Option Queen Letter

US SPX 500 Futures (Daily) July 21, 2014

The markets were, for the most part, up for this past option’s expiration week. Rallies that continue in the face of global chaos are not to be ignored. They are telling us that buyers remain strong and because the conflicts and chaos are not here in the USA, our markets are watching but not regarding this chaos as threats to the US stock market. That said, we will have our plunge eventually, just not yet. The market will tell you when it is ready to flop, so far, no news is good news on the flop front. Basically, until interest rates are pressured higher, there seems no place else for the income seeking investor to go than our stock market. Interest rates will advance, just not yet. Yes, the Fed is beginning to tighten by stepping away from their asset purchases but that is not causing interest rates to advance. There will come a time when interest rates begin to advance, whether Fed inspired or market inspired, and that will cause the US Dollar to become stronger which in turn will cause the US products and services, which are exported, to become more expensive. That eventually will cause a slowdown in exports and that will affect the value of various companies that rely on foreign exports for a good deal of their income. Well anyway that is the circle we will be entering eventually.

The S&P 500 rallied 17.75 in the Friday session tacking on 0.91% on the day. This past week saw one failed attempt at a new high and a range bound trading week ending the Friday session with a lower high and a lower low than was seen in the Thursday session. The stochastic indicator and the RSI are both pointing higher. The Thomas DeMark Expert indicator is pointing lower and our own indicator is beginning to curl to the upside but still remains negative. We are above the Ichimoku Clouds for all time-frames. The downward trending channel lines are 1975.58 and 1942.37. We note that should this market close above 1975.58, it will likely attempt a push to new highs. Both the weekly and the monthly chart remain positive. The daily 1% by 3-box point and figure chart continues to point higher with an upside target of 2278.81. The 60 minute 0.1% by 3-box point and figure chart has a violated downtrend line and a good uptrend line. We see a triple top and a downside target of 1935.69. 22.1% of last week’s volume was seen at the 1965.96 area. The 5-period moving average is 1965.01 (a recurring number indicating escalated importance). The top of the Bollinger Band is 1982.33 and the lower edge is seen at 1941.28.

The NASDAQ 100 rallied 1.39% in the Friday session printing an outside day on the chart. To the relief of the bulls, the volume expanded in this very positive session. All the indicators that we follow herein are issuing a buy-signal although the stochastic indicator is at overbought levels. As you well know, we are bullishly overbought and can continue in the condition for some time, therefore, this is an alert and not a signal. Our own indicator has just issued a buy-signal again, an alert. The Friday session did not yield a new yearly high for this index but it will not take too much effort to achieve that goal in the coming week. The 5-period exponential moving average is 3908.10. The top of the Bollinger Band is 3962.27 and the lower edge is seen at 3787.20. The upward trending channel lines are 3858.23 and 3972.32. The daily 1% by 3-box point and figure chart has an upside target of 3978.36 which looks achievable. We have no downtrend lines and the chart continues to look very positive. Another positive chart is the 60 minute 0.1% by 3-box chart. When changing this chart to a 0.2% by 3-box chart we achieve an upside target of 4120.29 on another very positive looking chart.

The Russell 2000 rallied in the Friday session and above the Ichimoku Clouds for the daily time-frame, above the clouds for the weekly time-frame and in the clouds for the monthly time-frame. The action in this index has been the poster-child for the risk-on trade, abandoned by those seeking less risky trades. The velocity to the downside cannot continue insomuch as the angle of decent has been too steep. The Friday session did help remove some of that decent but has not reversed the direction of the trade. The stochastic indicator and the RSI continue it issue go long messages. Our own indicator is not in agreement with that finding. The 5-period exponential moving average is 1145.53. The top of the Bollinger Band is 1213.65 and the lower edge is seen at 1130.31. The downward trending channel lines are 1164.51 and 1118.80. We expect to see this index rally and risk off traders return. Keep your stops tight and fasten your seat-belt.

Crude oil lost 0.3% in the Friday session after attempting to cross the horizontal resistance line at 102.98. The RSI has rolled over and is now pointing lower. The stochastic indicator sees the fast line flattening out while the longer line is curling to the upside. Our own indicator continues to issue a buy-signal. All this tells us is that we have a mixed bag of tricks and need confirmation to either go long or short. At the moment, the reversal from the 99.01 low is impressive but isn’t enough to become a bull. The medium uptrend line is 98.11. The 5-period exponential moving average is 101.36. The top of the Bollinger Band is 106.58 and the lower edge is seen at 98.93. We closed inside the Ichimoku Clouds for the daily time-frame above the clouds for the weekly time-frame and in the clouds for the monthly time-frame. The monthly chart continues to show a market in a trading range and trading between an uptrend line and a downtrend line which resolves itself in January of 2016. The daily 1% by 3-box point and figure chart has a troublesome downside target of 84.59. The 60 minute 0.2% by 3-box chart gives a slightly different view of crude. We have both upside (111.64) and downside (100.22) targets. We have closed above the downtrend line and look, well, almost positive. We believe that we need to see this market close above 102.98 for us to become bullish.

The chart of Gold looks much like the chart of crude oil for the Thursday-Friday session. The rally in Gold was contained at the horizontal resistance line of 1325.50. Support is seen at the 1293.80 horizontal line. Both the RSI and the stochastic indicator have turned negative at the neutral level. Our own indicator has just issued a sell-signal. The 5-period exponential moving average is 1312.14. The top of the Bollinger Band is 1340.61 and the lower edge is seen at 1298.69. The Bollinger Bands are flattening out after having contracted and could be warning us that volatility is about to return to this market. We are above the Ichimoku Clouds for the daily time-frame, in the clouds for the weekly time-frame and below the clouds for the monthly time-frame. The 60 minute 0.2% by 3-box point and figure chart has a downside target of 1210.64. The chart looks hopeful. The daily 0.9% by 3-box point and figure chart has an old upside target of 1470.31 and a more recent downside target of 1113.74. This chart highlights the congestion seen in this product. While we like gold, we prefer to wait for this congestion to resolve before jumping into a position.

The US Dollar Index broke out to the upside this week and closed the Friday session at 80.56. Friday’s action broke above the 80.62 resistance line but failed to close above it. On the daily chart resistance is still seen above at 80.62 and above that at the 81 mark (the June 5th high). 80.33 should hold this market in check on the downside (in conjunction with the short term uptrend line) and below that we see a safety net at 80.14. The Bollinger Bands are expanding with the upper band at 80.61 and the lower band at 79.83. The 20-period simple moving average is 80.22, the 5-period exponential moving average is 80.46 and the index is above both. Both indicators that we follow are registering continued buy-signals, however; our own indicator seems to be losing a little bit of momentum

The weekly chart of the US Dollar Index tells a very interesting story. Here we can see the market has been forming a very large triangle as it has consolidated over the past four years. A point of inflection lies just ahead in August/September and we expect to see volatility come into this market accompanying a violent move. For the week ahead, upside resistance crosses the downtrend line perfectly at 80.80 or so. This market should stay above the support line for the week ahead at 80 flat. The 30 minute .05 x 3 Point and Figure Chart shows this market to be in an uptrend (obviously). An internal uptrend line has formed and we have two activated upside targets at 81.45 and 82.70. Taking all of this information together, we think the US Dollar Index may (and this is a big may), pull back mildly in the first day or so of trading this week but will then make its way on to 81 flat followed by 80.80.

The Option Queen Letter

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