The Santa Clause rally failed

Futures and Options Trading Newsletter

Back to the grind!

The markets didn't waste any time getting down to business in 2015.  While many were still recovering from over indulgence of eggnog, crude oil fell $5 per barrel in two trading sessions and the ES (e-mini S&P) has fallen nearly 80 handles in four trading days.  Let's hope this isn't a sign of things to come. 

If you are a stock market bull, you are likely eager for this week's economic data to begin hitting the wire.  Most of the scheduled reports are believed to be relatively optimistic.  Particularly important will be the Wednesday afternoon release of the FOMC minutes (from the December 17th meeting) and the Friday morning employment report.

Aiding volatility in the commodity and equity markets was a late 2014 announcement made by Mario Draghi suggesting the Eurozone is prepared for bond buying programs (quantitative easing, AKA money printing).  In the recent past, such pledges have triggered rallies in stocks and commodities around the world, but there is a widespread consensus that this is the EU's last bullet.  In other words, it feels a bit desperate and there are doubts as to whether or not it will be successful.

ZB and ZN Futures Trading Chart

Profit takers in stocks are parking money in Treasuries regardless of yield

Money has been flowing into Treasuries as of late but we have a feeling it is due to a lack of an alternative, as opposed to long-term investments.  In other words, investors are likely "parking" funds in what they believe to be the best safe-haven asset until they get a better feel for how things might go in 2015. 

Further, the Treasury market has been held captive by central bankers in the Eurozone.  Specifically, their pledge for lower interest rates helps to keep rates in the U.S. under tabs.  It also creates a scenario in which the glimmer of a safe-haven shines more brightly in the U.S. simply because the Fed is in a position to ease stimulus, while Europe is still pressing on the gas.  Simply put, U.S. backed securities are winning the safety war.

Another thing to keep in mind is that the Euro currency and the 30-year bond futures contract have a strong negative correlation.  In fact, stats spanning over the previous 180 days suggest the long bond and the Euro travel in opposite directions roughly 80% of the time.  Thus, in order for Treasuries to turn the corner we'll need to see similar reversal action in the currencies. 

We certainly weren't counting on a Treasury rally over the holiday break, but the possibility of unusual trade during the lightest volume trading span of the year, is exactly why we recommended to play the downside in Treasuries with a long option (limits risk).


Treasury Market Ideas

**Consensus:** We are surprised to see bonds and notes moving higher.  The 30-year bond could be seeking 148ish.  We'll consider more aggressive bearish plays from there.

**Support:** ZB : 144'04, 141'26, and 138'29 ZN: 126'22, 125'18, and 125'01

**Resistance:** ZB : 148, and 149'11 ZN: 127'27, 128'15, and 129'27.

Position Trading Recommendations

*There is unlimited risk in option selling

Long March 138 puts near 20 ticks.

ES, NQ, e-mini S&P 500 futures trading

Profit taking with tax deferral in mind

The equity markets are in the midst of one of the largest, and longest, bull markets in history.  We are not of the camp that believes the party is over, but we do respect the fact that markets can (and do) correct rallies. 

Selling in late 2014, and early 2015, feels like profit taking; if so, it should be temporary.  Although we were looking for prices to see 2100, or a little higher before rolling over on profit taking, the market clearly had ideas of its own.  After peaking near 2090, a week or more prior to our anticipated climax, we've seen a steady flow of sell orders. 

Those that opted to take profits for the 2014 tax year turned out to be far better off than those who waited to take profits in 2015 (to deter their tax bill to 2016).  In our view, the regret of this decision likely lead to a bit of panic by those seeking to lock in gains.  For much of the day, there seemed to be little care for price or technical analysis.  It was simply a race to liquidate. 

Now that we've come this far, the most likely target for the bears will be 1976ish. Nonetheless, intraday charts are massively oversold, so we'll likely see a bounce overnight or tomorrow morning before the bears get back to work.

Stock Index Futures Market Ideas

**Consensus:** We tend to be optimistic in the long-run, but in the short run 1976 could be in play.

**Support:** 1976, 1953, and 1913

**Resistance:** 2047, 2099, and 2116

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**

Sell Levels: 2025, 2034, and 2048

Buy Levels: 2003, 1988, and 1976

In other markets....

September 10 - Sell December crude oil 82/98 strangles for about $1.10 ($1,100).

September 15 - Buy March 2015 sugar 18.00 calls near 32 ticks.

September 29 - Buy back the December crude oil 82 puts to lock in a profit of $370 to $400 per contract, and replace them with short 86 puts.  This brings in more premium and rebalances the trade.

October 2 - We made a big mistake rolling our 82 puts higher.  Let's rebalance the trade and look for volatility to decline by offsetting the existing strangle and selling the December 95/82.50 strangle.

October 9 - Buy back 95 crude oil calls to lock in gain on that side of the trade.

October 10 - Sell December crude oil 92 calls for about 60 cents to hedge the 82.50 puts. 

October 15 - Roll the December crude strangles into a January 70/90 strangle AND a December 74/88 strangle.

October 22 - Buy back December crude strangles to lock in profit of about $1,000 (this goes toward the premium lost on the 82.50 put).

November 10 - Sell January crude oil 87 calls for about 40 to 45 cents.

November 17 - Buy back the January crude oil 87 calls to lock in a profit of about $230 to $260 per contract before transaction costs.

December 1 - Roll the January crude oil 70 puts into two February 61/75 strangles.

December 9 - Buyback the crude oil $75 calls to lock in a profit on that side of the trade.  We'll hold the short $61 puts in hopes of a rebound in oil.

December 10 - Buy back the crude oil 61 puts and sell 58/66 strangles for February. 

December 12 - Buy back the February crude oil 66/58 strangles and sell the 64/53 strangles.

December 19 - Buy the March bond 138 put for 20 (or the 139 put for 25. 

December 19 - Get long the Aussie Dollar in a small way using e-micro futures.  We were buying near .8120 to .8080.

December 30 - Buy back the February crude oil 62.50 calls (part of strangle) to lock in a gain (about $720 before transaction costs for most). 

January 5 - Buy back the March crude oil $68 call near 25 cents to lock in a gain on that side of the trade (about $600 before transaction costs for most). 

(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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