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No data, but plenty on tap
There weren't any scheduled economic reports on Monday, and Tuesday has little to speak of. However, by mid week things could start to heat up. We'll hear the Fed's latest consensus on the economy in the form of the Beige Book, second quarter GDP, inflation data and consumer confidence figures. Coming off of last week's FOMC minutes fireworks, we could see a rather dramatic reaction to the news.
Don't forget about Friday's Jackson Hole Convention! Fed chair's often use what is intended to be a "relaxing" weekend of economic discussion in the popular tourist destination, Jackson Hole, as a platform for policy support. We could very well hear Bernanke argue support for another round of bond buying.
Based on action in Treasuries, and potential concern over what has been predicted to be an active hurricane season, it seems the market's short-term pre-disposition is for higher bonds and lower stocks.
Digestion looks to be resolving itself to the upside
In the last newsletter we had mentioned the "easy" money for the bulls had been made and the market could see some consolidation trade. Although the back and filling has been moderate, we feel like Friday's trade could have simply been a "reload" before the bonds and notes march higher.
Although we believe the path of least resistance in the equity market will be lower in the near-term, it is important to realize that Treasuries can go up WITH stocks when QE is "in the air". Government money printing has a way of forcing asset prices higher regardless of conventional wisdom, or even market fundamentals.
The CFTC's COT report revealed that large speculators (known as the "smart money) have been slowly adding to long positions in both the 30-year bond and 10-year note. Their net long holdings are moderate at best, but their inclination toward building bodes well for a supported market. Small speculators (harshly dubbed the "dumb money" have been selling into this rally using both bonds and notes. This often suggests the rally has a little room to move simply because it opens the door to a potential short squeeze by weak-handed shorts.
Treasury Market Ideas
Consensus:Seasonals and fundamentals leave us slightly bullish, but not enough to justify significant risk exposure.
Support:147'04 offers minor support, and then again 144'26 (30-year Bond), 132'30 and 132'05(10-year note)
Resistance:148'20, 149'18 and 151'28 (30-year Bond), 134'01, and 134'30 (10-year note)
Position Trading Recommendations
*There is unlimited risk in option selling
August 14- Buy the 5-year note futures contract near 124 and simultaneously purchase a 124 put for insurance. The put protects the trade absolutely beneath the strike resulting in a total risk of under $300 per contract. The profit potential is theoretically unlimited, but we are looking for a possible rally to the 125 area (which would net between $700 to $900 per contract depending on fill prices, etc.)
August 15- Sell 1 October 30 year bond 142 put near 25 ticks or $390.
August 21- Aggressive traders might look to lock in a profit on the long 124 put in the 5-year note and hold the long futures contract in hopes of a recovery. This opens the trade up to theoretically unlimited risk, but also gives the trade beyond option expiration (Friday).
August 23- We recommend flattening all bullish Treasury positions to lock in profits!
ES Support in the mid 1390's has held thus far, but appears vulnerable
The major indices spent most of the session waffling on both sides of unchanged; as a result, the VIX remains historically low. The VIX doesn't necessarily work on a predictable time-table, and can sometimes remain at discounted levels for months, or years, before the environment changes. Nonetheless, we don't believe the current environment justifies such longevity for a low VIX. After all, we are facing unprecedented global economic risk with Europe at the epicenter, an upcoming Presidential election, a potentially damaging hurricane season, and more.
Friday's Commitments of Traders Report portrayed the large speculator category as being neutral to slightly bearish the S&P 500 (this accounts for positions in both the e-mini S&P and the full sized futures contract). However, the small speculator category is rather significantly long the ES. This group isn't always wrong, but they are typically wrong more than they are right...also, they are the less capitalized of market participants and, therefore, tend to be extremely fickle. We feel like this leaves the e-mini S&P vulnerable to liquidation selling.
If we are wrong and Bernanke, or the economic data pleases the bulls, look for resistance near 1433ish.
NQ Futures are getting overheated
Stock Index Futures Market Ideas
Consensus:We continue to be bearish on rallies, but short traders must be patient. Avoid selling "in the hole".
Support:1396, 1373, and 1352
Resistance:1433 and 1448
Position Trading Ideas
August 20thPut spreads and synthetics in the NQ and the ES, call us for details
Day Trading Ideas
These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled
Buy Levels: 1404 and 1393
Sell Levels: 1418, 1424 and 1433
In other markets....
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
There is substantial risk of loss in trading futures and options.