Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
January 11, 2015
The Option Queen Letter
By the Option Royals
The action of the S&P 500 futures contract reminds us of a rollercoaster, trudging higher gaining altitude then whoosh, dropping like a stone. These waves of up and down are not uncommon in the market place. As a pit trader, we learned that the downside momentum is generally far greater than the upside momentum. We also learned that up moves take longer than the downside washout trade. This market has provided a great example of this behavior. It seems as though the buy-the-dips crowd jumps into the market after a retreat. The last two dips have produced higher lows and much higher lows than were seen in October of 2014.
The jobs data on Friday would suggest that the average income earner is earning less money. Clearly the drop in the price of crude oil and thus gasoline has helped the average wage earner survive and has actually given workers some extra jingle in their pockets. We hear nasty rumors of increased taxes on gasoline. Seriously does that make sense? The benefits of lower crude have trickled down to those who need it most and now a new tax is being considered? We certainly hope not! Aside from destroying all the newly freed cash in the pockets of consumers, such a tax would create a long term policy change based on short term circumstances. It was only a few months ago when crude oil was twice its current price. Commodity markets are a volatile place. A swift return to $80 barrel crude would render such a tax a disaster. Crude oil's impact on consumer confidence and spending should send an eye-opening message to the FOMC regarding their approach to stimulating the market and helping the average worker. The lesson learned is that small cost reductions on necessities help stimulate the average worker to spend on discretionary items and help the economy while zero interest rates do not flow down to the average earner. FOMC are you listening?
2015 will usher in a new batch of taxes that will affect tax payers (those who pay tax) and those who derive their income from passive investments. We agree, taxes on the Buffets of the world need to be altered and believe that such changes just might begin to help level out that tax benefit that was being enjoyed. Remember, Buffet admits to paying less income tax than does his secretary. With the addition of this tax, it is possible that he might be paying more tax. Unfortunately, a creative accountant might find a solution for that as well.
The S&P 500 closed down 24 handles (points) in the Friday session closing the day at the downtrend line. We are still above the uptrend line drawn from the October low. The 5-period exponential moving average is 2034.97. The top of the Bollinger Band is 2112.13 and the lower edge is seen at 1967.56. Both the stochastic indicator and the RSI are pointing lower from about the neutral area and our own indicator looks as though it could roll over in a few days also. We are above the Ichimoku Clouds for all time-frames. Notable areas of support are 1984.25 and 1961. The uptrend line is 2015.45 and the downtrend line is 2053.75. We are using horizontal lines to determine the support area. Remember, these areas can be violated but not for more than two-days. The reason for this rule is that the first pierce below the horizontal support line generally is met with reversal purchases. If these purchases are not seen by the second day, it should be assumed that a true violation has occurred and you should adjust for that information. Remember too that trend following black boxes will jump on the trade and could accelerate the action. Many managers place stops just below the low, and buy stops above a notable high, to protect positions. Once these orders are elected, markets tend to reverse. The most frequently traded price in the Friday session was 2050.50-2052. The highest volume was seen at 2040 which accounted for 13.2% of the day's volume. The daily 1% by 3-box point and figure chart has an upside target of 2619.43, a bunch of internal uptrend lines and is a very positive chart. The 60 minute 0.1%by 3-box point and figure chart has some internal downtrend lines which are troubling.
The NASDAQ 100 retreated 33.50 handles (points) in the Friday session. The line is the sand for this index is 4081.46-4076.55. Below that level, the door is open to the October low of 3684. This market is currently above its uptrend line of 4153.87 and below the downtrend line of 4266.41. The 5-day exponential moving average is 4194.99. The top of the Bollinger Band is 4355.34 and the lower edge is seen at 4088.77. The stochastic indicator is rolling over to the downside but has not issued a sell-signal. The RSI is pointing lower from neutral levels and our own indicator is flattish not giving us a real direction. We are above the Ichimoku Clouds for all time-frames. 4230-4231.50 are the most frequently traded prices, but the high volume price is 4212 where 10.2% of the day's volume was seen. The daily 1% by 3-box point and figure chart has a new downside target of 3710.69 and a previous high target of 5806.53. The 60 minute 0.1% by 3-box point and figure chart is friendlier although there are both internal up and downtrend lines. Basically we are in "show me" mode which means we are waiting for the market to tell us the direction it intends to take. Right now, we are neither bullish nor bearish based on the chart action.
The Russell 2000 lost 12.90 handles (points) in the Friday session. The 5-period exponential moving average is 1181.80. The top of the Bollinger Band is 1231.89 and the lower edge is seen at 1132.63. Both the stochastic indicator and the RSI have rolled over at neutral and now are pointing to lower levels. Our own indicator continues to point higher. The downside lines in the sand are: 1147.60 and 1128.20. Below those levels, the door will be opened to the October low of 1034.10. It is interesting to note, that the Russell 2000 ETF (NYSEARCA:IWM) has a bearish engulfing candlestick. We are above the Ichimoku Clouds for all time-frames. The most frequently traded price in the Friday session was 1190.00 - 1191.00; the heaviest volume was seen at 1184. If this market fails to reverse to the upside and remove 1195.20, the horizontal line at 1147.50 will be revisited.
Crude oil continued its drift lower in the Friday session, although it seems to be trying to find some support at these levels. Both the stochastic indicator and the RSI are pointing lower. Our own indicator has just issued a buy-signal. The Friday session had extremely high volume and could signal that the remaining longs were getting out of the trade. The most frequently traded price was 49.00; the heaviest volume was at 48.50. The action of crude oil's action is inverse to that of the US Dollar index. The daily 1% by 3-box point and figure chart looks awful and, although it might be trying to stabilize, it does not look hopeful. There are many internal downtrend lines on this chart. The 60 minute 0.2% by 3-box point and figure charts looks much better than does the daily point and figure chart. On this chart, we actually have internal uptrend lines and the action looks as though the market is trying to stabilize. Although we would like to nibble on this one, we will wait to see how things "shake out."
Gold rallied in the Friday session leaving a very large bullish candlestick on the chart. We need to see a close above 1239 for us to feel more comfortable with this product. All the indicators that we follow herein are pointing to higher levels. The chart action is positive but needs to see some more follow through and a removal of the 1239 level. So long as 1167 is not removed, we will give the yellow metal the benefit of the doubt to the upside. We also would like to point out that gold has been in rally mode along with the US Dollar which tells us the rally in gold is not based on the value of the currency but rather by demand for the product. We are above the Ichimoku Clouds for the daily time-frame but remain below the clouds for both the weekly and the monthly time-frames. The 5-period exponential moving average is 1212.17. The top of the Bollinger Band is 1229.91 and the lower edge is seen at 1167.19. The uptrend line is at 1170.18. There are several horizontal lines which should be respected. These lines are 1239, a close above which will signal a possible aggressive move to the upside and 1204.20 on the downside which would signal a return to the 1176 -1170 area. The most frequently traded price in the Friday session was 1210 and the highest volume was seen at 1217.50 which had 26.8% of the day's volume. The daily 1% by 3-box point and figure chart has an old downside target of 939.95 and a newer upside target of 1358.30. We have an internal uptrend line and a downtrend line. This chart looks as though we could find support at these levels. The 60 minute 0.2% by 3-box chart is friendly with an upside target of 1235.07. We like gold but need to see better confirmation of its recent upside action.
The US Dollar Index set a new 10 year high this week. You heard right, the last time the Index was at these levels, George W. Bush was just starting his second term, YouTube was in its first year of existence and Saddam Hussein was being put on trial. The Index closed the week at 92.15, pulling back after breaking the high. The Bollinger Bands are currently pointing inward with the lower band at 87.77 and the upper band at 92.87. The 5-period exponential moving average is 91.98, the 20-period simple moving average is 90.32 and the index is above both. The daily chart shows support at the 91.22 level with 90.67 below that. Both indicators that we follow are currently issuing sell signals. At these levels the Index is now in no-man's land and we need to look at a monthly chart to find where overhead resistance lies (an uncommon occurrence)! Here we can see the next point of resistance is 94.40, a ways away. The 30 minute 0.05 x 3 point and figure chart shows though the index is in an uptrend, an internal uptrend line has been broken and a countertrend internal trendline has formed. We have an activated downside target of 91.17. At this level, the index might pull back, very slightly, and may have found its new home.
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.