January 20th, 2009

Consecutive gaps lower but gaps are for filling.

Treasuries have gotten in the habit of posting significant losses in the days surrounding holidays.  Similar to what was witnessed in late December, the long bond dove several handles in a matter of a few short days. 

If you follow this newsletter closely, you may recall our expectation of the long bond to retrace from 131(it never quite got there) to just above 137 before making its way back down.  As it turns out, our original analysis was relatively accurate.  However, as Treasuries rallied and the 10-year note managed to close above what I considered to be significant technical resistance levels, I essentially talked myself out of my own opinion.  The lack of trust in my instincts is a good indication that I should take a few days off in terms of attempting to speculate on direction, timing, etc. 

Under "normal" market conditions, I would be convinced that the market's ability to hold our noted resistance levels and the subsequent selling pressure would force the March T-Bond below 131.  Additionally, there are signs pointing toward increased interest in corporate bonds.  Demand for fixed income securities in other arenas should divert some of the Treasury demand.  Also, the avalanche of Treasury issues to fund Obama's stimulus package is pulling the rug from underneath the market as traders fear an oversupply. 

However, there is a large wild card...the equity market.  It seems as though the stock indices could continue to run sell stops.  I see as a potential the plunge to run to the November lows and perhaps eventually even lower.  If this scenario plays out, the flight to quality bid may come back to life. 

Support in the March 30-year bond lies near 130'15, while resistance remains in the mid-137's.  The 10-year note is facing a similarly wide trading range between 128'11 and 128'11.  I am neutral at current levels and awaiting clearer signals to pick a direction. 

If you are holding the long Eurodollar call in the recommendations below, I suggest giving it a little more time.  If the stock market continues to trade weaker, we could get a retest of the 98.18 area.  At which point you may be able to sell the option at a profit or re-sell the futures contract. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

·         January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract. 

·         January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs.

·         January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn't consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price. 

*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.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.