Crude is dumping but the ES is holding up, something is amiss...

Crude Oil Dumps, but S&P doesn't follow

Why are financial futures traders ignoring crude oil?


According to stats available to us (which include the previous 180 trading days), the correlation coefficient between the 30-year bond and crude oil futures is a negative 85%. In other words, both markets have a strong inclination to move opposite of each other. We cannot deny that Treasuries have had a nice bounce along side the crude oil meltdown, but for a negative correlation that high it seems as though Treasuries are a little behind.


Similarly, the S&P often follows crude oil because investors assume that weaker demand for crude equates to a weaker economy. Similarly, large oil stocks carry big market capitalization figures and have an influence on the stock index values. In addition, if the selling becomes sharp enough in the energy complex, traders might look to cover margin calls in their commodity accounts by selling stocks. Ironically, the $10 dollar per barrel plunge in a few short days has had little impact on the S&P.


Somewhere along the line, something has to "give". Either crude will turn sharply higher, or equities need to come down to reality. A it sits now, things just don't line up!

Crude Oil Futures under selling pressure


Speaking of correlations...


One of the strongest negative correlations on the board is between the Euro and the 30-year bond. Over the last 180 trading days, these two contracts have traded opposite to each other 90% of the time.


The strength of the inter market relationship has been exaggerated by concern over European Sovereign Debt. As money moves out of European bonds, it moves into Treasuries and Vice Versa...thus causing the Euro to benefit from Treasury losses (money flowing back into Sovereign Debt.)


Although things aren't happening as quickly as we had hoped, and it looks like the door has been open for retest of the highs in the Euro (and maybe the lows in Treasuries, we continue to believe the best trade in bonds and notes is from the long side of large dips.

Offset short put trade recommendation in bonds


Treasury Market Ideas


Consensus: The two day rally has been tepid, we'd like to see more follow through. Nevertheless, we continue to lean higher overall but the market is vulnerable to back and fill, or even a retest of the lows. Buy the dips!


Support: 144'11 and then again 143'19 (30-year Bond), 131'20 and 130'24(10-year note)


Resistance: 147'11, 148'12 and 149'06 (30-year Bond), 132'24 and 133'19 (10-year note)


Position Trading Recommendations


*There is unlimited risk in option selling


September 14 - Sell November T-Bond 139 puts for about 25 ticks or $390.


September 19 - Exit short 139 puts at 10 ticks. Assuming an entry of 25, this is a profit of $235 per contract before transaction costs


ES bears need currencies to cooperate


The S&P bears have everything they need to trigger a sell off except help from the currency market. Without weakness in the Euro (AKA strength in the U.S. dollar) the bears likely won't get any satisfaction.


We aren't throwing in the towel on the idea of a nicely sized correction in the equity market, but the lack of immediate weakness is definitely a concern. Accordingly, each of the financial markets might look to retest their technical extremes before rolling over. Our models estimate such a move is about 50% probable...not much help to those looking to get overly aggressive at current levels, but should be a good reason not to.


We like the idea of adding to, or initiating, bearish positions (short calls, bearish option spreads, or maybe even futures for those with nerves of steel) on spikes up to the mid to high 1470's if seen.


Be sure to give the market room to breathe! Picking a high is an art, and not a science...

S&P 500 Futures see technical resistance


Stock Index Futures Market Ideas


Consensus: We like the idea of being bearish on rallies. If you want to play the downside, you had better account for the probability of one more moderately new high.


Support: 1427, and 1409


Resistance: 1477 and 1484


Position Trading Ideas


September 7 : Sell October 1470 ES call for about $8.00 in premium ($400)


September 13 : We like the idea of adding to the previous position by selling October 1480 calls for about 8.75 in premium.


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: 1453 and 1446


Sell Levels: 1469, 1477, and 1483


In other markets....


September 4 : Buy a December DX futures contract near 81.65 and purchase an October 81 put for insurance. The max risk = premium paid for put and difference between futures entry and strike price of put (a little over $1,000 before commissions and fees). Profit potential is theoretically unlimited.


September 14 : Adjust the existing position by offsetting the protective put completely to lock in about $1600 on that leg, and hold the future in an attempt to recover lost ground. Or conservative traders could take the profits earned on the original 81 put and spent $600 to buy a 79 put. This adds about $500 in risk to the trade but enables a quicker and more likely recovery if the dollar rallies.


(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
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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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