Dead cat bouncing, FOMC minutes in focus

Futures Market Newsletter with technical, seasonal and fundamental analysis
  

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All eyes on the FOMC minutes

The lack of economic news is putting even more attention on tomorrow's FOMC minutes.  The markets will spend the afternoon reacting to the latest in the "taper vs. no taper" debate.  However, in our view...the taper is already accounted for and could soon be forgotten. 

On the other hand, an overnight swoon in many foreign stock and bond markets could be pointing to increased anxiety in the U.S. markets. 

Although it isn't getting much press, Greece will soon be asking for another bailout and suddenly cash is pouring out of sovereign debt securities.  It will have to go somewhere...and we think Treasuries might be the eventual target but it is up to the Fed to avoid messing things up.

ZB, ZN, TLT, Treasury futures technical analysis

Bond bulls were likely feeling desperately defeated yesterday, maybe that was the "max pain" low

Unfortunately, all traders know (from experience) that the markets constantly seek the outcome that will create the maximum amount of pain to the majority of market participants.  However, once the inflection point is reached in which the bulls simply can't take the squeeze anymore and all of the bears are in with both hands; the trend ends.  Perhaps that is what we saw yesterday.

We realize that a single up day in a sea of red doesn't make for a trend reversal.  However, we've been here before and yesterday's trade felt desperate.  Whether you were looking at futures prices, ETFs, or mutual funds...it was clear that retail investors had enough of the interest rate headlock; liquidation was widespread and massive. Even the bullish of the bulls (us) were feeling defeated...that is what lows are made of folks.  Pain and frustration. 

**From yesterday, but we are still of the same opinion:**

The market appears content to price in the beginning of the Fed taper next month.  Yet, the Fed hasn't confirmed such a stance.  Additionally, the Fed has made it clear that any possible tapering will be slightly letting the foot off the brake as opposed to an outright cease in Quantitative Easing. Once again, the market appears to have gotten ahead of itself.  In the meantime, we are wishing we would have waited a few more days to begin nibbling on bullish positions (short puts in the ZB).

We are wondering when the public will begin viewing Treasuries as a value.  We've seen the panicked liquidation, but in their haste we've yet to see the realization that the risk free rate for 10 years is nearing 3%.  This might not sound like much based on historical standards, but this is the best we've seen in years.  It wasn't that long ago that investors were willing to by T-bills at a negative yield to ensure the return OF their capital (without regard to return ON capital).

We aren't giving up on the idea of higher bond prices (and lower yields) yet.  The Fed has worked hard to keep rates low, they might find it worthwhile to "talk their book" in the FOMC minutes released on Wednesday.

Treasury Market Ideas



**Consensus:** The technical bounce is welcomed, now we need the FOMC minutes to keep the momentum going (and we think we'll get it).  We prefer being bullish on dips!

**Support:** ZB: 129'10 and 128'18 ZN: 124'11 and 123'30

**Resistance:** ZB: 131'27, 133'11 and 134'29  ZN: 125'27, 126'06 and 127'11

Position Trading Recommendations

*There is unlimited risk in option selling

August 15 - Sell October 30-year bond 126 puts near 29/30 ticks, or $468.

ES futures, $es_f, S&P, chart

The bulls won the battle, but the bears might win the war

We aren't bullish, but we do think the short squeeze likely has room to run.  Our intra-day models suggest the mid 1660s will offer the first area of "good" resistance.  However, the chart suggests that prices could bounce as high as 1680ish without really negating the down-move.  In other words, now more than ever you want to resist selling prices into a decline.  Look for higher probability entries into strength (remember, the goal is to buy low and sell high). 

Despite signs that suggest the buying could extend another day or two; the upswing isn't convincing.  Also, there is a lot of chatter about oversold oscillators and technical indicators.  While this is mathematically true using daily price data, the bigger picture paints a much different story.  On a weekly time frame, the market is nowhere near being oversold and on a monthly chart the market is still overbought!

**From yesterday but still valid:**

The S&P is sitting on the cusp of disaster.  If the mid 1640s hold, we'll likely see another sigh of relief rally but if we break through support (and hold for any meaningful amount of time), things could get ugly fast.

According to the latest COT data from the CFTC, both large and small speculators added to long positions in the ES last week (or at least until the close Tuesday).  We suspect that selling later in the weak suggests significant long liquidation, but both groups were holding net longs in excess of 100,000 contracts.  Consequently, there is still plenty of room for more selling to occur.

We believe that being bearish will be the best paying trade.  Thus, if you want to be a buyer on the dip you should be playing with risk protection.  If (or when) things finally fall apart, the downdraft could be surprisingly harsh.

Stock Index Futures Market Ideas

**Consensus:** 1645ish held (despite a temporary puncture in off hours trading).  There could be more bouncing before selling resumes. 

**Support:** 1645, 1624, 1609 and 1591

**Resistance:** 1664, 1683 and 1696

Position Trading Ideas

Flat

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: 1646, 1638, and 1624

Sell Levels: 1658 (minor), 1664 and 1673


In other commodity markets....

June 24 - Sell September 85/101 crude oil strangle for about $1.60, or $1,600.

July 1 - Buy back the September 85 put to lock in a profit of anywhere from 60 to 65 cents (depending on fills) before commission and fees.  We'll hold the short 101 call for now and will consider re-selling puts to re-balance in the coming days.

July 5 - Roll 101 crude oil calls into September 109/93 strangles and October 110/89 strangles.  This slows the trade down and spreads the risk to both sides of the market at distant prices.

July 16 - Buy back September crude 93 puts (some have 92s and 93s) to lock in profit of anywhere from $400 to $650 depending on strike price and fills before transaction costs.

July 24 - Sell September crude oil 99 put for about 58 cents or $580 to re-strangle the oil market.

July 25 - Roll October crude puts into 94 puts (buy back existing put and sell the 94).  Depending on exact strike and fill prices, most clients were locking in anywhere from $400 to $600 per contract before transaction costs.  This moves re-balances the strangle to make it neutral. 

July 26 - We like the idea of nibbling on bullish positions in corn via either long mini futures (near 495) or long September corn 520 calls for about 5 cents.  Both are low risk ways to play a possible 20 to 30 cent recovery in prices.

July 30 - The seasonal low in natural gas is looming, we like the idea of buying a mini futures contract near 3.45.

July 30 - Buy back all September crude oil calls. If you are holding the $111s your profit should be somewhere between $450 to $500 before transaction costs, if you have the $110s it should be somewhere between $550 and $600 before transaction costs, if you have the 109s it should be somewhere between $500 and $550 before transaction costs.

July 31 - Buy back September crude oil 99 puts near-break even (they were put on to hedge our short calls and are no longer needed).

August 13 - Buy back October crude 94 puts near 20 cents to lock in a profit of 50 cents or $500 per contract before commissions and fees.  We'll hold the short calls for now.

August 20 - Sell the October 98 put for about 48 cents ($480).  This brings the position back to a neutral strangle).

(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)

DeCarley Trading a Division of Zaner
Twitter:@carleygarner
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1-866-790-TRADE(8723)
http://www.decarleytrading.com)
http://www.atradersfirstbookoncommodities.com


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.**  

 

 

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