the Bollinger band is at 2101.37 and the lower edge is seen at 1899.47. We are inside the Ichimuko clouds for the daily and the monthly time-frames but are above the clouds for the weekly time-frame. When market suffers the damage seen this past week, they need to take some time to repair themselves. Thus most rallies will be met with seller and most retreats with buyers, but the buyers will be willing to take only limited risk on their trades. Thus we should see the S&P outperform the Russell 2000 as risk is removed from the market. We expect to see stabilization return to these markets in the coming week. Be prepared for the worst and hope for the best.
The Russell 2000 continued to slide in the Friday session. We continue to see mixed signals as generated by the indicators. The Thomas DeMark Expert indicator is trying to turn to the upside. We are getting a sell-signal from the stochastic indicator and our own indicator looks as though it might issue a buy-signal tomorrow or perhaps on Tuesday. The RSI continues to point lower. There is resistance at 763.23, 689.90 and at 700.56. Still we believe that if the market is going to take a less risky approach to the market, this index will underperform the rest of the market that is until the all clear signal is sounded. The 5-day moving average is at 691.92. The top of the Bollinger band is at 756.34 and the lower edge is seen at 671.63. The waterfall spill that occurred last week paints a picture of panic. When cooler heads prevail, the market will likely adjust its downdraft to a less sever waterfall pattern. We closed inside the Ichimuko clouds on the daily chart and above the clouds for the weekly chart. Both the weekly and the monthly charts are overbought and continue to issue a sell-signal.
Crude oil closed below the Ichimuko clouds in the Friday session leaving a large red candle on the chart. Crude oil has been down four out of the five trading days this past week. As to the indicators, crude oil is grossly oversold but shows no signs of reversal. Much of crude oils recent problem stems from the strength in the US Dollar. Some of the concern about the fragile global economies is bleeding into the crude oil market which is dependent on a certain amount of growth to continue its upward movement. There is also some concern about a possible slowdown in the expansion seen in China. The 5 day moving average is at 80.224. The top of the Bollinger band is at88.75 and the lower edge is seen at 77.52. We closed below the lower edge of the Bollinger and will likely move back inside the band.
Gold seems to have an evening star at on its daily chart. Gold is grossly overbought and continues to point to higher levels. The 5-day moving average is at1187.04. The top of the Bollinger band is at 1201.6 and the lower edge is seen at 1124.20. Although we have been somewhat of a gold bug for a while, we believe that gold has gone a bit further than it should have and will likely retreat in the coming week. We continue to buy gold on reasonable dips.