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 8, 2016

Surprise! Freight rail traffic is down 16.1% for the month of April. In case you believe that this

is a fluke number, it is not. The freight rail traffic has been down every month since November.

Okay so not everything was down, vehicle part were up as well as coke and chemicals.

Petroleum products were down 25.1% and even grain mill products, grains, and pulp and paper

were down. Coal, is a disaster, down big every month.1

Recently the financial news network’s anchors have been blaming the US election process for

the weakness in the markets. HELLO! It is earnings guys. The good news is that the US Dollar

has weakened and as such we should be more competitive in our pricing. Bad news is that this

dollar weakness will not be reflected in earnings until next quarter, that is, if the US DX

weakness continues. Right now the US DX is in a trading range and has bounce from a support

area. time will tell on this one. As long as multinational earnings are under pressure it is unlikely

that they will expand their hiring. Given the cost of health insurance and benefits clearly part-

times will be preferred to full-time workers. The bottom line is that the average income earner is

still having a very difficult time surviving.

A huge concern for the investing public is the treatment of bond holder. Puerto Rico, Chicago,

Detroit, Atlantic City, et al are on the brink of failure. Actually Puerto Rico has already failed.

The question that bond investor must ask is, will we be paid and when? Puerto Rico, Guam, the

US Virgin Islands and others of this ilk have been selling their tax free debt to Americans for

years. The municipal bonds from the territories of the United States, for the most part, are tax

exempt federally as well exempt from city and state taxes and have been a parking spot for tax

free income. The Puerto Rico problem will affect these territories abilities to borrow money in

the future.

The description of a bond, which used to be on the face of the bond, explains how much interest

will be paid, when that interest will be paid, and what income stream will be used to pay the

interest and principal upon maturation of the bond. Some bonds are callable, can be redeemed by

the issuer before maturation and some are puttable, those bonds can be redeemed by the holder

of the bond on given dates. Some bonds are GO’s, which are backed by the taxing power of the

entity. GO’s are general obligation bonds. There are hospital bonds, backed by the income

earned by the issuing hospital. There are FHA bonds, section eight bonds etc. Some bond are

not totally tax free and some bonds are taxable. All is stated on the description of the bond. So

for a bond to fail and stiff the lenders is a big thing.

In 1971, the Washington Public Power bonds call WPPSS were issued to pay for the construction

of five new power plants. The interest and principle was to be paid by the sale of power. These

bonds had major problems and went into default in January of 1982. The construction of plants

four and five stopped. Plants one through three were never finished but the bonds were backed

by the Bonneville Power Administration so they were safer than the bonds issued for

construction of plants four and five. Believe it or not, these bonds were triple A rated bonds,

well one through three were. The bonds issued to build plants four and five defaulted and

construction ceased. The default was on $2.25 billion in bonds and the rate payers, users of the

utilities were on the hook for the borrowed money. This amounted to $12,000 per customer! In

1988 after a many lawsuits, many of the bond holders were awarded 40 cents, some as little as 10

cents, on every dollar invested. The lawsuit finally settled in 1995. These bonds were issued to

build power plants. Bond holders lending money to plant one, two, and three, for the most part,

were paid. Those who lent money for the construction of plants four and five suffered the

greatest losses. Since that time, we had a recent instance of a default, in Vallejo, California, but

that was resolved. The rating agencies rate bonds but as you can see from the WPPSS mess, they

are not always correct. Some bonds are insured and some are not. Generally those that are

insured do so to enable them to achieve a higher rating and thus, sell their bonds. The higher

ratings enable the lenders to pay less interest than non-insured bonds because these bonds are

deemed safer.

The S&P 500 rallied 10.25 handles (points) in the Friday session after initially retreating on the

“Jobs Report” data. All the indicators that we follow herein are issuing a buy-signal. The short-

term downtrend line is 2060.91. The trendline taken from the recent high is at 2085.34. Both of

these lines represent resistance although the steeper line is likely to fail. The most frequently

traded price was 2041. There is some divergence seen. Although we made a lower low in the

Friday session our own indicator did not make a lower low and in fact made a higher low. The

weekly chart looks a bit heavy and appears to be rolling over to the downside. We believe that

there will be a bounce; however, we do not believe that all is well, chart wise, and that this index

is likely going to retest the 2030 horizontal line and possibly go to 2012.

The NASDAQ 100 added 33.50 handles (points) in the Friday session. All the indicators that we

follow herein are pointing higher. The market opened badly on the “Jobs Report,” but by 12:30

it was in full rally mode moving higher. The market stayed inside the downward slopping

channel lines, 4355.19 and 4208.38. The weekly chart continues to look awful although the last

candlestick on the week is a doji, which could mean that the market is in transition and just

might change direction. The most frequently traded price in the Friday session was 4292.50. It

is likely that the bounce will continue on Monday.

The Russell 2000 gained 10.30 handles (points) in the Friday session. Both the stochastic

indicator and the RSI are issuing a buy-signal Our own indicator is curling up but has not issued

a buy signal as yet and appears to be a couple of sessions away from that signal. The most

frequently traded price was 1101.50 and the heaviest volume was 1104.75 where 10% of the

day’s volume was traded. The market rallied from the open and continued upward for most of

the trading session. The weekly chart seems to be curling over to the downside. All the

indicators we follow, on the weekly chart, are issuing a sell-signal. This index will outperform

on the up and the downside. The volatility of this index is huge so take care.

The US Dollar Index rallied in the Friday session leaving a long tailed- small bodied candlestick

on the chart. All the indicators that we follow herein continue to issue a buy signal but at a

slowing rate. The most frequently traded price was 93.70 but the highest volume was seen at

93.60 where 18% of the day’s volume was traded. We continue on a point and figure buy-signal

for this index. The weekly chart clearly shows that we continue stuck in a trading range from

100.6 to 91.88. Warnings of a breach of this range can be seen at 99.95 on the upside and 92.52

on the downside. On Tuesday, of this past week, we saw the DXE trade below the support line

at 92.52 but quickly reverse to the upside. Our rule is that we have to see a breach for two days

on a closing basis to accept the breach as valid.

Crude oil rallied in the Friday session adding 0.24 handles (points) leaving a doji candlestick. A

doji is a transition candlestick which tells us that the bulls and the bears were evenly matched,

neither winning in this session. It also tells us that we could see a change of direction. The

stochastic indicator continues with a sell-signal but is curling to the upside. The RSI is pointing

higher and our own indicator will likely issue a buy-signal in the next session. The downtrend

line is 45.92 and the uptrend line is 43.48. The market is stair stepping higher, in other words

moving higher, retreating and then resuming the upward move. The pattern looks like stairs and

thus is called, stair stepping. The most frequently traded price was 44-44.25. The weekly chart

clearly shows that crude oil has broken the downtrend line. The next resistance is at the 48 level

and then 50.89. Should the market trade above 50.89, 62 is next. The uptrend line is 41.16.

Gold rallied 17.4 handles (points) in the Friday session. The chart shows that gold consolidated

from about 1213 to 1270 then rallied to the upside printing 1306 with a doji candlestick. From

there it retreated for three days and Friday lunged forward. Both the stochastic indicator and the

RSI are pointing higher. Our own indicator continues to flash a sell-signal. We have broken the

downtrend for the daily, weekly and monthly time-frames. The most frequently traded price was

1280 but that was not during the day-session. The most frequently traded price for the day-

session was 1290. Platinum is beginning to outperform gold…..finally. It added 21.3 handles

(points) in the Friday session.

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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