PPI was a non event, but next week it will be the Fed
The only economic report released this morning was the Producer Price Index, which showed a down-tick in November. However, the core version of the index showed an uptick. Either way, they were in-line with expectations and left little reason to react.
As quiet as this week was from a news regard, next week will be the opposite. Along with key housing and inflation data, we'll be forced to endure Wednesday's Fed meeting, subsequent monetary policy decision and commentary.
The taper debate lives on, and so will the volatility. In our view, the Fed will continue to pledge the existing free money monetary policy for the foreseeable future. Which, should offer support to asset prices.
Post-auction buying should lead to Fed front-running
In a previous newsletter we mentioned that the Treasury complex had a tendency to find a near-term low after an auction cycle. Particularly, one in which the 30-year bond is involved. After all, the market has to digest the new supply before reverting back to a more equilibrium price and turning back to fundamentals. With yesterday's 30-year bond reopening behind us, we can't help but feel like the path of least resistance is higher.
It seems as though fear of a Fed taper hit the market a few days early. In recent previous occasions the pre-Fed dip has been bought into by aggressive traders looking to get long ahead of the Fed.
Bernanke and Co. have worked hard to keep their interest rate scheme in tact, and will be very careful not to provoke a repeat of the summer Treasury plummet. They had the exit door swung wide open for them in June and they opted to close it. With that in mind, we believe they are expecting the QE experiment to continue at full-force well into the new year.
Treasury Market Ideas
*You should be trading the March contract!
**Consensus:** We think the lows are in, or near. We prefer being bulls on the dip.
**Support:** ZB: 128'18, and 127'15 ZN: 123'30, 123'19, and 122'06
**Resistance:** ZB: 130'11, 131'24, and 132'18 ZN: 125'02, 126'01, and 126'30
Position Trading Recommendations
*There is unlimited risk in option selling
December 6 - Buy March 5-year note future and the February 120 put. The risk is limited to about $600, but the profit potential is theoretically unlimited. We are looking for the futures price to return to the upper end of the range, which would be a profit of about $1000 on the future (but a moderate loss on the option) before transaction costs.
We wouldn't buy into the S&P, but we doubt now is the time to sell either
The bears are salivating over the recent dip in the ES (S&P futures), and we don't blame them. Any type of correction at all has felt like a pipe dream most of 2013. However, we aren't convinced that this particular pull back will be "the one" (for reasons detailed in section below) which most agree must come at some point.
Strictly from a charting point of view, the inability of the ES to break below the 1770 mark doesn't bode well for the bears in the short-run. In fact, it signals a probable rise to the upper end of the trading channel. This likely translates in to a retest of the highs, or even a moderately higher probe (think 1830ish). We'll be holding out for these levels before turning comfortably bearish.
We know things have been boring lately, but the truth is...less is more in December. Light volume make this a treacherous time of year to be trading, so you are best off keeping things on the light side.
From a previous newsletter but worth noting again: We aren't fundamentally bullish, but there are three reasons this market likely won't sell off immediately
Wednesday's Fed meeting
- The ES has consistently rallied into Fed meetings in recent years. There are many theories as to why it happens, but it is likely due to the fact that the Fed almost always comes through with QE stimulus talk. Also, the most active traders in the market tend to be short sellers (bulls are more often buy and holders) and the event risk encourages them to get flat, or lighten up, ahead of the Fed (as they buy shorts back they put upward pressure on the market). Maybe this time will be different, but the odds are against it.
Options expiration is next week
- More often than not, the ES rallies in the first two or three sessions of option expiration week. In fact, in a quarterly expiration (Quadruple Witch), we often see the ES post an extreme high on the Friday morning the futures contract goes off the board (expires). With this in mind, statistics point toward a new high going into the end of next week. Again, maybe this time will be the odd man out...but all we can do is go off of probabilities.
- We've said it before, and we'll say it again. December equity markets tend to see melt up trading into Christmas. Many will have you believe it is Holiday spirit, but we think it is simply the result of a light volume environment in which the most active traders (the shorts) square up positions (and get squeezed out).
Once we get past the aforementioned events, we believe the market is highly vulnerable to a much needed correction (or should we say wake up call to the complacent). Until then, the odds are for a grind higher in the short-run.
Stock Index Futures Market Ideas
**Consensus:** We wouldn't mind getting bearish from higher levels; ideally 1827ish.
**Support:** 1767, 1746, and 1726
**Resistance:** 1812, 1817, and 1828
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: Let's see what Monday brings
Sell Levels: Let's see what Monday brings
In other markets....
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.
November 21 - Buy e-micro gold futures near 1240.
(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.**