Four-year highs in stock indices trigger profit taking, Treasuries stabilize

DeCarley Trading New Financial Futures Newsletter

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Four year high came and went

Similar to yesterday's session, there weren't any scheduled economic events. However, there was a significant mile stone...the major indices kissed four-year highs, before reversing mid-day. It isn't surprising to see traders pull money off the table at multi-year highs. We'll find out in the coming sessions whether it will turn into something more. We think it might!

The lull in economic news ends today. Tomorrow we'll hear the latest existing home sales, the minutes recorded at the last FOMC meeting and crude oil inventories. Later in the week the markets will be forced to digest new home sales and durable goods orders.

ZB, $ZB, ZB_f, $ZB_F, chart

Interest rates look to be turning the corner

Another probing sell-off to the lower end of the trading range gave bond bulls a scare but by the end of the day, all was forgiven. Yields across the curve settled slightly lower; the lack of momentum might shake the bears up enough to entice profit taking. Given the size of the drop, the squeeze could be surprisingly sharp and the more bears caught off-guard the larger the "dead cat" will bounce.

Before we get too excited, it is important to realize that although support has held nicely, so has resistance. In fact, this is the fourth consecutive session the September 30-year bond has tested resistance near 146'10ish. We suspect that there are buy stops lining the upside above 146'25, so it will take a move above this level to get the rally going. Nonetheless, we continue to feel like patient bulls buying dips into support levels will fare better than the bears attempting to sell the mini intra-day rallies. Once the reversal grows legs, it will be too late for any complacent short to get out "with their shirt".

Treasury Market Ideas

Consensus: We aren't giving up on a fall rally, this large dip could prove to be a great buy. A 'normal' market bounce would see 149'15ish first

Support: 144'02 is the next major support area, but 144'21 will provide a moderate floor(30-year Bond), 131'26 and 131'09(10-year note)

Resistance: 149'13 and 151'28 (30-year Bond), 133'19 and 134'22 (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).


ES, SP, spoos, S&P


Standing on a shaky limb, but it looks like the highs could be in

While we are waiting for the latest economic data and the FOMC minutes later this week, we thought it would be worthwhile to point out the impact the currency market will have on the fate of the stock market. The currency market, or more specifically the U.S. Dollar Index, and the Euro currency, have been trading relatively mixed for months. However, we have a funny feeling we could be in the eye of the proverbial storm.

As we know, the financial markets have become increasingly correlated as technology has enabled for a more global marketplace, and lower barriers to entry for retail traders. The lack of volatility has enabled stocks and currencies to become relatively independent (correlation coefficient's are near zero) but if volatility comes back this will change quickly. Accordingly, once resolved, the consolidation pattern in the currency markets could be a primary driving force behind other financial instruments (stocks and bonds). Simply put, once things heat back up trade will be looking for the currency markets for guidance...and we should to.

From a technical standpoint, the e-mini S&P future is behaving itself. Our models had been pointing toward a short squeeze into the mid to high 1420's before rolling over, and that is nearly exactly what we saw on Tuesday. Nevertheless, it will take some follow through selling to get the ball rolling on a correction.

We are looking for a potential move to the 1385ish area as the first level of support in corrective trade. If we are wrong about the reversal, the next stop will be 1433ish on the upside.

The best way to play the downside might be with put spreads, or synthetics (short futures, long calls and maybe even short puts to finance the purchase of the insurance). Contact us for details.


$USD USD US Dollar Index Futures Chart

Stock Index Futures Market Ideas

Consensus: Bearish on rallies. The squeeze is on! Resistance at 1416 is holding, but we can't rule out the mid to high 1428's before things possibly roll over.

Support: 1383 and 1358

Resistance: 1428 and 1435


Position Trading Ideas

Put 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: 1406, 1398 and 1391

Sell Levels: 1417, 1422 and 1428


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)

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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.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future. 

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