December 19th, 2008

Happy Holidays from DeCarley Trading!

Treasury uptrend intact, with charts pointing slightly higher.

Talk of a government auto bailout and Paulson urging Congress to hand out the rest of the TARP money sucked some of the life out of Treasuries.  However, a day of moderate selling isn't enough to call an end to the biggest Treasury bull of all time.  When and if the reversal comes, there is a good chance that it will be just as spectacular as the run up was.  Markets tend to go down faster than they go up and I don't see Treasuries escaping the curse. 

Economic data was thin, but Federal dramatics were deep.  President Bush approved and emergency bailout of the Auto industry that will likely allow the big three to continue to operate until the next administration can take a stab at resolving issues.  The Federal government has agreed to loan $17.4 billion in rescue loans in exchange for concessions regarding business dealings and employee compensation.  The news worked in favor of stocks and against bonds and notes.  However, I caution that trade on a Friday session ahead of a holiday week isn't necessarily credible.  Position squaring and expiration of the financial futures and options are likely creating some artificial guidance.

Our chart analysis suggests that the Treasury train will continue to chug forward into next week's extremely light trade.  A lack of volume has propelled the upside thus far and with many speculators short this market, it will likely continue to do so.  In the meantime, we see potential for the long bond to move to the mid 142's while the note may see 129.  However, despite our short-term prediction of higher prices we believe that a significant reversal is looming. 

I will be "working from the road" next week, and am available at my usual contact information.  Keep in mind that Wednesday is a half trading day, the markets will be closed on Thursday in observance of Christmas and will be open for a full trading session on Friday.  However, the volume will be extremely light and should probably be avoided if at all possible.  This newsletter will be updated on a limited basis.  However, you are free to contact me with questions. 

Have a great weekend!

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). 

·         These are both well underwater, but we haven't given up on the long-term prospects.  We recommend holding on for now. 

·         You may have taken our advice to roll into the March 136 calls for even money.  This lowers the delta and the margin, hopefully improving the odds of riding this out. 

·         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.