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With the market gyrating like they were dangling from a bungee rope, now might be a good time to get serious about reviewing your charts. Today's letter is loaded with charts along with opinions.
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Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
www.OptnQueen.com
October 19, 2014
The Option Queen Letter
By the Option Royals
Fed Chairman Yellen finally verbalizes what we the people have known for quite a while, that
the gulf between the rich and the average worker is growing. She said: “By some estimates,
income and wealth inequality are near their highest levels in the past hundred years.” Federal
Reserve stimulation has helped the rich, ultra-rich, banks and corporations but has done little to
help the average work survive. As a matter of fact, the average worker today has less
discretionary income than was available to that worker in 1970. Wonder why the economy isn’t
growing faster? What Chairman Yellen doesn’t say is how the actions of the Federal Reserve
will help the average worker.
Again we will suggest that tinkering with the normal business cycle may help in a finical crisis,
but tinkering should be short-lived and allow the system to repair itself. If that means that
institutions fail, so be it. Financial institutions that are too big to fail are far more harmful to the
general public then monopolistic telephone service providers. Who is there to help the average
man out of bankruptcy? Nobody! It is quite normal for booms and busts in a business cycle.
Because the Federal Reserve has meddled with the normal cycles we are feeling the results that
tinkering with great divides between the wealthy and the average workers. The poor are better
off today than before and there are many more in the ranks than ever before in our history.
Government hand-outs are growing and the tax base is becoming narrower. The ultra-rich will
leave our shores and divert their income off-shore. Who will pay the taxes? Who will fund the
masses that live on government and state assistance?
So why isn’t OPEC alarmed at the decline in the price of oil? Could it be the production of oil
from shale here in the USA and Canada will be impacted and become too expensive to use? You
bet it could be. At the current price of crude oil there is little reason to expand shale oil
extraction. It is too expensive to extract. Now you know why OPEC isn’t upset by the retreat in
crude oil’s price. They are of the belief that at the present price of crude oil that shale oil
extraction will not expand and might even shut down. This will support their incomes and
export of crude oil. It is interesting to watch the games that are played.
So, what happened this past week? Yes it was the anniversary of the 1987 crash and just to make
sure that we remembered the market retreated. By the end of the week, the shorts began to cover
which spurred on a lively rally ending this options expiration week on a much more comfortable
note. We also believe that the shorts covered and wanted to enter the weekend flat rather than
short or long. Is this the end of the down-draft? Maybe yes but probably not. The S&P 500
closed below the 100 day exponential moving average, not a good thing. The Russell 2000 out-
performed the other indices on the upside because this index is loaded with stocks that will not
feel the impact of a strong dollar and likely don’t rely on exports. The S&P 500 on the other
hand, is loaded with stocks that rely a great deal on exports…make sense to you? It does to us.
The strong US Dollar hurts the US’s ability to compete with foreign products. In a way, it can
cause deflation insomuch as it depresses the cost of materials priced in US Dollars. Because the
US average consumer has little or no discretionary income, they are not spending on imports;
this hurts the Eurozone and others. The Eurozone is feeling the pressure of no growth thus they
are not expanding or spending. If the Eurozone is failing, we here in the USA will feel that
pinch. We do not live in isolation and their bad economy will affect our economy. Yes we are
the best of the bad but the key word is bad. Deflation is not something anybody should wish for.
It can be devastating and difficult to treat, as the Japanese have shown us over the past quarter of
a century.
The S&P 500 enjoyed a two-day rally closing the week on a positive note for the day. For the
week, the market closed down making it the fourth down week. Don’t be surprised to see that, it
is common to have a market go in one direction for six to eight weeks at a time. All the
indicators that we follow herein are positive and have plenty of room to the upside. The 5-period
exponential moving average is 1873.81. We have a downside target of 1803.25 which we
believe will be undercut giving the index a good opportunity to rally from that point. The top of
the Bollinger Band is 2020.38 and the lower edge is seen at 1841.98. The Market Profile chart
had a large area of single and double prints below the close of this market. This tells us that we
may go back to that area and fill in that area. The profile seen is a bi-modal curve. The bulk of
the trades for the Friday session were at 1880.20 where 12.1% of the day’s volume occurred.
The most frequently traded number by brackets was seen at 1873.40 where 9.8% of the volume
was seen. The daily 1% by 3-box point and figure chart has a downside target of 1530.57. The
0.1% by 3-box point and figure chart has a downside target of 1830.32. We are below the
Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and monthly
time-frames. We have broken the uptrend line on both the daily and the weekly charts. We are
above the 200 day exponential moving average but below the 100 day exponential moving
average.
The NASDAQ 100 rallied in the Friday session closing up 1.65% or 61.75 points on decent
volume. All the indicators that we follow herein are issuing a buy-signal with plenty of room to
the upside. The 5-period exponential moving average is 3801.52. The top of the Bollinger Band
is 4162.31 and the lower edge is seen at 3733.11. We are above the 100 day exponential moving
average. The down-draft in the NASDAQ 100 did not feel as awful as did the down-draft in the
S&P 500 because this index never closed below the 100 exponential moving average, while the
S&P remains below the 100 day exponential moving average. The 30 minute Market profile
chart is a bi-modal curve. 3808 represents 11.5% of the day’s volume while the most frequently
traded number, bracket wise, was 3804.50, 3797.50 and 3794. The daily 1% by 3-box point and
figure chart has a downside target of 3041.08. The 0.1% by 3-box 60 minute point and figure
chart has a downside target of 3702.98. We are below the Ichimoku Clouds for the daily time-
frame but are below the clouds for both the weekly and the monthly time-frames. We see
negative indicator readings on both the weekly and the monthly charts. The downdraft has been
too steep to maintain at this acceleration and clearly needs time to adjust. We do believe that we
likely will rally but that rally does not indicate to us that the down-side is over. There was a lot
of damage done to the chart and at the very least some consolidation will be necessary. We
remain cautious and recommend that tight stops be maintained. On the other hand some issues
have become cheap enough to tweak our interest.
The Russell 2000 retreated in the Friday session losing 3.70 handles or points on the day. This
index has been the beneficiary of money flowing into it rather than into the S&P 500. Some of
this can be attributed to the belief that a strong US Dollar will not hurt the stocks that compose
this index. On Friday as the S&P 500 and the NASDAQ 100 rose, this index retreated. Only
the RSI has issued a sell-signal, both the stochastic indicator and our own indicator continue to
point higher although the stochastic indicator is curling to the downside. This index closed
above its 100 day exponential moving average. The 5-period exponential moving average is
1072.88. The top of the Bollinger Band is 1150.02 and the lower edge is seen at 1085.47. The
Bollinger Bands are again beginning to compress. The high volume area for the Friday session
was 1087.50 where 12.6% of the day’s volume was seen. The most frequently traded number
was 1086. We are below the Ichimoku Clouds for the daily time-frame, in the clouds for the
weekly time-frame and above the clouds for the monthly time-frame. Keep your stops tight and
no napping when trading this index.
Crude oil retreated in the Friday session and looks a lot like the chart of the S&P 500 with a
waterfall retreat and some stabilization in the Thursday and Friday sessions. So, what’s next?
Well, clearly 80 didn’t hold in the Thursday session. We really were not surprised to see the
market undercut the 80 level and trading down to 79.78 was expected. Here is the problem.
Should the support fail to come in and hold up this market, we do have a liability to 74.95, again
which likely will be undercut as MIT(market if touched) orders are elected. This market is so far
below its 100 day exponential moving average it funny. The 5-period exponential moving
average is 83.28. The top of the expanding Bollinger Band is 96.63 and the lower edge is seen at
80.36. The only good thing we can see on this chart is that the volume fell off a cliff in the
Friday session. We are below the Ichimoku Clouds for all time-frames. The stochastic indicator
Continues to look positive although it is flattening out a bit, our own indicator is issuing a buy-
signal and the RSI is flat. The 60 minute 0.2% by 3-box point and figure chart has a downside
target of 79.97 which has been achieved. There are internal uptrend and downtrend lines on this
chart and the chart looks as though the price is consolidating. The daily 1% by 3-box point and
figure chart is negative with a downside target of 78.9. We look as though we are consolidating
but there is an overhead downtrend line that appears miles away. 30% of the Friday volume was
seen at 82.25 and that was the most frequently traded number, by bracket, for the day. The
downward trending channel lines are 86.00 and 78.93. We remain concerned about crude oil and
believe that because the 75ish number is there, that the market could undercut that number just to
probe for any stops. It is difficult to catch a falling knife, so, we don’t and recommend that
sometimes watching is better than trading.
Gold seems to be holding its own although it retreated in the last two sessions. The indicators
are mixed. The 5-period exponential moving average is 1235.00. The top of the Bollinger Band
is 1244.26 and the lower edge is seen at 1195.83. The upward trending channel lines are
1255.88 and 1232.60. The long term downtrend line is 1263.62. We are below the Ichimoku
Clouds for all time-frames. The Friday session left a doji candlestick on the chart. This is
generally a sign of transition. The market has rallied for the last two weeks but before you
become a gold bull, there is an important downtrend line on the weekly chart at 1304 plus or
minus two points. Those who are short this product, will not worry until or unless that
downtrend line is removed. The 60 minute 0.2% by 3-box point and figure chart looks positive.
The daily 1% by 3-box point and figure chart looks as though this market consolidating. The 30
minute Market Profile chart shows us that the most frequently traded number is 1238.50. This
number is the same level for the most frequently traded number in the Thursday session as well.
We conclude that this number must be important and is considered fair value by the marketeers.
It’s lonely at the top and we think the US Dollar Index can’t handle the pressure. After an
incredible 4-month rally, we think it’s the US Dollar index may be looking to retrace. The index
closed the Friday session at 85.22 having retreated with the general market during the week. The
Bollinger Bands are contracting; the lower band is 84.60 and the upper band is 86.38. The 20-
period simple moving average is 85.47, the 5 period exponential moving average is 85.22 and the
index is below both. The RSI is in a down trend though starting to turn up and our own indicator
is continuing to issue a sell signal. Support can be seen on the daily chart at 84.32. The weekly
chart shows a number of week support lines on the downside. Beyond 84.32, 84.10 follows.
Ultimately, we could see a pullback to 82.75-83. The 30 minute .05 x 3 point and figure chart
supports our near term view. Although the index is still in a long term uptrend, an internal down
trend line has formed and we have multiple activated downside targets at 84.55, 84, 83.95 and
83.30. This is the technical story we are looking at. How will Ebola affect the US Dollar? Yes it
is chaos but it is our chaos, wouldn’t that hurt the dollar? What do you think?
Risk Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions
involves substantial risk of loss and is not suitable for all investors. You should carefully
consider whether trading is suitable for you in light of your circumstances, knowledge, and
financial resources. You may lose all or more of your initial investment.