Traders stretch the three day weekend into four

Trading futures contracts and options

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Traders stretch the three day weekend into four

It was clear from the get-go that traders opted to turn Presidents' Day weekend into a four day affair.  Trading volume has been an ongoing concern for some time, but the most recent trading week has been almost shocking.  I can't recall seeing such inactive markets in post financial crisis trade.

I can't help but think back to February of 2007; the S&P was in the midst of a similarly relentless grind higher in a low volume and low volatility environment. Eventually, the market simply buckled under the pressure if its own weight.  The once complacent retail investors began to panic causing the S&P to fall about a hundred points in a very short period of time. 

In 2007, the market was able to recover and post new all time highs a few short months later, but the correction was fierce and quick.  Our best guess is that we could be in store for something similar. After all, corrections are a normal and necessary part of any healthy bull and this market is well overdue.  Yet, on the other hand...longer term fundamentals suggest (as well as the infamous January effect) that 2013 could be a good year for the markets overall so the correction might be deep, but it likely won't be long-standing. 
ZB_f, ZB futures, bond futures chart

30 year bond auction comes through, but we still might see a flush

As it turns out, yesterday's issuance of 30-year Treasury securities was the best of the bunch.  As a result, the ZB found a way to rally before hitting its downside technical objectives (more importantly the prices we were interested in seeing before turning bullish).  However, Friday's trade and the never-ending equity rally continues to leave the door open for bonds to make one more run at the sell-stops. 

Such a flush, which would knock the weak handed bulls, is sometimes a necessary evil to putting a rally together.  After all, it elects all the standing sell orders and leaves traders yearning to buy to get back in.  The motivation of buyers to re-enter, along with bargain hunters looking to bottom fish can often encourage a dramatic reversal.

The Fed's Bullard made comments yesterday that could be interpreted as anti-QE.  While we agree this isn't a valid concern, that doesn't mean the markets won't spend a few days reacting to the idea.  In addition, we have a plethora of news due next week, including inflation, which might keep the trend in tact early in the week. If so, this sentiment could pave the way for a move just under 142.  At this price, we'll likely be comfortably bullish.  Stay tuned! 

Treasury Market Ideas

**Consensus:** We suspect there might be a spill in Treasury prices before a stronger recovery is possible.  Look to get bullish near support levels noted below. 

**Support:** 141'24 and 140'30(30-year Bond),  130'28 and 130'14(10-year note)
**Resistance:** 144'03, and 145'29(30-year Bond), 131'27 and 132'13(10-year note)

Position Trading Recommendations

*There is unlimited risk in option selling



This can't end well, but it doesn't have to end immediately.  Play it close to the chest.

Stock Index Futures Market Ideas

As the S&P continues to defy gravity, we continue to hear horror stories of trading accounts being "blown out".  According to our sources on the CME floor, even some of the most experienced and highly capitalized traders have fallen from grace at the hands of this rally. 

Not only has trade been overall one-sided, but many of the common barometers used to (attempt) to predict price have been misleading.  For instance, most equity indices are trading near all times highs, yet Treasuries yields are near all time lows.  Similarly, equity traders are willing to buy into the market as the Euro rallies, but chooses to ignore the currency market if selling comes into the Euro. 

The bottom line is that traders must make sure they are positioned to live another day.  Although the longer the market grinds higher, the further and faster it will likely eventually fall it can stay overbought longer than most can stay solvent.  If you are playing the downside, be sure you aren't betting the farm.  There will be better trading environments down the road. 

A cheap and low risk play might be to simply buy lottery tickets (we call them lottery tickets because they are low risk/high reward/low probability ventures).  Aggressive traders could look to begin at current levels but conservative traders might look for a spike in the S&P 500 futures into the 1525ish area.  We like the March ES puts with strikes of 1480 or lower.   

**Consensus:** 1525ish and then 1534 are the next resistance areas.  We are cautiously bearish, perhaps post holiday and option expiration trade next week will finally weigh on pricing.

**Support:** 1502, 1481, 1459
**Resistance:** 1525 and 1534

Position Trading Ideas

**January 2:** Sell February S&P 500 1490 calls for about $10 in premium (or $500).

**January 23** Roll the February 1490 calls into March 1510 calls for about even money.

**February 12** Roll 1510 calls into 2 1535 calls for near even money.

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....

Flat - Volatility is incredibly low, we're waiting to see if things pick up next week before making any short option recommendations.

 (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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