The Option Royals

So what is wrong with a bull market? This has been a wonderful reprieve from the doom and gloom we have lived with since the Lehman Bros sacrifice. Don’t try to figure out when it is going to end; it is like sunshine it is great for the spirit and soul but bad for the skin. The bull market will help the Obama campaign and if it lasts just a wee bit long, it will help his re-election. Remember that we can get skin cancer from the sun. That works for the market as well.
This week is a very light week for economic releases and earnings so the market will likely be a little boring for those who love action. We noticed that the NASDAQ 100, the leader of the bull market band, took the day off in the Friday session and felt the pangs of the sellers overwhelm the buyers. Not much damage but a stark difference from the rally seen in the S&P 500.
Spring is just around the corner and although we haven’t heard much from the green shoots camp, there seem to be green shoots everywhere. We do have major problems to deal with but even the biggest bears have turned in their claws and joined the bull camp. Bob Farrell’s rule number nine: “When all the experts and forecasts agree–something else is going to happen.” We would agree and it might be a good time to purchase a few protective wing puts on the market. (A wing put is a put that has little chance or probability of paying off and is like a lotto ticket than a well thought out investment.) Buying a wing put is buying into the “black swan” and is about as likely. That said, a professional in the market will not sell these options because they are not worth the risk. Most of us in the Russell ring bought these puts rather than selling them. They cost about $25 and they served to reduce the margin on your other positions if sold, they would increase your margin far more than the $25 you would get.
Here is some advice, the markets do not go up in a straight line nor do they go down in a straight line. This market has been going up in a straight line and for now, that is all well and good, but remember it will correct so plan on it.
Wednesday: January existing home sales are released at 10:00.
Friday: February Michigan Sentiment is released at 9:45-10:00 and January New Home Sales are released at 10:00.
A daily chart of the US Dollar index shows we have broken above the 61.8% Fibonacci retracement off of the January 13th high that had been acting as resistant only to find new resistant at the 79.85 level. A candle stick chart shows a bearish engulfing pattern with a large upper wick (demonstrating strong resistance above) followed by a doji (signaling indecision). Turning to our indicators, the RSI is flat at the 50 level, the Stochastic is pointing down in negative territory with the fast stochastic beginning to turn up and our own indicator is issuing a sell signal. The upper Bollinger band is at 80.084 and the lower is 78.518 and we can see the two of them coming together. The 20 day moving average is at 79.301 and seems to be acting as support. In the near term we foresee the 61.8 Fibonacci number acting as support and the dollar index eventually pushing through the 80.084 resistance. Above these levels we see 80.60 as the next stop followed by 81.056. That is not to say there won’t be some backing and filling between now and then!
The S&P 500 was the best performer in the Friday option’s expiration for February. This index is climbing along the upper edge of the Bollinger band staying comfortably above the 20 period moving average. The market has maintained its rally inside the channel lines. The channel lines are 1375.84 and 1336.15. The 5-period exponential moving average is at 1351.72. The top of the Bollinger band is at 1365.99 and the lower edge is seen at 1298.22. We are above the Ichimoku Clouds for all time-frames. Our next area of resistance is 1373.50 which is an old high seen in May of 2011 basis the futures continuation chart. All of the indicators that we follow herein are pointing higher. We have been overbought since the end of December never dropping even to the neutral level, so until the market totally loses its upside momentum and retreats say to the neutral level, we will remain positive. We are concerned that we have come too far too fast and that there will be some pain along the way. With that in mind we suggest you purchase some wing puts that are way out of the money and further suggest that you keep your trailing stops tight.
The NASDAQ 100 suffered a decline in the Friday option’s expiration trading session. This index reminds us of the pole like qualities seen in the days of the tech bubble. The appreciation in this index has been stellar. We have been hugging the upper Bollinger band for all of the 2012 trading year, well so far we have. We have been, for the most part, trading above the 5-day exponential moving average. This really looks like a bull in action. That said, we are due for a correction and we would not be surprised to see that in the very near future. The RSI is losing ground and, although still overbought, pointing lower. Our own indicator has just issued a sell-signal. The Thomas DeMark Expert indicator is flat at neutral and the stochastic indicator is about to issues a sell-signal but has not done so as of this writing. We are above the Ichimoku Clouds for all time-frames. If you were to continue counting above the 13 level, you would see that we are at 18. Clearly we can go higher but as we do, we open the door to the opposite movements. We have seen rallies like this one in sugar where we actually went to a 24 count before the market corrected and printed a 24 on the bottom. Interesting stuff.
The Russell 2000 ended the Friday session just about where it started the session. We seem to be bumping up against the upper edge of a rectangle. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is at 823.35. The top of the Bollinger band is at 842.57 and the lower edge is seen at 777.94. Although all indicators continue to issue a buy-signal, the stochastic indicator and our own indicator are curling over to the downside. Until or unless this index closes above 833 and stays above that level for two day, it is likely that we will retreat.
Crude oil broke out to the upside in the Friday session. Now the question remains will it be able to stay there for another day? We find the indicators grossly overbought although pointing higher. The 5-day exponential moving average is at 102.15. The top of the Bollinger band is at 103.14 and the lower edge is seen at 95.96. We closed above the upper band and would expect to see either the bands expand or the market retreat back inside the bands. We are above the Ichimoku Clouds for all time-frames. When looking at the monthly chart, we see that the next resistance level is at 105, 107,114.83….yikes! So much for deflation.
Gold retreated in the Friday session but remains in the flag of the chart. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is at 1724.35. The top of the Bollinger band is at 1764.84 and the lower edge is seen at 1682.22. We have plenty of overhead supply in gold so it isn’t going to be a slam dunk rally. If this market can move above 1800, we will open the doors to the old highs and possibly printing new highs but until that time, it looks as though we are stuck backing and filling for a while.

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