Option Queen Letter By the Option Royals

Jeanette Young, CFP®, CFTe, CMT, M.S.

4305 Pointe Gate Drive

Livingston, New Jersey 07039

www.OptnQueen.com

optnqueen@aol.com

May 15, 2016

While we rarely speak of the Dow Jones Industrial Average as the indexes mere 30

stocks provide a limited view of the market, today might be a good day to do so. This

average, created by Charles Dow, the co-founder and editor of the Wall Street Journal,

is named after Mr. Dow and his business associate, Edward Jones. It was Dow’s goal to

construct an index of companies that would reflect the behavior of the USA’s industrial

sector and broader\ economy. Our analysis today shows that this index is in danger of

removing a support line which has been in tack since April 12 of this year. Should that

level of 17535.32 fail, the Dow Jones will fall to about 17200.00. The good news is

that the volume is not unusual.

What is more interesting is the fall in the Dow Jones Transportation Index. Last week

we spoke of the decline in the volume of commercial traffic on the rails. This index

broke a key support level at 7663.17 and tested another level at 7507.31. Charles Dow

believed, as we do, that in a strong economy the movement of goods from one place to

another should be robust. In other words, stuff produced needs to be delivered to those

who use. Thus, the Transportation Average should reflect this behavior by rallying if

the economy is expanding. It is also thought that if the transportation average does not

rally, then the economy is likely contracting. The bottom line is that a falling

Transportation Average tells us that the economy is punk. The weekly chart of this

index is even more disastrous than is the daily chart.

The Baker Hughes rig count dropped again. Last year the Baker Hughes rig count was

660 and today it is 318. Much of the petroleum products we use are transported by rail.

You can immediately see that this drop has negatively affected the transportation

average. Boone Pickens said, in a Bloomberg interview, that crude oil (WTI) must rise

above $60 a barrel for drilling operations to resume. We guess that is looking under the

hood alright!

Some experts are saying that the average wage earner is benefiting from the lower cost

of gasoline. While we agree that the lower cost is certainly helping, when you see the

price of port products rise 35.9% it is clear that savings is being eaten up by food and

housing, both of which are rising.

The sectors that were under pressure in the Friday session were the financials, basic

materials (except for Monsanto which had a take-over bid), healthcare (with the

exception of the biotech’s and generic drug companies), consumer cycles, technology,

transportations, utilities and energy. In other words, this was a broad based retreat.

The S&P 500 June futures contract retreated 16.25 handles (points) in the Friday

session. Both the stochastic indicator and the RSI continue to issue sell-signals. Our

own indicator is going sideways with an upside bias , still issuing a buy-signal. This

divergence suggests that we need to look more closely at the action of the index. The

volume was not impressive but the Bollinger Bands are beginning to expand and this

warns of increased volatility. So far, this index has not tested the horizontal support

line at 2030.25. It is useful to review the Heikin-Ashi charts insomuch as they clearly

show the direction and remove much of the noise seen in the other charts. What we see

is worrisome for the bulls. The very short downtrend line is at 2068.75.04, the longer

downtrend line is at 2077.05. The most frequently traded price was 2052.75. When

reviewing the weekly charts one is struck by the importance of the horizontal line at

2030.24. The level below that support line is 1992 and then 1967.25, ouch! All the

indicators on the weekly chart are pointing lower. Caution is warranted although we

believe that the market will bounce from these levels within a day or so.

The NASDAQ 100 retreated in the Friday session but made several attempts to go

positive during the session. Ultimately the index failed and closed down for the day.

All the indicators that we follow herein are issuing a sell -signal. It is interesting to see

that the 38.2% Fibonacci line has supported this index. Should this Fibonacci level fail

to support the market, 4219.87 will be the next stop, the 50% retracement line. The

weekly chart looks as though this index is making a stand here. That said, should it fail

at 4271, there isn’t much support until 4102. All the indicators that we follow herein

are negative with plenty of room to the downside. The most frequently traded price was

4320. As with the S&P 500 caution is warranted.

The Russell 2000 retreated a mere 4.50 handles (points) in the Friday session. All the

indicators that we follow herein continue to point lower with plenty of room to the

downside. This chart sort of look like a head-and-shoulders top. There isn’t a sell

signal as yet based on the possible pattern because the neckline hasn’t fa iled. The

Bollinger Bands are beginning to expand and that warns of increased volatility in the

not so distant future. The most frequently traded price was 1100.50 but 9% of the

volume was seen at 1100.00. The weekly chart has rolled over to the downside. The

downtrend line is 1124.53. All the indicators that we follow herein are pointing lower

with plenty of room to the downside. The 11 by 3-box point and figure chart tells us

that this market needs to stay above 1099. The chart itself looks negative.

The US Dollar index closed the Friday session at 94.61, up for the week. The 20 period simple

moving average is 94.02, the five period exponential moving average is 94.21 and the index is

above both. The Bollinger Bands are currently expanding ever so slightly; the upper band is

95.31 and the lower band at 92.73. All indicators that we follow are currently issuing clear and

continued buy signals. The 30 minute 0.1% x 3 point and figure chart shows the index to be in a

new uptrend with multiple internal up trend lines and two activated upside targets at 95.94.

Over the past two weeks, the charts of the US Dollar Index have told a very interesting story.

Keeping within a down trend channel started January/February 2016, the dollar index met the

93.32 support level two weeks ago, a level that has been in place since January 2015. Below

here, there is a fairly steep drop, with the next support levels at 89.41 and 88.40 below that. After

dipping below this line, the index rallied back to upper channel line, breaking above it on the

daily chart and hitting the top of it on the weekly chart. The index will likely rally to 95.64 and

from there, move on to 96.49. If the index breaks below 93.32, watch out below!

Crude oil retreated in the Friday session leaving what looks like a hangman on the

chart. Crude oil poked above the horizontal resistance line in the Thursday session but

never challenged that line in the Friday session. The indicators remain positive bu t are

losing momentum and are beginning to roll over. The most frequently traded price was

46. The weekly chart is very interesting and clearly shows that the horizontal line at

46.76 is containing this market. The next resistance level will be 50.89. Both the

stochastic indicator and the RSI, although over bought, are pointing higher. Our own

indicator has just issued a sell-signal. Above the 46 and certainly above 50, the shorts

will begin to panic and could propel this market higher as they cover their short

positions. This sort of behavior, unless accompanied by heavy volume, usually does

not last.

Gold gained 3.1 handles (points) in the Friday session. The down trending channel

lines are 1285.87 and 1253.73. The uptrend line is 1263.66. The stochastic indicator

continues to issue a sell-signal but it has curled up aggressively and likely will is sue a

buy-signal within the next session. The RSI is pointing higher and our own indicator is

clearly pointing lower. That said, caution is warranted. The weekly chart shows us that

gold is backing and filling. Both the stochastic indicator and the RSI are issuing a clear

sell-signal. Our own indicator will issue a sell probably by the end of the week. The

most frequently traded price was 1272.50.

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.

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