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Employment Report Chaos
We had been pointing out this week's lazy trade as the calm before the storm. Yesterday's EU money printing pledge and today's poor payroll report (which eventually points to more money printing), that finally lit the fireworks fuse.
On Thursday, ADP told us the private sector grew by over 200,000 jobs but but the government report came in near 100,000. Jim Cramer said it best; this is the "nail in the coffin for the ADP report". The payroll giant has been consistently, and grossly, off the mark.
The unemployment report actually ticked down to 8.1%, but the "improvement" was the result of a shrinking employment pool rather than actual job growth. The news was a grave disappointment, but swings the door wide open for QE3...and traders liked the idea.
ADP delivered for the bears, and non-farm for the bulls...washout!
Treasuries suffered significant losses on Thursday at the hands of technical resistance overhead, but more significantly ADP's lofty expectations of the employment picture. However, prices snapped back sharply on news of the government's take on jobs. The result was a massive washout of complacent traders on both sides of the tape. Any trade with un-hedged positions, and less than perfect speculation likely suffered large losses during today's session.
Not only has technical action washed out the weak handed traders ,but it also blew out the chart. Prices are currently at relatively neutral territory with a slightly bullish bias compliments of the close above 149 in the December 30-year bond.
Both the S&P and the U.S. Dollar are near potential reversal levels. We suspect there is a pretty good chance of each of those markets turning the corner, if so, it should provide support to both the 30-year and 10 year. The correlation between the DX and the ZB is currently about 84%.
Don't forget about next week's Treasury auction in the 3 year, 10, year and 30 year as well as the Fed meeting. It should be another exciting week!
Treasury Market Ideas
Consensus: Potential reversal in the U.S. Dollar and the ES, and Friday's close above 149 make it difficult to get overly bearish Treasuries.
Support: 148'07, 145'29 and then again 145'02 (30-year Bond), 132'05 and 129'27(10-year note)
Resistance: 151'06 and 152'12 (30-year Bond), 134'02 and 135'07 (10-year note)
Position Trading Recommendations
August 31 - Sell December 5-year note near 124'18, buy the 124.50 call for about 19 ticks for insurance. Total risk on the trade is approximately $220 before commissions and fees.
Bears crushed, bulls chasing prices higher
There was a substantial amount of bearish chatter prior to the events of Thursday and Friday but it was the "buy and holders" that were rewarded. In the current environment government manipulated markets and high levels of speculation, "bad" can really mean "good". That is exactly how the equity market interpreted the latest jobs numbers. The report was bad enough to trigger speculative QE longs, but more importantly forced the bears to cover shorts.
In the case of the equity markets, light volume often opens the door for large rallies simply because the longs are "investors" that have bought into the market and are willing to hold on through thick and thin. The bears, on the other hand, are typically much more active and prone to reacting to the noise. In other words, the actions of the bears have a bigger influence on pricing in light volume.
According to last week's COT data. Large specs had covered most of their short positions. We suspect that today's rally accounted for the remaining. Small speculators were holding net long positions coming into the week and price action seems indicative of some performance chasing. If we are right about these two things, the buying could dry up shortly.
Our chart suggests the rally could get toppy in the mid to high 1430's, with 1445 as a possibility before things roll over.
Stock Index Futures Market Ideas
Consensus: The Thursday/Friday rally was enough for us to start getting comfortable being bearish. 1437ish through 1445 is a potential reversal area.
Support: 1423 (minor), 1409, and 1390
Resistance: 1437(current), 1445, and 1453
Position Trading Ideas
September 4 : Lottery tickets...buy volatility using cheap ES puts.
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: 1427 (minor), 1421, and 1413
Sell Levels: 1439, 1445 and 1453
In other markets....
September 4 : Buy a December DX futures contract near 81.65 and purchase an October 81 put for insurance. The max risk = premium paid for put and difference between futures entry and strike price of put (a little over $1,000 before commissions and fees). Profit potential is theoretically unlimited.
(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)
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.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.