November 4th, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

Have bonds turned the corner?

After reaching a low in the mid 112's in yesterday's overnight session, Treasuries have  been toying with the idea of moving higher.  Due to shifts in volatility, my downside target has been revised from 111'17 all the way up to 112'06.  As we all know, picking an exact top or bottom is nearly impossible, but recent action suggests that perhaps my projections were a bit too pessimistic.  If that is the case, we may be in store for a bounce higher. 

Today's trading was somewhat puzzling in terms of inter-market relationships.  Commodities traded sharply higher, the dollar sharply lower, equities sharply higher; yet contrary to typical Treasury behavior the fixed income complex rallied.  My sense of things tells me that the buying was the result of technical support levels holding in the long bond but more importantly position squaring ahead of the Presidential election and Friday's employment data.  Event risk is high, and bond traders are noted to be making their way to the sidelines.  According to sources, one insider summed up the day's rally in the following statement; "There is nothing, not a thing behind this.  There is no news and you won't hear any news, it's just guys getting out of stuff.  Nothing here."

The financial markets are much more global in nature than they were in 2000 and even 2004.  Additionally, the advent of electronically traded Treasury futures has drastically changed the level of market volatility outside of the traditional day session.  Knowing this, Bond traders and market followers could be in store for a very long night in light of the election and subsequent tally of the votes.  While the outcome seems to be relatively certain based on polling figures, anything can happen and markets don't like uncertainty. 

The long bond blew through resistance near 115'11, this level seems to be attainable by covering shorts and only moderate buying interest.  However, a close above 115'11 may lure bulls into the market pushing prices as high as 118'13 in the coming sessions.  Long term support remains at 112'09....and the recommended position is to be on the sidelines.

Notes have recovered from what looked to be a market controlled by the bears.  On the contrary, the December 10 year note futures have broken resistance and are now looking higher toward to 116'05.  If prices do trade above 116, a short opportunity will likely present itself. 

I like the idea of selling the 5 year note futures near 115'16.  I am not recommending placing a stop, but we may shop for options if necessary. 

If you took the Eurodollar recommendation below, be patient.  The risk is limited due to  the long call option.  If you are aggressive, you may consider selling the call on additional strength and holding the short futures.  Naturally, this increases the risk along with the profit potential.  Contact me for details. 

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

November 4 - Sell 1 December Five year note futures at 115'16.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79

·         October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy.  Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees.  The profit potential is theoretically unlimited!!

There is substantial risk of loss in trading futures and options.