Last week's claims for jobless benefits came in higher than expected at 339,000. Nonetheless, any print in the low 300,000s is considered a positive (considering where we came from). At the peak in 2008, the figure was in excess of 650,000!
We also learned that the U.S. trade balance widened to $41.8 billion, and non-farm productivity ticked higher to 1.9%. This marked the strongest quarterly gain since the third quarter of 2012.
Although today's data points were the first of the week, they were overshadowed by the Senate's confirmation hearing of the upcoming Fed Chair, Janet Yellen. Yellen has been the vice chair since 2010 and is widely expected to carry on the Bernanke tradition of "easy money" policy.
Whether or not you agree with the Fed's quantitative easing experiment, you have to admit that Yellen sells it well...and we suspect she'll continue to act accordingly for the foreseeable future.
Some questioned whether she could handle the national stage, but today's testimony suggests that she is a capable and prepared communicator. Policy aside, she appears to have thick enough skin to avoid inadvertently spooking the markets with off-hand comments under pressure.
The bond rally is on track, we think 134 is likely
The Treasury market has spent this week removing some of the bearish speculative excess. However, the buying has not had the momentum we were hoping for. This suggests we are still in a minor short covering stage, but haven't yet reached a full-on short squeeze...which we think could be just around the corner. Janet Yellen continues to show the market her hand and it should translate into perpetually low interest rates.
It is a well known premise in the trading community that there is more inherent "fat tail" risk in selling Treasuries than there is in buying them (despite this year's price action). This is in contrast to the equity market in which the bulls carry a higher "fat tail" risk.
We aren't saying that bonds and notes will see an explosive move higher, but we do think the complex is a better buy than it is a sell from a risk and probability standpoint.
Treasury Market Ideas
**Consensus:** We continue to look higher; specifically, we believe the 30-year bond is headed to the 134 mark in the coming week or so.
**Support:** ZB: 131'12, 130'30, and 129'17 ZN: 125'27, 124'29 and 122'30
**Resistance:** ZB: 134, 136'06 and 137'27 ZN: 128'01 and 128'24
Position Trading Recommendations
*There is unlimited risk in option selling
October 8 - Sell January ZB 126 puts for about 25 ticks or $390.
Yellen has her foot on the gas
According to Janet Yellen, and most government stats, there is very little inflation. Yet, anybody short the stock market,sidelined in real estate, or feeding a hungry family, might feel differently. Nevertheless, if price pressures stay out of the data QE will live on.
From a charting standpoint, it looks like the bulls will be shooting for 1800. We'd rather not see it, but if so it would likely be in the next day or two. After all, tomorrow is option expiration and markets like to find highs after the option traders have already suffered.
We suspect there were plenty of put buyers on the dip earlier this week; those will be expiring worthless. Similarly, there are likely call sellers that complacently held through yesterday's rally (guilty) who are now being forced to buy futures to offset their risk (which is propelling prices higher and will likely do so through tomorrow's expiration).
Once the market is done chewing these option traders up, there is potential for a reversal (near 1800).
If you are following our short call trade, we are short the December 1800 calls from about $14/$15. They are slightly underwater at the moment but we are willing to give it a few more days. Although hind sight is 20/20, we really wish we would have taken the moderate profit we had in the position yesterday. We were shopping for prices but weren't quick enough to take action.
Stock Index Futures Market Ideas
**Consensus:** We've been mentioning that we wouldn't be willing to get aggressively bearish unless higher prices were seen; well, we are almost there. 1800 looks likely, but this could be a spot for the bears to give it a shot.
**Support:** 1749, 1736, and 1722
**Resistance:** 1798 and 1808
Position Trading Ideas
October 18 - Sell the November ES 1760 calls for about 9.00 in premium ($450).
October 22 - Sell November ES 1780 calls for about 7.50/8.00 (some clients sold the 1775s for about the same)
October 29 - Roll the November 1760 call into a November 1780 and a December 1800. This adjustment slows the trade down (lower delta) and brings in a little more premium (about 4.50 or $225) to compensate for risk and transaction costs. If the market begins to correct, we'll start peeling risk off leg by leg.
November 7 - Buy back all November ES calls to lock in a profit ahead of the employment report. Most of you have 2 lots (or more if trading multiples), one as the add-on and the other as part of the roll out of the 1760 calls. Assuming a fill near $3.50 the profit should be somewhere between $200 and $300 per contract.
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: 1779 (minor), 1772 and 1762
Sell Levels: 1793, 1799, 1808
In other markets....
September 19 - Buy a December dollar index futures contract (near 80.35) and a November 80 put option. The total risk on the trade is about $900 plus transaction costs. The profit potential is theoretically unlimited. We are looking for a bounce into the 81.70 area.
October 2 - Buy a December corn futures contract near $4.40 (preferably using minis for most retail accounts). The plan is to add on at lower levels if seen.
October 18 - We advised clients to sell their November DX 80 puts for a small profit. This lowers the break even level for the futures contract and increased the odds of success on the trade if the dollar bounces out of here, but it also opens up the downside risk exposure.
October 17 - We recommended that clients sell December Euro strangles using the 140 call and the 133 put. Fills were coming back near 69 ticks, or $862.50.
October 25 - We advised clients to buy back the December Euro 133 put (part of strangle) to lock in a profit of about $250 per contract before commissions and fees.
October 29 - Sell Euro 135 puts near 33 to re-strangle Euro ahead of the Fed.
November 1 - Buy back 140 calls near 12 ticks to lock in gain of about $300 per contract on that leg of the trade before commissions and fees.
November 4 - Buy back 135 Euro puts and sell 2 for 1 strangles using the 138 calls and the 132 puts. This can be done for a small credit.
November 4 - Exit DX futures to lock in a profit of anywhere between $350 to $450 (this includes the options) before transaction costs.
November 8 - Buy back 138 calls near 7 ticks to lock in a profit of about $300 per contract before commissions and fees. We'll hold the short 132 puts in anticipation of a possible bounce into next week.
(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.**