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Sometimes we are just plain wrong... |
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Written by Administrator
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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. May 18, 2012 Staying cool under pressure can be a challenge for traders, here are a few tips (click here). Browse Carley Garner's Trading Education Books Sometimes we are just plain wrong...A few weeks ago we were looking for a June 30-year bond rally into the 145 space, but have to admit this week was not what we had in mind. In fact, we are surprised at the market's ability to run past record levels (set in the midst of a major economic collapse and then again post US debt downgrade). In our opinion, rather than reacting to reality, investors are reacting to "what if" scenarios. That doesn't mean the market's aren't vulnerable to a self-full-filling prophecy...because they are. We've seen it multiple times in the last few years; panic makes its way into asset prices long enough to force a majority of investors to the sidelines and then they reverse course without them. Unfortunately, panic moves are seemingly limitless in regard to price or time. Ignoring emotion and fear of contagion in Europe, this week's news was overall neutral to bearish for Treasuries. Inflation was stagnant, but measures of the economy such as retail sales, the Empire Manufacturing Index, housing data and leading indicators were all respectable. At some point, fundamentals will come back into play and when they do Treasuries will have a difficult time holding their ground. Next week will be a slow news week, but expectations for the data seem relatively low. In theory, they should work against the rally but with Europe in the news the headwinds will be strong. |
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Testing, testing, testing...Treasury futures |
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Written by Administrator
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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. May 11, 2012 Staying cool under pressure can be a challenge for traders, here are a few tips (click here). Testing, testing, testing...Treasury futures Had it not been for the JP Morgan surprise conference call last night, this newsletter might have gone in a completely different direction. In fact, I think we likely could have witnessed the typical counter-trend Friday action that we are accustomed to seeing. Instead, Friday's trade resulted in another retest of the upper limits (just over 145 in the June 30-year bond and just over 130 in the 10-year note). We are still relatively comfortable with the idea of a price reversal in Treasuries in the coming sessions but we can't ignore the fact that traders continue to press the highs. The longer prices linger "up here", the higher the probability of one more round of short squeezing (AKA running the buy stops above resistance). Accordingly, if you are looking to play the downside, be sure to leave room for error. In mid March few believed Treasuries could rally at all, let alone to this magnitude. The current run has been the longest winning streak in government backed securities since 1998. We aren't going to say that we were absolutely certain prices would rise from 135 to 145 in the span of about two months, but we had been pointing toward positive seasonals and the possibility of prolonged short covering (there were too many bears). Now that we are trading near 145 in the June 30-year, we've eliminated most of the weak shorts and it feels like the rally has "suckered" in what could be the late buyers. Unfortunately for them, that is exactly what needs to happen for the market to turn the corner...if all of the buyers are in and the sellers forced out, we will simply run out of bids. Our models suggested resistance (and potential reversal areas) in bonds near 145'03 and the June bond failed to trade above it for long (the high of the day was 145'08). If we are right about a change of heart, the market could make its way back to the mid 142 level in the coming sessions. If we are wrong, the next resistance level will be 146'02 and then again near 146'20. The downside in Treasuries could see notes trading back to 132ish with resistance near 133'27. From yesterday but still valid: It has been a relatively wild week thus far, and it is only Wednesday! However, it feels like the markets have managed to work out most of the turmoil early in the week and we could be in store for a period of "risk on" trading. In addition, in yesterday's newsletter we pointed out resistance in the DX futures near 80.50, and today that seemed to hold. If so, this could be a key to a reversal in other financial markets such as Treasuries and equities. Don't forget, this time of year is overall bullish for bond and notes so betting the farm on a complete collapse probably isn't a good idea. Instead, we believe the pullback will be rather modest in size and temporary in nature. Judging by action in the option markets, it appears as though retail traders (the small guy, harshly known as the dumb money) are eager to be long 30-year bond calls. It was evident from the get go that moderately higher futures prices were translating into grossly overvalued call options (due to high demand for the instruments). Accordingly, this morning we were comfortable in recommending our clients sell the July bond 149 calls for about 30 ticks this morning. Some fills were reported at 30, but most took 29 and were satisfied. These exact options were trading under 10 ticks last Friday, so they have more than tripled in value in a matter of days and settled at 20 yesterday. Being nearly 5 handles out of the money in an already extended market with 45 days to expiration, it seemed like a high probability trade to us...and so far so good, at the time of this writing these call options were trading near 21. We hope to be able to buy them back in the next few days for a little less than half the premium collected.
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Wild overnight session, quiet day session in Treasury futures |
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Written by Administrator
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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. April 27, 2012 Carley was recently interviewed on the nationally syndicated radio show, Your Money Matters...click here to listen (scroll to middle of page). Wild overnight session, quiet day session in Treasury futures Those holding positions in the Treasury futures markets overnight likely didn't get much sleep. A late afternoon S&P downgrade of the Spanish credit rating sent bond and note prices soaring and equities into freefall. The overnight high in the 10-year futures marked the 12-week low yield. However, the chaos was rather short lived...by the open of the trading day in the U.S. Treasury futures were only moderately above unchanged levels. Despite the pullback from the highs, the trading session stuck with a bullish theme. The largest support came from a relatively disappointing advance 1st quarter GDP reading of 2.2%, was well shy of estimates near 2.5% and the previous reading of 3%. Had we not gotten news of a better than expected Michigan Sentiment index, bonds and notes may have closed rather wildly positive. After all, the weak GDP reading gives nervous investors incentive to opt for safety, and weak data increased the chances of more Fed stimulus. The Merrill Lynch Option Volatility Estimate (MOVE) Index, is trading at its lowest level in over a year. The index has fallen from a high of about 94 in March to nearly 65 on Friday. As a result, premiums on the June options have collapsed significantly in recent days (mostly due to a rather non-eventful Fed meeting). Accordingly, we feel like it is time to begin considering offsetting the short 30-year bond strangles we had previously recommended. We are hoping for an uneventful weekend that will enable further deterioration of the option values by Monday and will be looking at possibly locking in the profits then. Despite a depressed MOVE Index, we might be able to sell July strangles at some point next week at attractive premiums. In this newsletter we have been noting the possibility of one more push higher to run the lingering buy stops of the remaining tortured bears. We mentioned that we liked the idea of becoming bearish from about 143'20 (to the 144 area) in the 30-year bond and 132'20ish in the 10-year note. Both markets reversed in overnight trade just short of our technical figures and this appears to be close enough to begin suspecting Friday's key reversal could be a valid indicator of a tired rally. Our best guess is that the long bond will find a comfortable range to settled into for the time being with the upper end of the range being 144 and the lower near 141 (or possibly 140). In the note, this is equivalent to 131 and just under 133. |
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High flying Treasury futures |
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Written by Administrator
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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. April 13, 2012 Click here to check out the latest Futures for You column in Stocks & Commodities Magazine, written by Carley Garner of DeCarley Trading! High flying Treasury futures Bonds and notes soared into the weekend on a high note. Buyers were eager to own safety assets following a weak Chinese GDP report and a flare in the European Debt crisis. As a result, the benchmark 10-year Treasury note found itself below 2% again and comfortably within the multi-month trading range that was only briefly violated in Mid March. You might recall many analysts calling it the beginning of the end of the bond bull, but here we are again. Readers of this newsletters know we were willing to buck the consensus and look at is as an opportunity to be bullish and a discount. Thus far, that has proven accurate but it seems as though the buying might have nearly run its course for now. Seasonal pressures call for bullish prices later in the month and going into May, but we typically see some weakness in sympathy to what has historically been one of the best months for the stock market of the year. In addition, stocks tend to trade positive going into their option expiration (which is next Friday); we think stability on Wall Street will prevent the current Treasury rally from getting too much more out of hand. Nonetheless, the door is open to one more round of buy stop running. Yesterday's inflation report on producer prices showed little change in price pressures and today's consumer price index was much of the same. The CPI rose .2% according to the Labor Department; although most consumers realize prices have gone up tremendously it isn't showing up in the data for various reasons. For now, the financial markets seem to have grown accustomed to what is being perceived as a low inflation environment and are therefore unwilling to dump their Treasury holdings in search of higher yields. This week's reopened auctions were a bit rocky, next week the government will sell $16 billion in 5-year TIPS on April 19th, $4 billion more than the last outing in December. Traders will likely see this as rather inconsequential relative to next week's economic schedule. We will soon hear details on March retail sales, housing stats, manufacturing indexes on the East Coast and leading indicators. The bulls could seek out a few lingering buy stops above. If so, the June 10-year note could make a run for the 132 to 132'15 area and the long bond could test resistance near 142'05 and maybe even as high as 143. At this time, we doubt prices will be able to see much higher levels than those noted and see a good probability of some sort of range trade to be carved out (such as 143 to 139 in the long bond). |
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All eyes on employment report...non event? |
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Written by Administrator
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*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited. April 5, 2012 Click here to check out the latest Futures for You column in Stocks & Commodities Magazine, written by Carley Garner of DeCarley Trading! All eyes on employment report...non event? Traders spent the day preparing for tomorrow's employment report. Positioning ahead of the news is a bit more complicated this time around simply because the most influential piece of economic data of the month will be released on a day in which the markets are essentially closed. As we've been noting in this newsletter, the futures markets will trade overnight and close early in the morning (10:15 am Central for Treasuries) but the cash market for both bonds and stocks will be closed. We have a sneaking suspicion that although the futures markets will be open, there won't be "anybody home". Volume will likely be extremely light and this could breed volatility. In addition, traders will only have a few hours to digest the news before the CME closes up for the holiday weekend. There also seemed to be a substantial number of traders looking to the option market for an alternative to playing in what could be a dangerous futures market. Traders were willing to bid prices on out-of-the-money options in the long bond to relatively high levels which tells us traders are expecting a rather large move on the news. However, our antagonistic view of the world leaves us leaning toward the opposite scenario...and non-event. After all, we've had two days to digest and react to the ADP employment report which has been steadily improving in accuracy. Also, the long bond has experienced several massive swings but has failed to make progress in either direction in a little over a week. Highly volatile but ultimately directionless trade such as this often resolves itself with a "dead" market. This is because the day and swing traders typically suffer from the whipsaw causing trading volume and volatility to die as they move to the sidelines to recoup. Analysts are looking for about 200,000 jobs added to the economy in March, with 215,000 in private sector jobs. Anything over 180,000 on the headline could be considered bearish but anything under could be supportive. We've recommended our clients sell strangles in attempt to benefit from a potential reduction in volatility...let's see what happens! In the coming sessions, look for resistance in the June 30 year near 140'25 and again near 143'02. The pivot price is currently 137'24 (above bullish, below bearish); look for intermediate term support near 136 and 124'25. |
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