December 15th, 2008

Happy Holidays from DeCarley Trading!

The trend is your friend until it ends.

Treasury bonds and notes posted considerable gains...again.  Economic data is a bit sparse, but the news continues to support the uptrend in fixed income products and light volume could help to propel the move. 

The New York Empire Index was reported better than expected, but it is hard to argue that -25.8 is a good reading.  Industrial production wasn't as devastating,  but it was much weaker than the previous reading.  Another Treasury friendly report was the Net Foreign Purchases.  The headline figure of $1.5 billion suggests that money flowing into U.S. backed assets has dropped off significantly, but Treasuries was still receiving considerable interest from foreign investors. 

While the dollar was given credit for some of the recent success in Treasuries, its violent correction hasn't deterred bond and note buying.  The March dollar index has plunged nearly six handles since December 4th. 

Traders are bracing themselves for tomorrow's FOMC announcement.  A 50 basis point cut is expected, but some futures contracts appear to be looking for a 75 basis point cut.  The big news tomorrow won't necessarily be the cut itself, but any hints as to how long they expect to leave the overnight target rate near zero. 

Trading volume remains light and could make tomorrow even more exciting than a typical interest rate decision may otherwise be.  Accordingly, those with a low tolerance for risk are likely better off sitting this one out. 

Treasuries have been trading sideways, likely setting up for a large break-out in one direction or the other.  We continue to hold a higher bias in Treasuries despite what seem to be fundamentally unsustainable levels.  The technical momentum remains higher and a lack of volume may work to squeeze the remaining shorts.  Once this occurs, a trend reversal will be possible...remember, the trend is only your friend until it ends.  While being a bull may pay off for the next couple of handles in the bonds and notes, things could quickly change.  Caution is warranted. 

We are sticking with our initial targets of 138 (maybe even 140) in the long bond and just under 127 in the ten year note.  However, we also recognize that if a continuation of the rally is in fact going to take place it must do so sooner rather than later. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

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