Jeanette Schwarz Young, CFP®, CMT, M.S.

Jordan Young, CMT

83 Highwood Terrace

Weehawken, New Jersey 07086

www.OptnQueen.com

August 10, 2014

The Option Queen Letter

By the Option Royals

The topic de jour is tax inversions, a topic covered in these scribbling’s several weeks ago. Will

congress do something about this, probably not, but it is a great talking point for the November

elections. The current spate of mergers clearly created to address taxes is a real problem for the

US government. US corporations are keeping large stock piles of cash off our shores. Every

once in a while government passes a repatriation window and corporations jump and return their

cash to the US. The answer for the US is probably to reduce corporate taxes or place a financial

penalty for companies using this tactic to avoid taxation. We doubt anything besides jawboning

will come of this. This behavior is as old as the hills.

The natural maturation process of this sort of tax reductions is to develop new and different ways

to avoid taxes. Finding another loophole in the tax system is the goal. Recently a new old one

appeared. This one allows some qualifying corporations to spin off some parts, as Windstream is

doing, turning them into a real estate investment trust or REIT. The REIT will then lease back to

Windstream the copper and fiber network keeping that income stream untaxed. The corporation

can take the write off for the lease cost and allow the earnings flow to the REIT. In the past, to

qualify as a REIT the trust had to hold either mortgages or some sort of real estate but in a ruling

in May, the I.R.S. is now including microwave transmission, cell and broadcast towers,

transmission lines, pipelines and storage facilities. Don’t you worry, should these tax gimmicks

fail, we are sure another more creative one will appear. Voila, tax savings.

Back to the various global wars: we, the USA are now reengaged in the war against ISIS. Israel

and Hamas are at war, the Ukraine is defending itself and have we forgotten Syria and the other

global hot spots? Clearly this is all supportive of the very stable US dollar. The markets took a

breather last week and recouped some of the losses in the Friday session. Lest you forget, we are

in a seasonally soft period of the year nearing the worst performance month of the year,

September. As we approach that time, the market demonstrates softness and some reluctance to

proceed higher. Yes we can make a new high but until we get past September, we will stand on

the sidelines, just snatching and grabbing profits from very short-term trading, where ever we

find an opportunity. Sometimes overnight risk just isn’t worth it. We sell calls on equities and

only sell puts on issues that we wish to purchase. The current increase in the volatility has given

us an opportunity to use options as a cash raising tool in our portfolios. When the downdraft

does appear we want to have cash on hand.

The S&P 500 is above the trendline drawn from the November 2012 low. The candlestick seen

in the Friday session is a bullish engulfing candlestick. We have a nine-count on the daily chart.

All the indicators that we follow herein are issuing a buy-signal. The market tested the 1900

area, briefly piecing it printing 1890.25 but closed the session at 1923.75. Although we would

like to believe that the market will continue higher, we have some concern about the fragility of

this rally. The volume was respectable but not as high as seen on August 1, 4, and 6th

. We

believe that the action was in part short-covering initially and then some trend following as

players jumped it to catch a piece of the rally. The S&P 500 closed above its 100-day moving

average but continues below the 50-day moving average. The 5-period exponential moving

average is 1920.19 and the market was able to close above that level, which can be viewed as

positive for the moment. The Bollinger Bands illustrate the return of volatility to this market.

The top of the Bollinger Band is 2002.68 and the lower edge is seen at 1901.01. We are inside

the Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and the

monthly time-frames. Both the weekly and the monthly charts show that this market has been

stair stepping its way higher with little accidents along the way. The 30 minute Market Profile

chart is a tri-modal chart……. The daily 1% by 3-box chart continues to look positive for this

index. The 60 minute chart shows a clear breakout to the upside with a target of 1955.13.

The NASDAQ 100 chart shows that although Friday session was a nice 17.50 handles higher,

that the high was lower than the high seen in the Thursday session and the printed low was lower

than seen in the Thursday session. This is the definition of a downtrend. The NASDAQ 100 has

not challenged the 100 day moving average and did close above the 50 day moving average. All

the indicators that we follow herein are pointing higher. We note here that the RSI never became

oversold in the most recent downdraft and that the downdraft was not a vicious as that seen in the

S&P 500. The 5-period exponential moving average is 3876.32. The top of the Bollinger Band

is 3995.33 and the lower edge is seen at 3839.33. We noticed that the Bollinger Bands are

expanding very much for this index while they have become wide and continue to widen in the

S&P 500. The downward trending channel lines are 3883.15 and 3802.25. The 1% by 3-box

point and figure chart continues to look positive with an upside target of 3978.36. The 60

minute 0.1% by 3-box chart has a current upside target of 3955.49 and continues to look positive

for the near future.

The Russell 2000 did rally in the Friday session but clearly was following the pack and not in a

leadership position. This tells us that the risk on trade is alive and well for the moment. This

index continues in a downtrend. The down trending channel lines are 1128.23 and 1074.26. The

Index is below both the 50 day and 100 day moving averages which are getting closer together.

Should the 50 day moving average cross below the 100 day moving average, some danger flags

would be issued. The Russell 2000 did close above the 5-period exponential moving average

which was 1122.20. The Bollinger Bands are not expanding for this index. The top of the

Bollinger Band is 1164.67 and the lower edge is seen at 1106.53. Although all the indicators are

pointing higher, our own indicator looks as though it might issue a sell-signal in the next session.

Crude oil closed up slightly in the last session. That said, it has been on a slide since late June

when it printed 106.55. The market appears to be oversold but continues to point lower. The

strong US dollar has had an impact on the price of crude insomuch as crude is traded in US

dollars. The down trending channel lines are 101.44 and 96.14. The market remains below the

20, 50, and 100 day moving averages. The 5-period exponential moving average is 97.65, just

slightly above the day’s close of 97.35. There is a horizontal line at 96.84 which should serve to

support this market although it has been breached briefly in both the Wednesday and Thursday

sessions. The indicators are mixed with both the stochastic indicator and the RSI flashing sell-

0signals at or near oversold levels. Our own indicator is issuing a buy-signal. The top of the

Bollinger Band is 104.25 and the lower edge is seen at 95.88. The daily 0.8% by 3-box point

and figure chart shows a downside target of 84.63 and shows a market trading below the

downtrend line. The 0.1% by 3-box chart has a downside target of 95.84 and shows a narrow

market with an active downtrend line.

Gold retreated in the Friday session but continued to post a higher high and a higher low. So far,

that has been positive for the product. That said, we see that gold rejected the upper channel line

and back off closing below the day’s opening. The upward trending channel lines are 1323.12

and 1291.38. Gold is above the 5, 20, 50 and 100 day moving averages. The 5-period

exponential moving average is 130546. The Bollinger Bands are contracting and this generally

leads to less volatility. The top of the Bollinger Band is 1323.12 and the lower edge is seen at

1284.22. The 1% by 3-box point and figure chart has an upside target of 1812.66 and a

downside target of 1118.19. We see a rather range bound chart seeming to be forming a pennant.

The 0.2% by 3-box chart confirms our observation that the market seems to be coiling or getting

ready to do something. Note that the Bollinger Bands on the point and figure chart are also

becoming narrow. The Market Profile chart is bi-modal and shows areas of discomfort for the

market. We have closed above the downtrend line and that is a positive for the gold market.

That said, we continue to watch and wait.

The US Dollar Index is a pseudo momentum indicator for global chaos. The index closed the

Friday session at 81.41, having been locked in a 43 cent trading range for the week. With

Anthony Weiner’s new restaurant the only NEW chaotic element added to a laundry list of

global turmoil this sort of action is natural. The index bounced off of our 81.74 resistance line

and for the most part stayed above our 81.29 support line. Above 81.74, 81.96 remains the next

resistance line and 81 flat remains support below. The index is inside The Bollinger Bands,

which are currently contracting. The upper band is 81.86 and the lower band is 80.13. The 20-

period simple moving averages is 80.99, the 5-period exponential moving average is 81.44. The

index is above both. Both indicators that we follow are issuing sell signals.

Looking to the weekly chart, though the index broke above the 81.41 resistance line, it failed to

close above it. Strong resistance can again be seen around 82 while 80.60 should keep this index

contained. The 30 minute .05 x 3 point and figure chart, while still in an uptrend, has formed a

countertrend internal trend line and has a downside target of 80.95. Taking the sum of all of this

information, should Anthony Wiener’s restaurant succeed, the index should pull back to 81, with

80.60 the ultimate safety net below should world peace be established.

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.

Past performance is not necessarily indicative of future results.

Copywrite 2014 The Option Royals