As always on Fed day, the markets were essentially closed until 2 pm Eastern
It was painfully quiet prior to one of, if not the, most critical Fed announcements of the year. There were a lot of factors coming into today that had the potential to set off fireworks; for instance, this was Bernanke's last FOMC press conference, economic data has been teetering on the brink of the pre-set taper thresholds, volume was light due to the upcoming holiday, and traders seemed to have overloaded positions. Specifically, "most" market participants were position on the long side of the ES, short Treasuries and Short gold ahead of the news.
When there is an overwhelming majority of speculators placing the same wager, the environment tends to favor a wake up call to those complacently following the crowd. With all of these aspects ringing in our ears, we were more than happy to come into today's event risk with very "small" positions with low risk.
I've been doing this long enough to know that December is the month of the year in which traders have a higher probability of being in the wrong place at the wrong time; leading to financial disaster.
We apologize if you are bored at the lack of solid trading ideas in recent weeks, but we assure you it is better to be on the sidelines wishing you were in; than in, wishing you were on the sidelines. There will be better opportunities around the corner.
The Treasury bears were betting on some sort of taper talk, they got it
In a previous newsletter we pointed out that most speculators were short Treasuries. Based on the COT and subsequent price action, it is clear that traders were willing to pile on the risk ahead of the Fed. After all, how the the Fed continue to avoid the elephant in the room?
Everyone knew tapering was coming, and it did. Today the Fed finally began the "taper". We'll admit, we thought the Fed would wait until the new year to actually begin making its move. However, the move was more symbolic than anything; they will still be buying Treasuries and Mortgage Backed Securities in droves.
In our opinion, the actual taper is probably the most bullish development we've heard in Treasuries for quite a while. This premise sounds illogical, but many of you might recall several years ago when the Fed first announced the QE program. Treasuries rallied into the announcement but once the Fed started actually buying securities the bottom fell out. Will we get the opposite here? We think the odds favor it.
It is frustrating to watch a market do what you believed it would do, without you. We've been looking for a Treasury flush to sell bonds puts against. Today's low in the mid 128s was exactly want we wanted (and where we wanted). It turned out to have been a good place to be a put seller...in a normal market anyway.
Unfortunately, this is far from a normal market. Today's volatility was fast and fierce, leaving little prayer of getting our desired trade off. Not only did the market move fast, but the put option value went up in pixie dust in the blink of an eye.
Once we get past the Fed, the quadruple witch, and the holiday the trading environment will likely be more conducive of comfortable speculation (as opposed to the slot machine pull the markets seem to be at this juncture); we'll look to start getting a little more aggressive then.
Treasury Market Ideas
*You should be trading the March contract!
**Consensus:** Believe it or not, today's taper news is actually bullish. We like the idea of being bulls on large dips.
**Support:** ZB: 128'18, and 127'15 ZN: 123'28, 123'19, and 122'06
**Resistance:** ZB: 130'11, 131'24, and 132'18 ZN: 125'02, 126'01, and 126'30
Position Trading Recommendations
*There is unlimited risk in option selling
December 6 - Buy March 5-year note future and the February 120 put. The risk is limited to about $600, but the profit potential is theoretically unlimited. We are looking for the futures price to return to the upper end of the range, which would be a profit of about $1000 on the future (but a moderate loss on the option) before transaction costs.
Flat and happy
*You should be trading the March contract going forward.
We don't typically time our position trade recommendations to be relatively flat on a FED day (I say relatively because we came into the day with VERY small bullish positions in the 5-year note, gold, corn, and coffee), but it sure was nice. While many in the trading forums, chat rooms, and of course social networks were expressing feelings of anxiety, we were sipping caffeine and popping popcorn for the big show.
Once news hit of a Fed taper, the ES was immediately a cesspool of pain for anybody that had stop orders working. First the market took out the sell stops pre-announcement (knocking out the weak longs), then it spent post-Fed trade running the buy stops (knocking out the weak, and even some hard core, shorts).
Ironically, the ES really hasn't budged much in three weeks. We are still near the 1790 mark first reached on November 15th.
Accordingly, don't fool yourself into thinking that any large move in one direction or the other is either "bullish" or "bearish". We are in a directionless market. Until we see prices breach the range it has carved out for itself in any meaningful way, traders are best off avoiding long term position trades. This is a swing traders market.
Stock Index Futures Market Ideas
**Consensus:** We wouldn't mind getting bearish from higher levels; ideally 1834ish (in the March contract).
**Support:** 1764, 1753, and 1729
**Resistance:** 1811 and 1834
Position Trading Ideas
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: 1774, 1765, and 1754
Sell Levels: 1807, and 1814
In other markets....
October 2 - Buy a December corn futures contract near $4.40 (preferably using minis for most retail accounts). The plan is to add on at lower levels if seen.
November 21 - Buy e-micro gold futures near 1240.
(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)
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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.**