The Option Queen Letter

A reminder of Bob Farrell’s rules:

“Excesses in one direction will lead to an opposite excess in the other direction. Exponential rapidly rising or fall markets usually go further than you think, but they do not correct by going sideways.  The public buys the most at the top and the least at the bottom.”

We know the markets are going higher, know that they will retreat, but are not foolish enough to tell you when that will occur.


US SPX 500 Futures - Option Queen Letter

US SPX 500 Futures

Okay so how many of you knew that once the S&P 500 approached 1800 that it would take it out? We would be willing to guess that the majority of our readers were of that belief. Any market watcher, worth listening to, would have come to that conclusion. Now that the mission is completed, what is next for the averages? Hold on to your holiday hats, the fat lady has not yet begun to sing. Yes we understand that our term fat lady isn’t too PC but remember we did not originate that phrase. Oh we long for the days of old when we could say what we think without worrying about being PC were allocated decent sized airline seats and knew kids that know how to hold conversations that are not text documents or emails, these all seem to be a thing of the past.

We have come up with an idea for all those companies who would like to hire full-time employees but are afraid of the health care costs associated with these hires! Hire seniors who are covered by Medicare…….cheap, smart, and desperately looking for employment. Solution, be the first in your industry to understand that older workers still have brains, don’t get pregnant, generally don’t go out drinking and partying every night and are grateful for employment. Seriously guys, seniors are an underutilized population of well-seasoned experienced people who are probably cheaper to hire than the younger less experienced models. Can seniors be declared disabled? Are seniors disabled from getting jobs because of “age discrimination” which can never be challenged or proved? We need a senior march! Can you imagine telling Einstein that because he is over 50 or 60 that his brains fell out? Well isn’t that what our industries are doing quietly. There is a hush to this movement.

We are in full press for the holiday season. Retailers are giving “Black Friday” advanced pricing and hyping their goods. Yes, we do understand that this is the most important season of the year for most retailers, but wouldn’t it be easier to just give us the bottom line, without having to wait to see if tomorrow the item will be cheaper. Same with car dealers, it is getting really old to have to go and bargain with these guys to buy a car only to find out that your neighbor got the car from the same guy cheaper. Enough already! Life isn’t that easy anyway so why make it worse than it needs to be…..

The S&P 500 rallied in the Friday session finally printing a new high over the 1800 level. Whole numbers seem to challenge the markets and are like moths being attracted to a light bulb, they know it is there, they want it but it is sooo hot, yet they achieve that goal. We are not saying that the market is so hot but we are acknowledging that the S&P 500 is overbought and extended. We do not believe that this signals a sell-off but rather believe that it will usher in a backing and filling or a minor retreat and then another run to the upside. We are seeing more and more guru’s giving ups the hope for a correction. Our interpretation of that is that we are indeed getting closer to a retreat and eventual correction. Remember last week we told you that when all the dissenting gurus throw in the towel for a correction, that will be our signal that we are about to achieve that eventuality. Although we are technical analysts we are concerned with the quality of the recent reported corporate earnings this quarter. It seems that the growth came from cost cutting, people cutting and mergers rather than from growth in profits from production.
The 5-period exponential moving average is 1791.31. The top of the Bollinger Band is at 1802.62 and the lower edge is seen at 1740.39. The RSI on the daily chart is at 70.03, which is overbought, our concern is with the weekly and the monthly RSI which is extended and going higher. All the ducks are lined up in a row, higher public participation, marginally higher interest rates and bullish sentiment by increasing numbers of gurus, we just do not know when.

We are above the Ichimoku Clouds for all time-frames. The stochastic indicator, RSI and our own indicators continue to issue a buy signal. The thrust to the upside is beginning to lose momentum but a day or two pull-backs could reignite the rally. This is a seasonally strong time of the year when people feel good about everything including the economy. The 30 minute Market Profile chart, which by the way is a chart of the market’s behavior for the day, shows us that 13.7% of the day’s volume occurred at 1802.25. Now we could view this as shorts covering or money flowing into the market. When we look at the daily Market Profile chart, which is a weekly chart, we see the volume spike for the week falls in two places, separated by less than a tenth of a percent. Those levels are, 1786, with 15.6% of the volume and 1757.50 with 15.1% of the volume. The daily point and figure chart continues to tell us that the direction of this market is to the upside. The RSI on that chart is overbought yet continues to point higher. The upside target on the 60 minute chart is……1876.63.

The NASDAQ 100 rallied in the Friday session but did not make a new multi-year high in that session. The stochastic indicator, RSI and our own indicator continue to point higher but only the stochastic is in overbought territory. The 5-period exponential moving average is at 3397.83. The top of the Bollinger Band is at 3425.78 and the lower edge is seen at 3334.61. The Bollinger Bands are beginning to expand, ever so slightly. We are above the Ichimoku Clouds for all time-frames. The ADX line warns us that this market is losing momentum. 20.6% of the day’s volume was seen at 3420. The weekly chart shows that 19.3% of the week’s volume occurred at 3381. The daily 1% by 3-box point and figure chart continues to look very positive. The 60 minute 0.1% by 3-box chart is also very positive. Clearly you can see the twin towers on this chart.

The Russell 2000 did print a new life of contract high in the Friday session. The stochastic indicator and our own indicator are overbought and beginning to curl over to the downside but have not issued a negative warning. The Thomas DeMark Expert indicator is pointing higher as is the RSI. The 5-period exponential moving average is at 1113.16. The top of the Bollinger Band is 1125.41 and the lower edge is seen at 1083.43. We are above the Ichimoku Clouds for all time-frames. Our observation is that the Bollinger Bands are awkwardly narrow and the volume for this new high was anemic. We will have to see more volume come into this market to encourage a lasting high rather than a momentary flash in the night. 14.1% of the day’s volume occurred at 1123.50 with 1118.25 being the most frequently traded price. In the context of the weekly behavior the high volume number was 1095.25.

Crude oil retreated in the Friday session after an early assault to the Thursday’s high and then quickly retreated. We are below the Ichimoku Clouds for the daily time-frame but are above the clouds for both the weekly and the monthly time-frames. The 5-period exponential moving average is 94.27. The top of the Bollinger Band is at 97.68 and the lower edge is seen at 91.74. The stochastic indicator is curling over on the daily chart but has not issued any signal. For both the weekly and the monthly time-frames the stochastic indicator is issuing a buy-signal. The RSI has curled over at the neutral area on the daily chart and is now pointing lower, however; the RSI on the weekly chart is pointing higher. The uptrend line on the weekly chart is at 92.33, a level that must be held. The monthly chart shows a market in a range with a lot of support at 91.55. We seem to be coiling. Drawing steep channel lines on the weekly chart yields these numbers: 96.52 and 90.27. The channel lines translate to 89.16 and 95.40 on the daily chart. We are bumping up against the downtrend line and we believe that should the market rally to the 97 range that the existing shorts will begin to feel rather uncomfortable. On the other hand should the market remove 92.43, it is likely that the shorts will press their positions looking for a washout. The daily 1% by 3-box chart has a very clear downtrend line and evidence of the market failing to hold above the uptrend line. The RSI on this chart is pointing lower. The 60 minute 0.5% by 3-box chart has an internal uptrend line and an unfilled target at 89.01. The RSI is beginning to bend to the upside.

Gold has a really ugly chart with two doji candlesticks for the Thursday and Friday session. The Friday session was an inside day. We are below the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 1253.53. The top of the Bollinger Band is at 1363.36 and the lower edge is seen at 1227.97. The very steep downward pointing channel lines are 1266.10 and 1214.70. The stochastic indicator is giving us a buy-signal and the RSI is beginning to curl to the upside, both are coming from oversold territory. Would we buy? No, we would watch for confirmation and volume follow through. That said, both the weekly and the monthly stochastic and RSI are clearly pointing lower. The 60 minute 0.5% by 3-box point and figure chart clearly shows a market that failed to respect the uptrend line. The downside target is 1115.96. The daily 1% by 3-box chart shows a market that violated the uptrend line and has a downside target of 1146.92.

With regard to the US Dollar Index, our chart is beginning to look a bit crowded with trendlines galore above and below the current price, a fitting tribute to a market suffering from indecision. The US Dollar Index closed the Friday session at 80.70, a little less than down 13 cents for the week. The market entered the current trading range on November 1st from below and we have been waiting for a definitive sign as to the break since then. The Bollinger Bands are currently curling in with the upper band at 81.72 and the lower band at 79.56. The market is currently below the 5-period exponential moving average (80.84) and above the 20-period simple moving average (80.64). All indicators that we follow are currently issuing sell-signals and for the short term at least, we believe them.

The daily candlestick chart is showing us support at 80.1 and resistance around the 81.36 level. With a break below support we would expect this market to make its way down to 80 and with a break above resistance, the market will likely move up to 81.96 (and since markets have an affinity for whole numbers, likely 82).

Looking to the weekly chart we can see with a break, the market will likely get stuck at 80.14 on the downside and 81.78 on the upside.

The 30 minute .05 x 3 Point and Figure Chart is showing the index to still be in an uptrend with several internal trendlines and an unactivated upside target of 83.15. There is also an activated downside target of 80.40 and a countertrend internal trend line. Taking all of this together, we are unfortunately not getting inordinately strong signals as to the direction the market will break. Forced to take a position, the Dollar Index may float back towards the 80.40 level in the early part of the week. What is clear upon examination, there are the levels that must be broken and the near term and directional targets that such a break will produce.

The Option Queen
Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086

Enhanced by Zemanta

, , , , , , , , , ,

Comments are closed.