The Option Queen Letter

The airs is full of talk of sequestration and the resulting furloughs of air traffic controllers. Naturally this mess was quickly cleaned up when our elected officials needed to avail themselves of the flights. Now there is more to this than meets the eye, of course. How much of the delay was due to sequestration furloughs and how much was caused by employee backlash at the notion that their job security was on the line. Were the furloughs properly placed or targeted in such a way as to inconvenience people enough to make the resolution of the problem a reality. One of the big questions is why would there be airport improvement funds held when the people that care for the safety of our flights are furloughed. Improve what, cleanup of crash sites. Yes we understand that airports do need improvements funds but not during a crisis. We wonder if it was a bad option to remove the air-traffic controller and not some other people who might not have been so key to the smooth operation of incoming and outgoing flights. Perhaps janitors or secretaries might have been a better choice. Then the stories about piles of government airport TSA people milling around and only allowing one security pass through rather than the multiples that could have been manned. How much of the delays were manufactured by disgruntled employees and how much was caused by sequestration. Was this, in part, an effort by those who want to play the bad guy Republican card or a Democratic effort to get spending increases into a budget that really does not address the deficit problems. We have lots of questions no answers.

We do not see the rally in the markets falling apart and dying. We noticed that more and more people are jumping on the income bandwagon abandoning the negative returns of the bond markets. Foreign countries are investing in our markets, not so much in the bonds as in the companies that pay dividends. This is all supporting the market and will continue to do so until interest rates begin to compete in yield with the markets or the markets advance to a point where the dividends are comparable with the paltry yields on bonds. As we have said for a very long time, we are the least thorny flower in the global flower garden. We have our problems but they are tiny compared with the problems found in other parts of the globe.

30 Year U.S. Treasury Bond Yield chart

30 Year U.S. Treasury Bond Yield chart

What is going on in the gold and silver markets? Is it as simple as one major bank dominating the volume at the COMEX and London exchange? Could it be the Hunt Brothers all over again? There is an awful lot of chatter on that subject. We are sure some is false but where there is smoke there is fire. We wonder where that is. This is what has been noticed: even as gold was crashing, people were purchasing physical gold, neither the ETFs nor future’s contracts but actual gold in any form available. The most favored form is coins. The US Government sells gold coins and we noticed no size restrictions on the amount that can be purchased.

The S&P 500 retreated in the Friday session as traders flattened their positions in front of the trade-less weekend. This week will not only enjoy the “Jobs” data but will see some portfolio adjustments as we close out the month’s trading. Yield hungry investors will continue to plow their savings into stocks that pay dividends. Those who have missed the rally will continue to “buy the dips” all of which is going to support this market and keep dips fairly shallow. The fact of the matter is that even if the market dipped to 1510, we would still be above the medium term uptrend line. The most recent pullback was to about 1530.75 might have been scary for the day-trader but in the longer view, did little to change the current bullish look. We likely will see the market challenge the 1593 level and then quickly remove the 1600 area. Then don’t be surprise to see the market rest for a while. We could have some backing and filling before the next run to 1593. We are above the Ichimoku Clouds for all time-frames. If you look at the weekly or monthly chart, it is clear that this market is in an uptrend. The stochastic indicator has just issued a sell-signal and the RSI is rolling over to the downside. Our own indicator is losing momentum on the upside but the Thomas DeMark Expert indicator continues to point higher at overbought levels. The 5-period exponential moving average is at 1572.14. The top of the Bollinger Band is at 1592.59 (you have seen this number before) and the lower edge is seen at 1532.00. The Market Profile chart is a nice bell shaped curve with its tails at 1592.25 and 1529. Both the daily and the 60 minute point and figure charts are positive.

The NASDAQ 100 retreated in the Friday session leaving an inside day on the chart. The NASDAQ 100 does have an average dividend yield of 1.24% with a high yield of 5.18% and 48 of the 100 stocks with no yield. The current yield on the S&P 500 is 2.03% which supports the view that the S&P 500 should outperform the NASDAQ 100. That said, when the risk off trade re-enters the trade this index should fare better than its big brother. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is 28.22.69. The top of the Bollinger Band is at 2867.66 and the lower edge is seen at 2740.28. The stochastic and the RSI both are pointing lower, our own indicator will issue a sell-signal within a day or so and the Thomas DeMark Expert indicator is pointing higher at overbought levels. The 30 minute Market Profile chart shows the high volume area at 2836 with 10.9% of the volume occurring at that price. The point and figure daily 1% by 3 box chart has some upside targets that seem doable if the triple top can be removed. The targets on the 60minute 0.1% by 3 box chart are totally reachable and seem likely on the next push to the upside.

The Russell 2000 retreated in the Friday session. It is interesting to note, that the yield on the Russell 2000 is higher than the yield on the NASDAQ 100. We were surprised to learn that the Russell 2000’s yield was 1.34% beating the NASDAQ 100’s yield of 1.24%. The highest weighting of issues in the Russell 2000 is financials which make up 19.6% of the index or 386 issues. Coming in second place, is consumer discretionary companies with a weighting of 18.6% and 367 issues. In third place is technology with a 16.9% weighting or 334 shares. The Russell 2000 is inside the Ichimoku Clouds for the daily time-frame but remains safely above the clouds for the other time-frames. The 5-period exponential moving average is 928.56. The top of the Bollinger Band is at 951.69 and the lower edge is seen at 896.10. We have a horizontal line of support at 896.10. The down trending channel line is 942.36 and 890.84. We believe that if the Russell 2000 can clear 942.36 for at least two consecutive days that it is likely that the index will make a run for the recent high seen in March. The stochastic indicator and the RSI are both pointing lower. Our own indicator has not issued a sell-signal nor has the Thomas DeMark Expert indicator. Both appear to be curling over but no signal as yet. The 30 minute Market Profile chart tells us that 16.9% of the volume occurred at 933. The daily Market Profile chart tells us that 17.2% of the volume was seen at 942. What this tells us is that there is lots of supply at that level and that it will be difficult to break above. The 1% by 3 box daily chart has no downtrend lines and continues to look positive.

The US Dollar Index printed three black crows on the daily candlestick chart and closed the Friday session at 82.57. Of most interest to us, the Index failed to confirm the March 27th high. Non confirmation of this sort can be a bearish signal. The Bollinger Bands are contracting with the upper band at 83.30 and the lower band at 82.16. The 20-period simple moving average is 82.73 and the 5-period exponential moving average is at 82.78; the US Dollar Index is below both. All indicators that we follow are currently issuing a continued sell-signal. Continued movement to the downside should bring the market first to 82.14 followed by 81.82. Should the Index choose to about-face, we see it going to 83.61 (though that doesn’t look likely at this point). The weekly candle chart shows a market that has been in consolidation since March 8th. Turning to the 60 minute .05% x 3 Point and Figure Chart, we see several counter trend internal trend lines have formed. The index is currently resting on the objective uptrend line and there are no new downside targets. There is, however; one activated downside target of 81.32 and one activated upside target of 84.72. Should the current objective upside trend line be broken, we would expect to see this market move lower. If, however; we see the market turn in the other direction and see the conformation of internal trend lines, and/or upside targets, we would become more bullish.

Crude oil closed lower in the Friday session closing below the Ichimoku Cloud. The rally from the low of 85.61 has been dramatic seeming to duplicate on the upside the same rate of change seen in the downdraft. The chart looks amazingly symmetrical. The 5-period exponential moving average is at 91.56. The top of the Bollinger Band is 97.86 and the lower edge is seen at 85.73. We closed inside the Ichimoku Clouds for the weekly time-frame and above the clouds for the monthly time-frame. The 1% by 3 box point and figure daily chart does have some downtrend lines also shows a bulge in volume at 94.38. The 60 minute 0.1% by 3 box chart has an upside target of 97.39. We have a parabolic SAR buy.

In spite of the rally in gold this past week, it continues to look weak. We saw the market regain a bit more than 50% of the initial loss from April 10th. This is no unusual after such a severe downdraft. If this rally is to have legs, it must regain more than 61.8% of the loss and must close above 1485.49. We are below the Ichimoku Clouds for both the daily and the weekly time-frames. We remain above the clouds for the monthly time-frame. We see some divergences in the oscillators. The stochastic indicator is pointing higher and the RSI, lower for the daily time-frame, however; the weekly we see both pointing higher. The 1% by 3 box daily point and figure chart continues to be of concern for the bulls. The 60 minute 0.5% by 3 box chart is a tad friendlier but really not much. We continue to have concern but will let the market tell us where it wants to go. Right now, we are not sure.

By the Option Royals
Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
April 28, 2013

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