The Option Queen Letter

The “jobs report” rally was a rally that took the market 6.25 points higher but failed to remove the loss of the week. We closed the Friday session of March 2, 2012 at 1368.75 and this week our close was 1366.75, not much difference. The important take away from this is that given the very positive “jobs report” we should have sailed beyond last week’s high and posted a new high for the year but we did not. So what is wrong?
Okay so far, we continue in a bull market. That said, we strongly recommend that you keep your eye on interest rates, the cost of raw materials, energy and the continuing recession in the Euro Zone. In spite of the FOMCs message that interest rates will remain near zero for at least two more years, they seem to be crawling up a little bit. All this pumping money or printing money is deflating the value of the currency thus, commodity prices are rising. 22% of the exports from the USA are purchased in the Euro Zone. If the recession is as bad as we think it will be, then this number will drop. Energy prices are in rally mode. Unfortunately, most of workers income increases are not able to keep up with the increases in energy costs thus the dollars available for discretionary purchases are greatly reduced and the middle class population continues to live from pay check to pay check. All this is not good for retail sales.
Here is another wild card, should the government decide to tax dividends as ordinary income, some investors might just decide to abandon their plan to purchase dividend paying securities. If you can get 3.10% on a bond such as a treasury bond and not pay any state tax on that interest rate payment, the issue might begin to compete with that dividend you were receiving with a 3.0 annual yield. Right now, the dividend wins because the maximum tax on the dividend will be 15% while the bond yield will be ordinary income so, the stock wins. Should the law change, the lines will not be so clear. Then there is another wild card, and this is truly a wild one with little chance of passage, the government is talking about taxing municipal securities which have enjoyed a tax free status. We wonder out loud do they not realize that it will cost municipalities more money to borrow for the needs and that will impact the tax payer whose real-estate taxes or state income tax will likely rise to absorb some of the extra cost for borrowing money. The end result would be, you guessed it, less discretionary income for the tax payer.
Tuesday: FOMC interest rate decision and statement to be released at 2:15 and February retail sales are released at 8:30.
Wednesday: February import prices are released at 8:30 and Fed Chairman Bernanke speaks.
Thursday: February PPI is released at 8:30, March Philly Fed survey is released at 10:00 and the Fed begins releasing the results of the bank stress tests.
Friday: February CPI is released at 8:30.
The US Dollar index broke above the down trend line established January 16th with vigor. We saw a testing of this line as support on March 8th and then a bold about face on the chart. Next stop is 80.238, the former high from February 16th, beyond that we can’t say. If the index fails to break through this top we could see some more backing and filling and sloshing around. If, however, the market chooses to press forward the former high of 80.433 from October 4th will certainly act as resistance. Beyond this there is a congestion zone above that ranges to approximately 80.90. For the daily view we are receiving buy signals on the Stochastic, the RSI and our own indicator, with all still well within neutral territory except for the stochastic which is just starting to move into overbought territory. Remember, the market can stay over bought for quite some time and we are still a long way from being over bought… The Bollinger bands are expanding with the upper band at 79.591 and the lower band at 78.330. We are above the 20 period moving average.
A weekly chart confirms are bullish outlook on the US Dollar index and shows a market that was approaching point of inflection and popped. This chart tells us the market is making its way to 80.474, a former high that has been hit multiple times in the past. We are still above the down trend line established August 29th. The RSI, Stochastic and our own indicator are all issuing buy signals with plenty of room to the upside.
The S&P 500 contract front month is June. That fact could have accounted for the move to the upside in last week’s trading as shorts covered their positions in the March contract. We showed you the chart of the open interest and it was very clear from that chart that there would be buying. We were not disappointed by that information. The 5-day moving average is 1356.15 the 5-period exponential moving average is 1360.05. The top of the Bollinger band is at 1378.24 and the lower edge is seen at 1338.10. All the indicators that we follow herein are issuing a continued buy-signal with plenty of room to the upside. The index seems to be bouncing from the lower Bollinger band to the upper Bollinger band. Remember we had been following the upper Bollinger band without every breaking below the 20 period moving average, however; this week we not only removed the 20 period moving average but we bounced off of the lower Bollinger band first time since December 20, 2011. The Market Profile chart clearly shows that if we close above the 1368.75 area, we will likely melt to the upside. When you look at the weekly chart a different picture emerges. We have signs of exhaustion in this market. The stochastic indicator is issuing a continued sell-signal at grossly overbought levels. The Thomas DeMark Expert indicator is neutral. Our own indicator is still issuing a sell signal but really not trending. The RSI is at overbought levels but like our own indicator not trending.
The NASDAQ 100 has been stronger than the S&P 500. This index regained all the points lost in the two-day sell off on Monday and Tuesday closing near the high of the day and not far from the high for the year. The 5-day exponential moving average is at 2626.37. The top of the Bollinger band is at 2657.63 and the lower edge is seen at 2545.61. All the indicators that we follow herein continue to point higher. This index only poked below the 20 day moving average on two days, Tuesday and Wednesday, but never closed below that 20 period moving average. We have been and continue to see the NASDAQ trade along the upper edge of the Bollinger band. The Market Profile chart is also quite bullish showing us that if we close above 2647.50 we will melt to the upside.
The Russell 2000 was the weakest of the indices on the sell-off leading the others lower. Although the rally on Friday took this index 1.6% higher, it has a weaker chart than the other indices has. The 5-period exponential moving average is at 804.14. The top of the Bollinger band is at 839.70 and the lower edge is seen at 790.84. We saw this index actually trade and close below the lower Bollinger Band on four of the past six days. Friday’s session saw it challenge the 20 period moving average but the index failed to close above that level. All the indicators that we follow herein continue to issue a buy-signal. The Market Profile chart shows us that above 817.60 we will likely melt to the upside. Remember we are looking at June futures which, is the front month.
Crude oil remains above the Ichimoku Clouds and inside the downward sloping channel lines. Until or unless this market closes above the upper channel line at 108.06 it likely will test the lower channel line of 103.82. The 5-period exponential moving average is at 106.96. The upper edge of the Bollinger band is at 110.33 and the lower edge is seen at 101.89. The Market Profile chart tells us that above 110.25, the shorts will become scared and will cover their positions. The monthly chart indicates that we will see resistance at 110.55 and at 114.83. Above those levels we will certainly melt to the upside. All the time frames are bullish….so far.
1663.40 the line in the sand for Gold. The past three days have been positive for gold but lots of damage was done during the flash crash seen on February 29, 2012. Was it because it was the 29th on a leap year? We don’t think so. We are above the Ichimoku Clouds for all time-frames. The indicators continue to point to the upside with plenty of room to travel. The 5-day exponential moving average is at 1708.11. The top of the Bollinger band is 1794.76 and the lower edge is seen at 1665.22. We have seen the market make some very feeble attempts at regaining the lost ground of the leap-day crash but little progress has been made. Remember that the overhead longs are itching to get even so we will see downward pressure on every advance. This will continue until it looks as like the market is going to make an upside run, then, the trend following systems will kick in and push this market higher. Till then, it is going to be difficult for gold. We continue to like gold.
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