The Option Queen Letter

S&P 500, 50 year monthly chart

S&P 500, 50 year monthly chart

We are not surprised to see the S&P 500 make a new high. Ever since the problems began in the Eurozone, the United States has been the least of the bad places to invest. Given our deficit problems and our political stalemate, we continue to have problems. Those problems are nothing compared to those seen in other parts of the world. That is why we are the least of the bad and the investment destination of money fleeing in fear of chaos. Our own domestically grown investment types are still sideline sitting waiting for pull-backs to join the crowd of investors.

Our followers know that we have been beating the drum to invest in this market because the alternative investment of bonds yielded a negative return. Now that real-estate is again primo and rising, some of the investment capital will flow in that direction. Actually in our letter a few issues back we noted that investment capital is purchasing houses on the cheap with the intent of renting or flipping the properties. These alternative investments have become very popular. Is it distorting the market, yes, but that distortion is egging the reluctant buyers sitting on the sidelines to purchase that house before the prices rise further. This in turn gives the feeling that the market is turning the corner and will continue to improve. If this could catch on, then yes, it would help pull the economy forward but one thing is missing, that is jobs.

The middle class earner barely squeaks by. The youngest of earners, without families to support and only college loans, are able to spend on discretionary products but those with families are still stuck in support mode, that is a mode of paying bills and hoping that they have enough to pay them all. This condition does not push the economy out of the hole but rather gives the appearances of improvement but with no real improvement. The hope is that some increase in consumer spending will inspire corporations to increase their hiring. The fly in the ointment is the new Obamacare mess which inspires corporations to hire part-timers, no health care benefits, rather than full-time employees. As a matter of fact, many small businesses have been cutting back on their full-timers to avoid Obamacare costs. It isn’t as though fewer workers are needed; it is just split up differently to avoid the onerous costs associated with the full-time employee. We aren’t seeing a slowdown, just a reshuffling of how the job gets done.

The bottom line on the market is, that until the bond market retreats, there is no competition for investment capital and the market wins hands down. There will come a time when risk will demand a higher return. We are not there yet, and we have no idea how long this transition will take. While the Fed is free with supplying money at near zero interest rate cost, there is basically no place else to hide so the market will continue meandering higher with periodic small retreats. This was the last trading session for the quarter and the month. Monday we will see the 401k money flow into the market which should add further support to the rally.

The S&P 500 is gunning for the high of 1586.75 which was last seen in October of 2007. The old high is not that far away from our current level and likely, after a short pause, will be removed and exceeded. It is interesting to note, that the Bollinger Bands are narrowing telling us that the volatility is contracting. Still this market is stair-stepping its way higher. All the indicators that we follow herein are pointing higher, some of these indicators are overbought and others approaching overbought. It is important to note, that markets can stay overbought or oversold for extended periods of time. The market seems to be trading in a box, at the moment. We assume that it will break out of that range and move to the upside. The up trending channel lines are 1544.35 and 1568.03. The 5-period exponential moving average is at 1556.08. The top of the Bollinger Band is at 1570.39 and the lower edge is seen at 1524.30. We are above the Ichimoku Clouds for all time-frames. The Market Profile chart continues to meander higher forming perfect bell shaped curves in this process. 19.3% of the day’s volume was printed at 1548 which appears to be what the market perceives as fair value. That said, we closed near the upper edge near the single print area which tells us that either it was short covering or perhaps some money being put to work on the long side, not much volume though. The daily point and figure 1% by 3 box chart is very bullish and shows the market trading above the upper 10 period Bollinger Band. Both our own indicator and the RSI continue to point higher. We are above the medium-term uptrend line and above the short-term uptrend line on the weekly chart. There is some concern with a slight divergence between two of the indicators that we are looking at. Clearly we will revert to the mean but the question is when, not if.

The US Dollar Index is an astute student of history. The Friday Session closed at 83.15 but only after visiting 83.46, near the top of the summer 2010 resistance zone. Friday’s candle tells a very dramatic story. Nearly the same size as Thursday’s candle, the market opened near Thursday’s high and again moved lower. Perhaps those trading the index did not want to remain long over the holiday weekend. Open positions over extended holidays produce stress on their own notwithstanding the turmoil and instability from the likes of Cyprus and the Korea.
The market is above both the 5-period exponential moving average (83.12) and the 20-period simple moving average (82.75). The Bollinger bands have contracted quite a bit with the upper band currently at 83.41 and the lower band at 82.1. As we mentioned, the market hit overhead resistance around 83.45, an area of heavy congestion the summer of 2010 and again, the summer of 2012. The RSI is continuing to print lower highs and lower lows however it looks as though it is starting to turn to the upside. Our own indicator is on the verge of issuing a sell signal and the stochastic is issuing a sell signal. With some return of some volume to the market, we would not be surprised to see this market take out the July high (84.14) if it can break above this week’s high it will be on to 84.14 (the July high). Below there is risk down to the 82 level. The 60 minute .05 x 3 point and figure chart continues to show numerous activated unfulfilled upside targets (83.70, 83.80 & 84.85) as well as the formation of multiple internal trend lines. The weekly chart shows a market that has taken a break before its next move. Here we see confirmation that a likely move will be back to support around the 81.44 level or onto the July high.

The NASDAQ 100 enjoyed a robust rally in the Friday session tacking on 12.25 points or 0.44% for the day. The action in the Friday session was inspired by position squaring for the quarter and the inflows of money from countries with scary banking systems. The NASDAQ 100 is not overbought and has room to the upside. The stochastic indicator, our own indicator, and the RSI are all pointing higher, the Thomas DeMark Expert indicator is pointing lower. We are above the Ichimoku Clouds for all time-frames. The up trending channel lines are 2824.27 and 2777.97. The 5-period exponential moving average is 2799.58. The top of the Bollinger Band is 2823.57 and the lower edge is seen at 2759.22. The Market Profile chart shows us that 14.2% of the volume in the NASDAQ 100 occurred at 2792 and that is obviously where the market sees fair value for the moment. We closed near the upper edge of the bell shaped curve. There is very little overhead supply in our way and we could easily melt to the upside. The daily 1% by 3 box point and figure chart remains bullish with unfilled upside targets and no downtrend lines in sight. The 60 minute 3 by 3 box chart shows a breakout from consolidation and a market that is on a SAR buy.

The Russell 2000 did not perform as well as the other indices in the Friday trading session. The Bollinger Bands are narrowing and the market seems to be in a trading range. All the indicators that we follow herein are pointing higher at or near overbought levels. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 946.62. The upper edge of the Bollinger Band is at 960.78 and the lower edge is seen at 948.90. 17.2% of the volume was seen at 942. It is interesting to note, that the Bollinger Bands on the 1% by 3 box daily point and figure chart are expanding while the Bollinger Bands on the daily candlestick chart are contracting. The 60 minute 1 by 3 box chart clearly shows congestion. We continue with a SAR buy on this chart and have no downside trendlines at this time. When looking at the weekly charts, it is clear how steep the angle of ascent has been. Our own indicator is issuing a sell-signal on the weekly chart and the stochastic indicator and RSI are both overbought. There are signs of exhaustion but so far, the rally continues. Please proceed with caution. Let the market tell you where it is going.

Crude oil enjoyed a 5-day rally this past week taking it to levels not seen since its fall in February. The market closed the session very near the highs of the session. Crude oil is overbought but has not triggered any concern as yet. We closed above the upper Bollinger Band for the third day. The Bollinger Bands have again begun to expand telling us that the volatility is returning. We are above the Ichimoku Clouds for all time—frames. The market has moved too fast and it is likely that we will see some backing and filling. The 5-period exponential moving average is at 95.89. The top of the Bollinger Band is at 96.87 and the lower edge is seen at 89.10. The Market Profile chart shows that fair value is 92.50 and that is where 19.5% of the volume could be found. We closed at the upper tail of the chart where the market is somewhat unstable. The indicators on the weekly chart are all positive. The candlestick left on the weekly chart is a huge green candlestick. It is likely that the shorts covered their positions when the market crossed above 94.09 and it is further likely that trend following systems kick into the market when the rally continued. The 1% by 3 box point and figure chart does have downtrend lines and it seems that crude oil is going to have to prove that this rally is something more than a short covering exercise. When looking at the 60 minute 0.50 by 3 box chart you find a downtrend line, an uptrend line and a SAR buy signal.

Gold did not participate in the rally in the Friday session actually it gave back almost all of the gains attained at its opening. The trade on Friday produced an inside day. We are above the uptrend line at 1589.47 and below the downtrend line at1606.50. The down trending channel lines are 1606.50 and 1583.20. The longer-term downtrend line is 1642.54. We are below the Ichimoku Clouds for both the daily and the weekly time-frames. We are above the clouds for the monthly time-frame. Should the market continue on this path we will have a point of inflection on April 5, 2013, when the lines meet. This should cause a violent move, do not fight the move go with it. The 5-period exponential moving average is at 1601. The top of the Bollinger Band is at 1618.19 and the lower edge is seen at 1566.67. Both the RSI and stochastic indicators are pointing lower. There is nothing on the Market Profile chart that tells us the market is going to change direction anytime soon. We believe that gold should rally with all this unrest in the world but it hasn’t that tells us that there is more trouble brewing in this market. We would love to be more positive but we only read the charts and they are telling us that by April 5th will discover the direction of the next move.


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