November 13th, 2008

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

Bond trade stalls, another rally looming?

Incredibly low yields have lured Treasury market bears back to the markets.  According to the latest COT (Commitment of Traders) data, both small and large speculators are heavily short.   Given the lack of upward momentum in the long bond in light of the equity selling and dismal economic news, I can see the appeal.  However, there seems to be more at play than can be seen on the surface.  While I suspect that bonds are much closer to a high than a low, I also believe that we may be in store for another run higher in the 30 year futures.  Shorter maturities on the other hand may have trouble making any significant moves higher. 

The market was finally provided some economic data to chew on.  This morning's weekly jobless claims suggested that the employment picture is worsening.  This week's claims jumped to 516k, well above estimates of 479.  The trade balance acted as a "balance" for the market by coming in a little better than consensus forecasts. 

Revisions to the infamous TARP plan has left many in the investing and trading community with an increased sense of uncertainty.  The bond market loves uncertainly just as much as equities dislike it.  Along with this theme, the long bond may be looking at temporarily lower yields and higher prices. 

Tomorrow and next week is loaded with data and could be the excuse that Treasuries need to begin the "blow off top" that we have become so accustomed to.  Along with the potential retail sales bombshell, we will hear about the latest inflation data, Michigan Sentiment and import/export prices. 

I am less confident in my analysis of the direction of Treasuries over the coming sessions due to geopolitical risk, end of week position squaring and next week's option expiration in equities.  However, from a purely technical standpoint, today's weakness in the 30 year bond futures may extend to 115'29 but could simply be the building of momentum to test resistance levels at 119*'14 and again at 119'29. 

The 10 year note seems to be heading toward a corrective move to 114'24.  However, longer term models are showing the potential for an exhaustion spike to 118. 

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.