Buy on dips in Treasury futures, sell rips in equities?

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$ZB_F ZB 30-year bond futures seasonal pattern

Better than expected Retail sales and "hot" PPI data supported stocks and weakened Treasuries

The summer doldrums are certainly playing a part in Treasury volatility. Light trading volume is typical this time of year, but it is clear that traders have opted to take a break from the markets.

Tapering volume across the Treasury complex as prices troll the lows suggests the market could be looking for a bottom. However, the lack of speculative activity also opens the door for stop running beneath the June lows. If this is the case, the 30-year bond could easily see prices near 146. An equivalent move in the 10-year note would be the mid 132s. Nonetheless, we continue to feel as though such a large dip would be a gift for bullish traders.Keep in mind, today's trade saw the highest price in the S&P since April 2nd and the highest closes in yields (lowest prices in Treasuries) since the end of May. Although it is difficult to be fundamentally bullish Treasuries at such long-term dismal yields, history suggests being bullish in late August and through September is the highest probability bet.Following a potential running of the sell stops, we like the idea of being bullish near 146 in the long bond and the mid 132's in the 10-year note. If you are having a hard time being patient with this market, please see the 5-year note recommendation below that provides an ultra low risk, low stress, way of playing the upside in Treasuries.

Treasury Market Ideas

Consensus: Bullish on dips, possible eventual retest of July highs

Support: 147'02 and 146ish (30-year Bond), 133'06 and 132'14 (10-year note) Resistance: 150'18 and 152'05 (30-year Bond), 134'11 and 135'05 (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.)
Better than expected Retail sales and "hot" PPI data supported stocks and weakened Treasuries

Late afternoon selling in the ES

Coming into the session we were looking for a short squeeze to end the rally (AKA run the buy stops above to force out the weak shorts). Today's high of 1409.50 was close to our targets, but wasn't enough for us to be comfortably looking lower.

It still feels like there could be one more run. After all, investors aren't overly bullish yet and there is still room for the late comers to step in at the wrong time (unfortunately, this is the nature of the markets).

Stocks got off to a good start following a slightly better than expected GDP reading in Germany, but it wasn't enough to defend profit taking as the day wore on. Nonetheless, the BOJ seems to be on course for more stimulus, as does "Western" economies and this could keep selling at bay (at least temporarily).We would love to be bullish but complacency is simply too high, and the VIX too low. The CBOE's volatility index is at its lowest level in years (near 15). In the past, discounted VIX levels have been the calm before the storm.
CBO Volatility Index VIX Chart

Stock Index Futures Market Ideas

Consensus: Bearish on rallies. Look for possible short squeeze above 1400 toward technical resistance (noted below) in the ES to be a bear.

Support: 1375 and 1354Resistance: 1416 and 1428

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: 1393 and 1386Sell Levels: 1410 and 1418 



In other markets....

August 6th - Sell October crude oil 106 calls and 80 puts. Premium collected = 93 cents ($930)

  • We recommend taking a quick profit on this trade, depending on fill prices it should be between $300 and $400 before transaction costs.
(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.

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