China and crude oil are running the show in the financial futures markets.

We aren't saying it is right, or even rational, but it is clearly China's economic data and volatility in crude oil that are in the driver's seat. Data out of China continues to disappoint despite some rather dramatic actions being taken by the country's central bank. We have to admit, we thought the futures markets (commodities and financials) would react more positively by moves made by the People's Bank of China. Instead, investors have taken their stimulus actions as reason to panic.

Crude oil has seen the largest percentage move in over two decades. In fact, we've seen the asset class move more in 4 trading sessions than some commodity markets move in years. In any case, those that have traded crude oil futures know that volatility is par for the course. The problem with oil market volatility is that it bleeds into the financial futures markets. Although yesterday's crude oil rally likely postponed selling the the S&P futures, today's weakness in oil was a good reason for equity traders to hit the sell button.

It is a little scary to see markets this dependent on the Federal Reserve

There are multiple theories attempting to explain why the markets are so intrigued by the Fed; some argue the Fed has become too transparent causing speculators to become pre-emptive.  Others believe that technology, specifically online trading platforms developed over the last decade, that have brought mass speculation into the markets. Regardless of the cause, it is clear the markets are far more interested in pricing in fundamental changes in monetary policy immediately (even if they have not been confirmed yet), rather than waiting for the details to emerge.  As we mentioned yesterday, in the "big picture" the difference between a quarter point rate hike in June vs. September is irrelevant. 

Based on the current celebration over the rate cut delay, it is reasonable to assume a temper tantrum when the inevitable day of reckoning finally arrives.  We suspect, the timing of that realization will likely be in early-to-mid summer.  In the meantime, the path of least resistance should be higher.

164'15 is critical in the ZB

Not much has changed from yesterday; seasonals and technicals in the Treasury complex are mixed, and intermarket relationships are present but weak. 

It is difficult to justify aggressive positions in either direction.  However, the chart suggests that as long as prices stay below 164'15 in the June 30-year bond (ZB), the bears have a slight edge.  Conversely, a break above this level gives the bulls the momentum.  We prefer to see what the market does with this level before making any bold predictions.  Let's see what Monday looks like.

**From yesterday, but still valid:**

From a fundamental standpoint, it is difficult to be bullish Treasuries.  However, seasonals are bullish and they are a factor that speculators shouldn't ignore.  Similarly, we tend to be bullish equities and (believe it or not), higher stocks should support bonds.  These two asset classes have been positively correlated roughly 44% of the time.  Further, a stronger dollar has helped to drag Treasuries higher.  Accordingly, being a bond bear isn't as easy as it might seem on the surface.

On the other hand, chartists are pointing toward a potential key reversal.  The way we see it, bonds and notes are worth a bearish position that can be categorized as a nibble.  In other words, keep the risk small because there is just as much working in favor of Treasuries, as there is working against them.  With that said, if you are looking for bullish trades, you've missed the "gravy train".  Buying into an overbought market after its posted a key reversal, is a difficult trade.

Treasury Market Ideas

**Consensus:** We are getting mixed signals; it is too soon to know if this is a bear market bounce, or something the bulls can hold on to.  SMALL bearish positions with SMALL risk are justified due to the chart set-up. 

**Numbers based on June contract!**

**Support:** ZB : 159'27, 156'04, and 154'14 ZN: 127'07, 126'00, and 125'05

**Resistance:** ZB : 164'13, 166'20, and 168'12 ZN: 129'13, and 130'26

Position Trading Recommendations

*There is unlimited risk in option selling

None

Triple witch pattern anomaly

More often than not, the S&P finds some sort of temporary price peak following a Friday morning futures contract expiration.  The March expiration last year was particularly brutal for those bulls that got a little greedy.  However, today's session went against the historical norm by adding to gains AFTER the March contract expired at 8:30 am Central this morning.  This tells us the bull is healthier, and stronger, than most are giving it credit for.  Some back and filling early next week seems likely; after all, we've had 8 consecutive sessions of switch-back performances so the odds are pointing toward a red Monday. Nevertheless, large dips will probably be bought into.

For our big picture view on the ES, see our latest DeCarley Perspective: [https://madmimi.com/s/271406](https://madmimi.com/s/271406)

This analysis was featured on Mad Money on CNBC last night, here is the text write up:

[http://www.cnbc.com/id/102520406](http://www.cnbc.com/id/102520406)

We'll be looking for this move to extend into the 2170 area in the coming weeks, but the initial target will be 2133. 

**These are based on the June contract**

Stock Index Futures Market Ideas

**Consensus:** We're overall bullish through April.  Any large dips will likely prove to be buying opportunities.  2133ish will be the first upside target. 

**Support:** 2051, 2026, and 1978

**Resistance:** 2107, 2133, and 2161

Position Trading Ideas

Flat

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: Let's see what Monday looks like.

Buy Levels: Let's see what Monday looks like.

(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.**

Senior Commodity Market Strategist and Broker at DeCarley Trading, STOCKS & COMMODITIES Magazine Columnist, TheStreet.com, Contributor to Bloomberg Television, RFD-TV, CNBC’s Mad Money, and the Author of several books

Carley Garner is a futures and options broker with DeCarley Trading, a division of Zaner Financial Services, in Las Vegas, Nevada. With nearly two decades of experience, her commodity market analysis is often referenced on Jim Cramer’s Mad Money on CNBC, and she is a regular guest on Bloomberg Television’s Options Insight segment with Abigail Doolittle. You might also see her on the Cow Guy Close hosted by Scott Shellady on RFD-TV and “Futures” aired on TD Ameritrade Network. Garner is a regular contributor to TheStreet.com and its Real Money Pro service and is also a regular on the speaking circuit and can be found at TradersEXPOs and MoneyShows throughout the country.

Garner is also an award-winning commodity futures and options trading book author. In addition to Trading Commodity Options with Creativity, Garner has authored Higher Probability Commodity Trading; A Trader's First Book on Commodities (three editions); Currency Trading in the Forex and Futures Markets; and Commodity Options. She pens a monthly column for the long-running Technical Analysis of Stocks & Commodities Magazine. Her e-newsletters, The DeCarley Perspective, and The Financial Futures Report, have garnered a loyal following; she is also proactive in providing free trading education at www.DeCarleyTrading.com.

Carley is a magna cum laude graduate of the University of Nevada Las Vegas, from which she earned dual bachelor’s degrees in finance and accounting. Carley jumped into the options and futures industry with both feet in early 2004 and has become one of the most recognized names in the business.

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Are we finally going to see the correlation between stocks and oil soften?

In overnight trade, it was the same 'ol, same 'ol. Crude and stock index futures moved together in lockstep; we saw the same action in early day session trade. Yet, after the Fed meeting, each market seems to be willing to have it's own reaction to the Fed news. Crude oil squeezed, and held, well into positive territory while the stock market remained under moderate pressure. This probably isn't an immediate game changer, but it is a step in the right direction and is worth noting. Both assets trading as one isn't healthy for the financial markets, or the commodity markets. In fact, it should eventually be bullish for stocks...after all, they've taken a hit at the hands of the crude oil futures slide.

The big news of the day was the Fed meeting. The meeting itself was considered to be "dead" going in. This means that few (nobody) believed there was a chance for a policy change, but traders were hoping for hints regarding the pace of upcoming interest rate hikes. In a nutshell, they were very careful to leave a rate hike in March as a possibility, while simultaneously noting softening conditions that probably won't warrant another immediate tightening of credit. In the end, the news was relatively neutral to slightly bearish for stocks, but seems to have been enough to throw cold water on market volatility, which is a blessing in itself.

Overnight volatility blamed on a surprise Australian interest rate cut, and weak data in China but...

Most business news stations were attributing the overnight selling in U.S. stock index futures to weak economic data in China, and an unexpected rate hike by central bankers in Australia. However, the Asian markets traded mostly higher on the news because they've fallen into the "bad news is good news" trap (weak data increases the odds of more stimulus). Further, lower rates in Australia should be a positive for the global markets overall.

We think a better explanation for the selling was the sharp move in the currency markets. The dollar index plunged well below 93.00, while the euro soared above $1.16. These are both major milestones, which were passed in volatile trade. Thus, we believe despite the fact that a weaker dollar will boost corporate earnings, the uncertainty of volatile currency trading prompted selling in U.S. and European equities.

Ironically, the seasonal low for the dollar and peak for the euro is due this week...so perhaps the currency markets are in the process of reversing course in the short-run. In short, last night's "break-out" might turn into a trap.

The euro will need to roll over for the ES to attract sellers.

The euro currency has been on an impressive run (much to our dismay) but few have acknowledged the impact the currency markets are having on stocks and commodities. In the last 180 trading sessions, the euro and the e-mini S&P have settled in the same direction roughly 70% of the time. Thus, strength in the euro has helped hold the stock market afloat.

Similarly, commodities such as crude oil and copper have benefited from the change in currency valuation but might not fare so well if the euro finally succumbs to gravity. In short, if the dollar can find a way to reverse course (AKA the euro weaken) we should see bellwether commodities turn south and they could easily bring the S&P 500 with them. Keep an eye on the currency market, it could be ready to turn the corner!

The energy futures market is still in control

It will be difficult for the stock market to get much of anything going on the upside, without stability in the energy market. Both crude oil and natural gas have fallen to levels of despair for energy producers. Further, economies in oil rich areas such as Houston, and parts of New Mexico and Colorado, as well as the Bakken, are slumping significantly.

As is often the case with bubbles, sometimes they are only obvious after the fact. I should have known when my brother, a long-time member of the oil industry disclosed to me that oil field workers were paying New York style rents for run-down trailers near Farmington New Mexico (an oil rich area).

With oil valued above $100 it was clear the there was some exuberance that needed to be worked out, but few would have predicted a $30 handle a year and a half later. Nevertheless, here we are...and ironically, investors are praying for higher energy prices to avoid debt defaults that could send stocks reeling. Luckily, the Euro seems to have put in a long-term bottom..if this is the case, oil should eventually follow suit.

See our thoughts on this in the latest DeCarley Perspective: https://madmimi.com/s/ed5507

ECB meeting and payroll on tap

The euro soared on what is being described as hope for a Greek deal with the EU, but we see it as a good old fashioned short squeeze.  We have been noting the massive short positions speculators had accumulated in the Euro.  As you probably know, when traders overcrowd a market it tends to be a precursor to a violent reversal.  Today we finally got it. 

In our estimation, there are likely plenty more shorts in the euro to keep the overall trend higher.  In fact, euro speculators had been holding the largest net short position in history, so today's move could be only the beginning.  With that said, it would be rare for the market to muster up momentum after a day like today, so some back and filling is in order. 

Tomorrow's ECB meeting was likely a primary catalyst for today's short squeeze.  Further, it could be the source of more volatility so traders should be on their toes.  We opted to sell Euro calls today against our short puts to get back into a relatively neutral trade. Ideally, if the ECB meeting is a non-event, we expect the option premiums to decline quickly (which would be favorable to our position). 

Bloomberg leaked the Fed Minutes early, taking traders by surprise

Bloomberg "accidently" leaked the minutes of the latest Federal Reserve meeting well over 10 minutes early. Although that might not sound like a big deal for most Americans, it translated into millions of dollars made and lost in the markets in the blink of an eye. Perhaps a timely release might not have experienced such a volatile market reaction.

According to the minutes, most officials believe the stars are not quite aligned for the first rate hike in nearly a decade. The next FOMC meeting is still four weeks away, so there is plenty of room for things to change, but it seems a September rate hike is relatively unlikely. After all, since the minutes were taken, we've seen China's economy fall off the edge of a cliff. Accordingly, U.S. stock indices erased massive gains on the news, but eventually the e-mini S&P futures gave the rally back.

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Investors are on edge ahead of event risk

Thus far the summer of 2016 has been highly volatile, and we don't see any signs of this changing anytime soon. From grains, to energies, to currencies and, of course, the financials, there have been fortunes made and lost in the markets. We suspect this trend will continue well into the fall months. Accordingly, it is generally a good idea to try to keep speculative bets on the small side.

Risk-off assets such as Treasuries and gold are highly overextended despite the fact that equity market are hovering at relatively lofty levels. In our view, this offers a glimpse into the minds of investors; it is clear they are far from comfortable with the current environment. We can't blame them; we've yet to resolve the Brexit vote implications and we will soon be forced to endure the latest US employment report and, more important, it's potential impact on the Fed's interest rate policy. Soon after, the second quarter earnings season will roll out. With all of this in mind, it might be worth unloading some risk where possible.

Trading volume continues to disappoint, and direction is lacking.

Hopefully, most of you are still enjoying the summer vacation. We haven't seen this type of summer doldrum trade for quite a while. In fact, we've now gone 27 trading sessions without a 1% move in either direction. This hasn't happened since the summer of 2014 and is historically rare. It is hard to believe that earlier this year, the market was moving 1% up or down hourly and now it can't seem to do it in a trading session.

The one thing I do know is this won't last. Investors and traders have grown complacent, and that is precisely the environment that breeds chaos. It isn't a matter of if, it is a matter of when volatility rears its ugly head.

This isn't a notable news week, but the FOMC minutes released tomorrow afternoon could see a reaction.

Trading volume was muted ahead of the Fed announcement

Pending home sales were a bullish surprise this morning. According to stats, homes under contract for sale were up 1.4% in March. However, it was the crude oil inventory report that garnered the largest reaction...at least until traders remember it was an FOMC day, and stock prices reverted right back to where they started. The S&P fell markedly following a $1.00 drop in crude oil futures at the hands of the latest weekly inventory report, but both oil and the S&P recovered later in the day.

Naturally, the story of the day was the Fed. The Fed didn't change interest rate policy, as was widely expected. They also basically copy and pasted their policy statement from the last meeting. In short, today's FOMC meeting was a non-event.

China is ruling the roost, U.S stock index futures markets flailing

Today marked the end of this week's economic calendar, which leaves tomorrow's fate nearly entirely at the hands of tonight's Asian trading session. If we could put blinders on to block out Chinese volatility, we'd probably feel relatively upbeat about the prospects of the e-mini S&P futures from here. Unfortunately, China matters....**a lot!** The markets know this. With that said, we still expect the Chinese government to come to the rescue (again). Eventually, they'll find a way to get the job done for now (can kicking).

This week's news docket is skimpy but be cautious of the Fed's Beige Book on Wednesday afternoon.

I'm sure there will be plenty of headlines coming out of DC, as usual, but scheduled economic news is thin. This should leave traders focused on earnings, which are projected to be relatively positive. As mentioned in the previous newsletter, when earnings season arrives during a market dip it tends to be supportive. We suspect this time will conform to the norm, leading the S&P 500 futures higher for the next couple of weeks.

With that said, don't underestimate the potential market reaction to Wednesday's Fed Beige Book. With the Fed's interest rate hike campaign in full force, the markets will be interested in knowing their thoughts on the domestic economy.

Also, the early April stock market dip could have been tax related selling (investors liquefying to pay tax bills). However, post-tax deadline we could see funds flow back into the market equity.

Light futures market volume, and surprisingly light volatility

Another wave of stock selling in China failed to excite the U.S. equity market bears. In our opinion, the bears are simply busy doing other things (not trading). In regard to both volume and volatility, this is one of the most sluggish markets we've ever seen during our time as commodity brokers. It feels like Christmas in August! (If you've ever followed the markets over the holidays, you know what I'm talking about).

We've been reminding our readers of the fact that China is a communist country with few rules. When things get bad, they simply fabricate stability through money printing, legal restrictions on stock selling, currency market manipulation, implementing constructions projects with no real purpose, etc. Last night the Chinese central bank reached into their bag of tricks, and pulled out one of the largest cash injections into their financial system in nearly 2 years to put the brakes on economic contraction. Despite the government's intention of stability, the reaction was panic.

It is early, but October has been the least volatile month...EVER.

If today was the end of the month, this would be the quietest October on record and it would also be the quietest month ever. Of course, it is too early to suggest that is what is in store for the markets come October 31st, but it should at least offer some perspective.

Further, it has been almost a year without a 3% drawdown in the S&P 500. This is the second longest run of its kind in history. If the market survives the next 10 days, it will beat the previous record. Keep in mind, 3% is literally a drop in the bucket. At today's price, that would be a mere 75 ES points.

We don't when the dam will break, but we do know it always does, eventually. Traders should be on their toes. Afterall, investor complacency is at an all-time high and historically such environments haven't ended well.

As mentioned in a previous newsletter, the University of Michigan stock market sentiment index measuring the percentage of investors that believe the stock market will be higher a year from now is at an all-time high. Similarly, credit spreads are near historical lows (this is the difference between the yield on high-risk securities and risk-free Treasury securities). Tight credit spreads suggest investors are reaching for yield and lack concern for economic turmoil (in short, they are complacent). The last time we saw such tight credit spreads was mid-2007, just prior to the financial collapse. We aren't predicting a repeat of 2007, we are simply saying the bulls should consider exercising caution. Is anybody familiar with "Old Man Partridge" from "Reminiscences of a Stock Operator"? The trend is only your friend until it ends.

The E-mini S&P traded lower two days in a row for the first time since late September.

Although losses were minimal, the ES managed to settle in the red on two consecutive trading sessions to close out last week. In a normal market this wouldn't be worth a mention, but in this market, it is a rare occurrence. The last consecutive negative closes took place on September 25th and 26th. Before that, you have to scroll the chart back to early August!

I doubt the _bulls_ are concerned in light of the fact that the ES is within 15 points of its all-time-highs. On the flip side, the _bears_ must be growing concerned over the fact that the seasonal tendencies from Thanksgiving through the end of the year generally call for higher stock prices.

That said E-mini S&P futures traders are holding one of the longest positions we've seen this year. Thus, one has to wonder if the bulls will soon run out of capital. After all, most of the bears have already been squeezed out of positions. This is true even in the stock market, the percentage of outstanding short positions on individual equity products is near record lows.