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Tips for day traders from Carley's Stocks & Commodities column, Futures for you: http://www.traders.com/Documentation/FEEDbk_Docs/2011/01/fut4you.html

December 29th, 2010

Night and day Treasury auction results

After a disappointing showing at yesterday's 5-year note auction, investors had their wallets open for today's $29 billion issuance of 7-year notes.  The auction drew a yield of 2.83% (a bit lower than expected), with a bid to cover of 2.86 and a 64.2% participation rate by indirect bidders.  This was the highest demand seen for this particular instrument in 2010,  the previous indirect bidder take was 42.2%.  Also, the average bid to cover (over 10 auctions) has been about 2.88.  This was the last auction of the week (and year) and allowed the bulls to let out a sigh of relief.

The auction hinted that overseas investors weren't throwing in the towel on Treasuries despite the obvious interest rate risk.  It might also suggest confidence in the stability of the U.S. dollar.  After all, if foreign investors expected continued weakening in the dollar they might not be willing to be assets denominated in the greenback. 

The Fed purchased $5.39 billion in securities with maturities ranging from 2012/2013.  This was the final POMO (Permanent Open Market Operation) of 2010, but there are still a few more purchases on the tentative schedule.  They will be back on the buy side by January 3rd. 

Yesterday we noted that it wasn't fair to judge the Treasury complex based on the results of the 5-year note auction due to lightened holiday interest.  Likewise, today's Santelli rated A auction probably isn't indicative of reality.  Nonetheless, we feel like somewhere in between is enough to support Treasury futures.  Therefore, we maintain our stance and like the idea of being bullish bonds and notes on large dips. 

That said, we continue to warn traders of extremely light trading volume in both futures and options.  This type of environment often paves the way for irrational and unpredictable trade.  Accordingly, being sidelined or at least putting extra effort into risk management is imperative. 

We were hoping for yesterday's weakness to see some pre-auction follow through but bargain hunters were able to keep prices afloat.  We see support in the long bond near 119'28, 119'05 and then again just under 118.  Aggressive traders could look to establish bullish positions near the first area of support but if you want to wait for a higher probability trade (also risking missing the rally if it happens), the better bet seems to be near 119 with the idea of adding on a dip to 118ish (if seen). 

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 7 - Clients were advised to sell the February 117 puts for 27ish (some fills were coming back as high as 30.  This replaced the original order to sell the 116 puts at 27 (which turned out to be a great idea).  If you have the margin and the guts, adding on a 116 at the noted price could prove to be a good idea. 

*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.