January 17, 2016 with charts

Option Queen Letter By the Option Royals

Jeanette Young, CFP®, CMT, M.S. and Jordan Young, CMT

4305 Pointe Gate Drive

Livingston, New Jersey 07039

www.OptnQueen.com

[email protected]

January 17, 2016

Some of the wild action seen in the Friday session was due to option’s expiration and some of it

was just pre-holiday adjustments. We knew the retreat was coming; we were lucky enough to

have figured that out. What we don’t know is how long this retreat will last. A lot depends on

economic health which, so far, has been anemic. As the US Dollar strengthens, pricing pressure

remains a problem for US multinationals. This will impact earnings and future growth. It is not

so much about the trade with China, but more about intermarket relationships and their impact on

the US economy. Globally, if both our products and services are too expensive for consumers to

purchase, then we will dip back into recession. It is only a matter of time before corporations

halt hiring and buying/upgrading equipment and go back to the “Profit Incentive Plan (PIP).”

Generally, this leads to increased mergers and acquisitions as companies try to buy production

and then cut duplication of employees, equipment and real-estate.

If you are waiting for corporate buy-backs to support this market, think again. Earnings will

likely continue to feel the pressure of a strong US Dollar and aggressive competition for market

share. This will become clearer as we see earnings reports from many of these companies.

Today’s buyers are price takers and have no brand loyalty. Rail companies will continue to feel

pressure with the decline in the price of petroleum products. Remember, most of the growth in

carloads was attributable to transportation of petroleum product. December 2015 carloads were

down 15.6% from December 2014. Petroleum and its products were down 20.5, metallic ores,

39.1%, and primary metal products were down 21.3% according to Rail Time Indicators January

2016 report. Below is a quote from that report.

“U.S. Rail Carload Traffic

December 2015 was a lousy month in a lousy quarter for U.S. rail carloads. U.S. railroads

originated 1,219,443 carloads in December 2015, down 225,477 carloads, or 15.6%, from

December 2014. That’s the biggest year-over-year monthly percentage decline since

August 2009 (see the top right chart below). December 2015 was the 11th straight year-

over-year monthly decline.

Weekly average carloads of 243,889 in December 2015 were the lowest for any month

since January 1988 when our data begin.

Weekly average carloads in the fourth quarter of 2015 were down 11.3% from the fourth

quarter of 2014, the biggest year-over-year quarterly percentage decline since the third

quarter of 2009. Average weekly carloads in 2015’s fourth quarter — 260,424 — were

the second lowest for any quarter since 1988, behind only the second quarter of 2009.”

Saudi Arabia’s Initial Price Offering (IPO) of Saudi Arabian Oil Company (Aramco)….supports

cheap oil and gives the Saudi’s the cash to continue in the life style that they have been

accustomed to. This action is interesting insomuch as OPEC is clearly losing its control of its

member. Interesting!

Higher taxes in Connecticut have inspired GE to move…..sound familiar? Just take a look at

Chicago and the wonders that the high tax climate have created. Is that the fate of Connecticut

or will they wise up before the migration hits in earnest? GE also announced that it would sell

its appliance division to Haier. We hope the sale will be in US Dollars…

On Friday the S&P March futures shed 38 handles (points) by the close of the session, after a

bounce back from the low of 1849.25. We wrote last week that there was a horizontal support

line at 1861 which would likely support the market. There was another horizontal support line at

1850.50 which did support the market. The line below that is 1831. Beneath that line is 1813

and then, 1732, which dates back to January of 2014. The volume was up for both the daily and

weekly time-frames. This is possibly due to options expiration and the three-day holiday, Martin

Luther King Day. It is likely that portfolio managers hedged or flattened out some positions as

"a just in case something goes bad" trade. We have some divergences in the indicators on the

S&P chart. Our own indicator is issuing a buy-signal while both the stochastic indicator and the

RSI, although oversold, are pointing lower. The daily 1% by 3-box point and figure chart shows

three declines to 1886.26. . The fear is that should that level fall, we will open the door to

1849.09 and then, lower levels. The 60 minute 0.2% by 3-box point and figure chart has a

downside target of 1773.17 and looks lousy. The most frequently traded price in the Friday

session was 1867.25. We are beginning to find some stocks that are getting cheap. Up until this

time stocks were either expensive or fairly valued; however, today, there are some goodies to be

purchased.

The NASDAQ 100 dropped 111.75 points in the Friday session. We see divergence in the

indicators with fresh sell signals being issued by the stochastic indicator and the RSI and a buy-

signal issued by our own indicator. These indicators are telling us to monitor the price action

carefully because something is amiss. The downward trending channel lines are far too steep to

continue at this pace and have two choice; that is to go sideways to correct for the steepness in

the trade or to rally, neither of which is a signal for a reversal. The channel lines are 4290 and

4043. There is a horizontal support lines at 4040.75, 3958.75 and 3908.25. The daily 1% by 3-

box point and figure chart has a downside target of 3461.03. There are stiff downtrend lines on

this chart. Use tight stops on any trading. Some real values are beginning to appear in some of

the issues in this index.

The Russell 2000 only lost 12.20 handles (points) in the Friday session. The very steep channel

lines are 1026.58 and 978.20. Both the stochastic indicator and our own indicator are issuing

buy-signals while the RSI continues to point lower albeit at oversold levels. It would be logical

to expect to see some sort of rally in this index. Our first level of resistance is 1038.60 and then

1073.20. Those are not hard and fast numbers but rather approximation numbers. The most

frequently traded price in the Friday session was 1002.50 and the highest volume was seen at

995 where 8.2% of the day’s volume traded. The low of 978.20 was seen at 11:30 after which,

the market steadily rallied into the close of the session. Again respect your trailing stops and

trade with caution.

The US Dollar Index suffered a very minor decline in the Friday session but did leave a

worrisome long tailed candlestick for the session. The very wide up trending channel lines are

98.38 and 100.40. The down pointing channel lines are 99.27 and 97.84. Both channel lines are

making a sort of diamond shape when combined. We seem to be in a trading range of 97.21 to

100.61. Both the RSI and stochastic indicator are issuing a sell-signal while our own indicator is

issuing a buy-signal. This diversion makes us pay closer attention to the trade. The high volume

area for the Friday session was seen at 98.65 where 11% of the day’s volume was seen and the

most frequently traded price was seen at 99.025. The daily 0.5% by 3-box point and figure chart

has a downside target of 91.71. The 60 minute 0.2% by 3-box point and figure chart has a

downside target of 96.489 coupled with narrowing Bollinger Bands.

Crude oil lost 1.50 in the Friday session, printing a new low for the year and breaking support at

32. The retreat in crude has been organized and not erratic showing continuous pressure to the

downside. The correlation between the S&P 500 and crude oil has been losing steam and

although many on-air analysts state that because crude is down the market is down, the numbers

do not support that assumption. While Crude's downward trajectory has certainly not been a

helpful to the market, the correlation has been diminishing not increasing. The Bollinger Bands

are becoming wider, telling us that the volatility is not over for crude oil. Volume retreated in

the Friday session pointing to potential seller fatigue in this product. The 5-period exponential

moving average has been an excellent marker keeping you short from January 4th 2016. The

first upside target is the 38% Fibonacci line, but we think resistance will be seen at about 35 plus

or minus a couple of quarters. Our own indicator is diverging from both the stochastic indicator

and the RSI and is pointing higher. Both the RSI and stochastic indicator continue to point lower

although both are oversold. It is interesting to note that the indicators are at higher levels, are

more positive, than on the prior sell-off on January 11th. This could be a positive change. The

quarterly chart of crude oil shows support at 25.13, 16.70 and 10.35. The most frequently traded

price for crude was 29.60 and the highest volume was seen at 29.65. The 0.25% 60 minute 3-

box point and figure chart has a downside target of 25.43 which is the same number seen on the

quarterly chart. The daily 1.25% by 3-box point and figure chart looks dreadful. Crude oil is

washed out and I believe that it will bounce. Value can be found in refiners who do not drill for

oil. They simply don't care what the price of oil is because they make their money converting oil

to gas. So, although they have been beaten up, now might be good time to find value.

Gold rallied in the Friday session adding 15 handles (points) as the fear trade expanded. The

other precious metal, platinum, declined in the Friday session which helped expand the

gold/platinum spread. The 60 minute 0.25% by 3-box point and figure chart looks as though

this market is trying to stabilize. The daily 1% by 3-box point and figure chart has a downside

target of 825.9. The most frequently traded price was 1087.50. Both the stochastic indicator and

the RSI have issued a buy-signal. Our own indicator continues to issue a sell-signal. The

downward trending channel lines are 1067.55 and 1095.35. The chart looks like gold has formed

a rounding bottom; although we are not 100% sold on this one. This could be a tea-cup pattern

but time will tell. Should this be a tea-cup, it will be bullish for gold. Again, we are concerned

that this is a fear trade.

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.

Past performance is not necessarily indicative of future results.

Copywrite 2016 The Option Royals