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December  3rd, 2010

Treasury futures might be bottoming, but one more flush?

A decisively Treasury bullish employment report triggered a sharp rally in bonds and notes, but the reaction proved to be temporary.  A gangbuster rally on the news, was gradually faded by traders throughout the day.  Thus far, Treasury rallies have been at the hands of short covering and thus once a majority of the buy stops are run the market simply runs out of buyers.  As a result, small speculators seem to have become comfortably short the note market...and this is often the precursor to a large rally. 

Remember, most traders lose money and the odds are most dismal for those with smaller trading accounts.  This group of trader is often the most fickle (quick to get out).  Therefore, if the average retail trader is comfortably short red-flags begin raising...and traders might  be better off looking for a reversal as opposed to following the trend. 

Treasury traders appear to be reluctant to be long the market ahead of next week's large auction.  The Treasury will be issuing large amount of securities on Tuesday (3-year notes), Wednesday (10-year notes) and Thursday (30-year bonds).  If you recall, the last round of auctions didn't go particularly well and therefore the market seems to be anticipating a repeat.  However, we feel like the jump in yields will lure some safe haven buyers next week's auction. 

We mentioned this yesterday, but feel as though it is important...During the month of December, the Euro is typically strong and the dollar weak.  Accordingly, we feel as though fluctuations in the currency markets will ultimately favor the Treasury bulls in the coming weeks. 

In yesterday's newsletter, we stated a move to 122ish in the March 10-year note futures would be an ideal place to be a buyer and boy was it ever.  However, we are still looking for better levels to be bullish the 30-year bond.  It "feels" like there could be some weakness early next week.  Look for a possible dip in the long bond to the 123 area, and in the note 121'26ish, to be a bull. 

Tomorrow's employment report could be the make or break event for many of the financial markets.  It isn't uncommon for the non-farm announcement to trigger temporary reversals and that could be exactly what we see across the Treasury complex.  Specifically, we see support in the March 10-year note near 122 and would be bullish on a move to, or just below, it.  If you are trading the 30-year bond, we like the upside from about 123.  Clients were advised to sell the February bond 116 puts for about 27 and we think this has a chance of getting filled tomorrow. 

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software.

Treasury Bond and Note Option and Futures Trading Recommendations

**There is unlimited risk in naked option selling.

November 15- Clients were recommended to purchase a 5-year note futures near 119'19ish and purchase a 119'5 put for about 49.  This trade enables traders to hold a long futures position for 40 days with risk limited to about $850 plus commissions (more or less depending on fill prices).  This prevents traders from being stopped out prematurely and provides unlimited profit potential.

December 2 - Clients were recommended to sell the February 116 puts in the 30-year bond for about 27.

Carley Garner

*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.