December 10th, 2008

Happy Holidays from DeCarley Trading!

Early Bond and Note selling met with buying...again.

Trading volume is incredibly light in terms of Treasury futures and options.  It is clear that many traders have opted to step away from the markets at an attempt to enjoy the holidays following one of the largest interest rate moves in history.  Technical selling and speculative shorts ahead of the day's 3 year note auction put bonds and notes in the red in early trade but, once again, follow through selling was absent.  Despite today's glimmer of hope for the bears (I am one too) I expect another run at the highs and beyond before a major trend reversal occurs. 

The 3-year note auction turned out to be the decent, but not the gangbuster buying that has been seen in recent Treasury issues.  Eventually, Treasury supply will make its way back into the headlines and once again put pressure on the complex.  If you recall the sharp decline in October, it was almost entirely attributable to the massive amount of debt being issued by the U.S. government.  With that said, the realization of supply may not become a factor immediately.  In fact, it seems as though the 30-year bond futures could be in store for nearly 138 and the 10-year note 126'13.  However, I wouldn't recommend trying to play the long side as I have a hard time being a bull and all time highs; remember crude oil and wheat?  Perhaps there will be a more opportune time to be a bear. 

Although the Treasuries have failed to attract sellers on the equity rally, falling stocks will be likely to trigger more buying.  With all of the major indices at or near major resistance levels, we could see the window of opportunity open up for another bond rally.  If this assessment proves to be accurate, I expect that the move will be somewhat swift yet temporary.  As mentioned in yesterday's newsletter, Decembers have been known to be bond bull killers and this seems to be the perfect set up.  Once the rug is pulled from underneath the market, the long bond could quickly fall to the mid-120's and the note to just under 120. 

Meanwhile, March Eurodollars are becoming an attractive short but I will give it a bit more time...stay tuned for details.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

December 2 - We recommended buying the January 119 puts for 20 or better.

·         December 9 -Clients were recommended to liquidate these this morning near 11 ticks.

November 26 - Buy the January 10 year note 115 puts for about 15 ticks.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

·         If you aren't willing to rid this out to 138, you should be out of this trade.  The risks are high, taking deep pockets to ride this one out. 

November 20 - We were recommending to buy the December T- note 112 puts for about 19 ticks. 

·         November 24 - You can get in at a better price, you may want to buy the 113's. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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