Quadruple witch rallies are relatively reliable, even when it looks like they aren't
A whirlwind 24 hours in the financials
The new Fed chair quickly discovered that the financial markets don't always take kindly to "real talk". Clearly, everyone is aware that we'll eventually have to move toward some sort of normalcy when it comes to monetary policy but they don't want to be reminded of it. The phenomenon is similar to eating chicken and pork because it tastes good, while intentionally ignoring where it came from and the steps taken for it to get onto your plate.
Janet Yellen stuck to the game plan overall, but mentioned that adjustments in policy toward higher interest rates could come as early as six months down the road. She also diversified her decision making; rather than the tapering being contingent on employment she will be looking at a basket of economic data.
Initially, the seemingly innocent comments triggered a swoon in both stocks and bonds, but after having some time to digest, it appears as though the markets have stabilized.
Today's rally in the ES can be attributed to many possible catalysts, but we believe it is simply the ever reliable quadruple witch rally (see more details below).
The FOMC meeting didn't do the bond bulls any favors
We believed the Treasury market would react favorably to the FOMC meeting, but it did the opposite. We were assuming the Fed would taper it's bond buying program by another $10 billion per month...and it did. In our view, the measured tapering had already been accounted for and didn't change the fact that they are still a big bidder of their own securities. However, we did NOT expect Yellen to mention interest rate hikes at this stage in the game.
Traders seemed to come into today's session with cooler heads. The stabilization of pricing was promising, but the chart is as neutral as they come. Ideally we'd like to be bulls but we'd rather wait for better levels before acting on it. The market is trading in a well defined range, so it isn't out of the question for prices to retest the mid-to-low-130s in the June ZB (30-year bond futures). If they do, we'd be comfortable getting bullish.
Treasury Market Ideas
**Consensus:** Bulls shouldn't plan on getting aggressive unless we see a dip into the mid-to-low 131s.
**Support:** ZB: 131'13, 130'17, and 129'19 ZN: 123'08, 122'28, and 122'10
**Resistance:** ZB: 134'01, 135, and 135'26 ZN: 124'28, 125'08, and 125'29
Position Trading Recommendations
*There is unlimited risk in option selling
We aren't going to lie, yesterday's sell off in the ES was confusing
All week we had been touting the market's tendency to melt higher into the quadruple witch (futures expiration on Friday morning). Early in the week, the markets were right on track but Yellen's reminder of the inevitable, higher interest rates, seemed to interfere with the market's fate. Yesterday afternoon we had our doubts about the quadruple witch rally, but today it was in full force.
As a reminder, the market often posts an early morning high on the day of expiration (Friday). As the current futures contract comes off the board, the next contract month (June in this case) typically runs into weakness as Friday progresses (but sometimes it takes until Monday for things to kick in.
If you are a bear, look for a rally tomorrow morning to consider pulling the trigger. Ideally, 1880 (if seen) would be a good place to start, but position traders must keep in mind that a temporary push to 1900 is possible.
Stock Index Futures Market Ideas
**Consensus:** The highs might be near, but that doesn't mean we can't see 1880ish, or maybe even 1900 in the coming days. Nonetheless, the best trade will likely be from the short side (preferably at the noted levels).
**Support:** 1823, 1802, and 1779
**Resistance:** 1877, 1884, and 1899
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: 1852 (minor), 1844, 1838, and 1831
Sell Levels: 1868 (minor), 1873, and 1878
In other markets....
January 15 - Go long the CAD (eMicros are preferable for most to allow for scale trading and lasting power with little margin/risk).
January 30 - Nibble on more Canadian dollar micro contracts to average our entry price to a lower level.
Feb 14 - Sell E-micro CAD add-ons to lock in $170 to $200 per contract before transaction costs.
February 28 - Sell April ES 1900 calls for about $11.00.
March 13 - Roll all e-micro CD futures into the June contract. We need more time.
March 13 - Sell May Euro 143 calls near 30 ticks ($375).
March 20 - Buy back May Euro 143 call near 9 ticks to lock in a quick profit of anywhere from $250 to $275 per contract before transaction costs.
March 20 - Add to e-micro CAD trades (double the quantity for most). This lowers our average entry price.
(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.**