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May 02, 2010 at 18:53 PM EDT
Option Queen Letter
The US stock market is resilient and seems to want to rally. The only thing that will prevent this market from returning to the April highs will be an event that will cause fear to return to this euphoric market....

The US stock market is resilient and seems to want to rally. The only thing that will prevent this market from returning to the April highs will be an event that will cause fear to return to this euphoric market. We have seen European downgrades and an attack on Goldman Sachs, neither of which was bad enough to send some fear into this market. We need to see an event like a failed Treasury Auction. That is not going to happen anytime soon because money is flowing back into our currency and our markets. The yield starved investor is taking more risk daily just to get some returns on their portfolios. At the current money market rate, you are losing money and not keeping up with costs.

Although the VIX rallied from a low of 17.47 to a high of 22.39 this past week, we believe that we could see the VIX at 29 or 30 in the near term. Investors and traders alike would love to see some volatility return to this market. Volatility helps the options sellers get the returns they need. Meanwhile the US 10 year treasuries are comfortably below 4% and will not compete with returns achievable in the market. It is thought that once the treasuries yields above 5% or 5.25% that they will compete for dollars earmarked for the US equities markets. For right now, we seem to be miles away from that competition.

Another factor that needs to be considered is; should the dividend preference treatment be removed, money will again flow into the debt market. At the moment that tax benefit has encouraged investors to buy high yielding securities rather than debt instruments whose income is ordinary income and taxed as such. Should the Congress neither pass nor not renew that preference item it would help make the case for investors to invest in bonds rather than stocks.

Monday: March personal income/consumption is released at 8:30, March construction spending is released at 10:00, and April ISM is released at 10:00.
Tuesday: March factory orders are released at 10:00.
Wednesday: Challenger Gray & Christmas April job cut announcements, and ISM nonmanufacturing index for April is released at 10:00.
Thursday: 1st quarter productivity and Federal Reserve Chairman Bernanke speaks.
Friday: April nonfarm payrolls and unemployment rate are released at 8:30 and March consumer credit is released at 3:00.

The US Dollar index retreated in the Friday session with some of the money flowing to the Euro. The uptrend line for the Monday session is at 81.77, we remain above the uptrend line. The 9-day moving average is 81.799, which is very close to the uptrend line for the Monday session. The top of the Bollinger band is at 82.553 and the lower edge is seen at 80.224. We are above the Ichimuko Clouds for the daily time-frame but are in the clouds for both the weekly and the monthly time-frames. All the indicators that we follow are issuing a sell-signal on the daily chart of the US Dollar index. For the weekly and monthly charts, the indicators continue to issue a buy-signal.

The S&P 500 futures contract lost 1.8% of its value in the Friday session. The 5-day moving average is at 1193.60. The top of the Bollinger band is at 1215.32 and the lower edge is seen at 1174.50. There is a resistance line at 1208.15 which should serve to stop most rally attempts. There should be some support at 1176.25. Further support will be seen at 1151.67 and at 1146+/-. At the moment, the chart pattern looks like a head and shoulders top. We need to see 1176.75 removed to confirm that pattern. The stochastic indicator, RSI and our own indicator are all issuing a continued sell-signal with plenty of room to the downside. The Thomas DeMark Expert indicator is issuing a buy-signal. The long-term uptrend line is at 1054. Look at the point and figure chart. You can see the head and shoulders formation. There is a downtrend line at 1204.44 and an uptrend line at 1184.36. Remember Bob Farrell's Market Rules; "Markets tend to return to the mean over time. Excesses in one direction will lead to an opposite excess in the other direction. The public buys the most at the top and the least at the bottom." These are just three of the ten "rules of the road." We are above the Ichimuko Clouds for both the daily and the weekly time-frame but are below the clouds for the monthly time frame. Both the weekly and the monthly oscillators are overbought and curling over to the downside. Once the weekend is over, expect to see some of the buyers return to the market as the weekend fear is removed.

The NASDAQ 100 has a bearish engulfing candle on the chart. The 5-day moving average is at 2020.45. The top of the Bollinger band is at 2058.85 and the lower edge is seen at 1962.97. The stochastic indicator, the RSI and our own indicator all continue to issue a sell-signal. The weekly and monthly indicators, except for the flat DeMark, are issuing a sell-signal. The Thomas DeMark Expert indicator is going sideways a little below neutral for all time-frames. We are above the Ichimuko Clouds on all time-frames. We have signs of exhaustion on all time-frames. We will have some concern if the market trades below 1991.50 because we will be in the Market Profile single print area.

The Russell 2000 has a bearish engulfing candle on the chart as a result of the Friday trading session. All the indicators that we follow herein are issuing a continued sell-signal on the daily and the weekly charts. Only the stochastic indicator is issuing a sell-signal on the monthly chart, the other indicators continue to point higher at overbought levels. We have signs of exhaustion on the chart for both the weekly and the monthly time-frames. The chart indicates to us that we need to see a defense of the 708 level. The 5-day moving average is at 726.76. The top of the Bollinger band is at 743.10 and the lower edge is seen at 687.77. We closed the Friday session at the 20 day moving average.

Crude oil rallied in the Friday session. The downtrend line for the Monday session is at 86.65. We have an important high just overhead, that high is at 87.59. Should the market remove that level we will likely see a run to 90 and then to 93. We are above the Ichimuko Clouds on all time-frames. All the indicators that we follow herein are uniformly issuing a continued buy-signal. We will likely see some resistance at the 50% retracement level (from the high of 147.27 and the low of 32.48) of 89.96. The 5-day moving average is at 84.23. The top of the Bollinger band is at 87.34 and the lower edge is seen at 81.78. We have a long-term target of 105 for crude oil.

Gold rallied in the Friday session removing the previous month's high of 1169.00. All the indicators followed herein are issuing a continued buy-signal albeit at overbought levels. The 5-day moving average is at 1167.20. The top of the Bollinger band is at 1178.56 and the lower edge is seen at 1127.00. With all the global chaos, the PIIGS, Goldman Sachs and the oil spill in the Gulf, what would you expect? Naturally gold went on a trip to the upside of the chart. Naturally, we are above the Ichimuko Clouds.

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