FOMC was a relative non-event, bottom in Treasury Futures?

Stock Index Futures and Treasury Trading Newsletter by Carley Garner

An onslaught of news, but not much change in market price


This morning traders were forced to digest a plethora of important data pieces.  The first to hit the airwaves was the ADP private payroll number.  The payroll giant surprised the market with an estimated 200,000 jobs added in the month of July; expectations were calling for a number closer to 175,000. 


Soon after, we learned that the second quarter GDP reading has been revised to 1.7%.  This was a tick below the previous release, but most analysis were looking for a figure near 1.1%.  Also adding optimism to the economic recovery, the Chicago PMI index beat analyst estimates to come in at 52.3. 


Of course, the main event of the day was the FOMC interest rate decision later in the afternoon.  As expected, the Fed made no change to the interest rate policy.  Not surprisingly, they avoided making any changes to the accompanying commentary.


It was clear that the Fed was set on keeping the peace in the financial markets...mission accomplished.  Treasuries recovered from early morning losses to settle near unchanged and the equity market remained quietly within the current trading range.

ZB, ZN, TLT, Treasury futures technical analysis

Assuming the employment report doesn't deliver any surprises, it feels like Treasuries are bottoming


Despite what seemed to be bearish news for bonds and notes earlier today, traders were willing to bid up Treasury prices after receiving confirmation that the Fed will continue buying securities to hold interest rates down.  We suspect that we've finally reached the point in which all of the bearish news is out and accounted for, and the path of least resistance will be higher in the Treasury market. 


I realize being bullish bonds and notes isn't a popular stance, but sometimes that is precisely when one should be.  As we've mentioned in this newsletter before, Treasuries are seasonally bullish in August.  In fact, over the previous 5 years there has been a distinct pattern of a late July dip, followed by a sharp August rally. 


We took this morning's slide as a cue to exit any short bond call positions, but are comfortable holding short puts in this market (details below).


Treasury Market Ideas

**Consensus:** Unless the jobs number surprises, the lows could be in.  We prefer a "buy on dip" mindset. 


**Support:** ZB: 132'25 and 131'07 ZN: 126'08 (minor),124'31 and 123'30


**Resistance:** ZB: 136'21 and 138'07  ZN: 127'21 and 128'18


Position Trading Recommendations


*There is unlimited risk in option selling


May 10: Sell July ZB 140 puts for about 26 ticks ($390 per option). 


June 3: We were early on the first go around, but still like being short bond puts.  Clients who were flat were advised to sell the August 134 or 135 puts for about 29 and 35, respectively.  Some clients added to their July puts with these August puts.


June 5 - We rolled the July 140 puts into August 138 puts for even money to prepare (lower risk exposure) for the employment report.


June 24 - Roll 138 calls into a September 128/139 strangle and an August 130/138 strangle.  Roll 135 and 134 puts into a 2 by 1 lopsided strangle (sell 2 August 130 puts and 1 August 138 call). 


June 27 - Lock in profits on August 130 puts and September 128 puts; simultaneously sell August 133 puts and September 131 puts to bring the trade back to delta neutral.


July 5 - Lock in a profit on the August 138 calls and roll the August 133 puts into September 129/138 strangles for near even money.


July 17 - Buy back the September 129 puts to lock in profit of about 40 ticks (or $625) per contract before transaction costs. 


July 18 - Buy back the September 140 calls near 13 ticks to lock in a profit of about 30 ticks per contract before commissions and fees (equivalent to about $500 depending on your fill prices). 


July 18 - Sell the September 131 puts for about 25 ticks to re-strangle the market.


July 31 - Buy back the September 138 calls near 10 ticks to lock in a profit of about $300 per contract before transaction fees (depending on fills).


The market hasn't gone anywhere in weeks!

ES, $ES_f, ESU13, S&P 500 e-mini futures contract chart

Stop loss orders are accumulating quickly on both sides of the market.  The difference between a continuation of the rally and an outright reversal could be as simple as prices slipping above resistance or below support and triggering stops. 


We are fundamentally bearish, but we wouldn't be surprised to see the buy stops run going into, or immediately following Friday's employment report.  This might be the last gasp of a tiring rally (and just enough to sucker in the last of the bulls) before prices roll over. 


Unfortunately, the sheer magnitude of the buy stops up above could mean prices as high as 1716.  We'd rather not see it, but should it happen this would be a price for bears to consider getting more aggressive.


We are sticking with the same overall idea:


The S&P is pinned, the volume is light and we have plenty of event risk on the horizon.  There is absolutely no reason to be aggressively long or short this market.  Although we believe this rally will eventually fail, the chart leaves plenty of room for volatility on both sides of the trade.


Stock Index Futures Market Ideas


**Consensus:** We like the idea of being bearish on sharp rallies, it feels like we could see a last hurrah rally into the employment report that could provide better (higher) prices.


**Support:** 1667, 1640 and 1623


**Resistance:** 1697, 1716 and 1728


Position Trading Ideas


July 11 - Sell August ES 1700 call for about $10.00.


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: 1677, 1671 and 1667


Sell Levels: 1697, 1704 and 1716


In other markets....


June 6 - Sell August Euro 137 calls for about 38 ticks or $475.  These options have nearly quadrupled in value from last week, and we suspect they stand to lose value nearly as quickly if the Euro rally falls short. 


June 20 - Sell August Euro 127 put for about 33 to strangle the market (compliment the short 137 call).


June 24 - Sell September 85/101 crude oil strangle for about $1.60, or $1,600.


June 27 - Buy back the 137 Euro call near 10 ticks to lock in a profit of anywhere from $330 to $350 depending on fill price (before commission and fees). 


July 1 - Buy back the September 85 put to lock in a profit of anywhere from 60 to 65 cents (depending on fills) before commission and fees.  We'll hold the short 101 call for now and will consider re-selling puts to re-balance in the coming days.


July 5 - Roll 101 crude oil calls into September 109/93 strangles and October 110/89 strangles.  This slows the trade down and spreads the risk to both sides of the market at distant prices.


July 11 - Sell the Euro 133.50 call for a little over 30 ticks to re-strangle the market (goes with the short 127 put already held).


July 16 - Buy back September crude 93 puts (some have 92s and 93s) to lock in profit of anywhere from $400 to $650 depending on strike price and fills before transaction costs.


July 17 - Buy back August Euro 127 put near 10 ticks to lock in about 22 to 25 ticks in profit, or $275 to $312.5 per contract before transaction costs.


July 19 - Sell the August Euro 129 put for about 29 ticks to re-strangle the market.


July 24 - Buy back August Euro 129 put to lock in a quick profit of about 18 to 20 ticks per contract before transaction costs ($225 to $250).


July 24 - Sell September crude oil 99 put for about 58 cents or $580 to re-strangle the oil market.


July 25 - Roll October crude puts into 94 puts (buy back existing put and sell the 94).  Depending on exact strike and fill prices, most clients were locking in anywhere from $400 to $600 per contract before transaction costs.  This moves re-balances the strangle to make it neutral. 


July 25 - Exit Euro 133.50 call near break-even (or a small loss for some). We've had a good run in the Euro, if you had followed all adjustment recommendations the total profit would be near $900 per contract before transaction costs. It isn't worth pressing our luck any further. 


July 26 - We like the idea of nibbling on bullish positions in corn via either long mini futures (near 495) or long September corn 520 calls for about 5 cents.  Both are low risk ways to play a possible 20 to 30 cent recovery in prices.


July 30 - The seasonal low in natural gas is looming, we like the idea of buying a mini futures contract near 3.45.


July 30 - Buy back all September crude oil calls. If you are holding the $111s your profit should be somewhere between $450 to $500 before transaction costs, if you have the $110s it should be somewhere between $550 and $600 before transaction costs, if you have the 109s it should be somewhere between $500 and $550 before transaction costs.


July 31 - Buy back September crude oil 99 puts near-break even (they were put on to hedge our short calls and are no longer needed).


(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.**


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