October 31st, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

Bonds "trick and treat"

Treasury traders finally had something to look forward to in Friday session, economic guidance.  Skimpy news in recent weeks has lead to trade that is highly dependent on equities.  While that was still the case today, the inverse correlation took a temporary break in light of personal income and spending data, the employment cost index, Chicago PMI and the U of Michigan Sentiment. 

The day started off on good footing with the long bond climbing well above 115.  Helping it along the way, the Chicago PMI was reported nearly 10 points below consensus estimates at 37.8.  However, a slightly better than expected consumer sentiment reading and a solid equity recovery seemed to take the wind out of the sails of the bulls. 

Insiders were describing the volume as extremely light, and that may explain the precipitous two handle drop from high to low.  The move occurred in quick fashion and seemed to be in line with the Halloween spirit.  The early morning bull trap tricked the bulls and eventually treated patient bears. 

Also adding to the questionable trade through the session, today marked the last trading day in October and likely saw a considerable amount of week and month end position squaring. 

We are holding to our target of below 112 in the 30 year Treasury bond.  After today's action, the new downside target is 111'17.  With that said, things have worsened rather quickly and a temporary bounce can't be ruled out.  However, in light of what seem to be higher pointing equities, our objective may be seen as soon as the middle of next week. 

Note trade has taken a turn for the worse and should make its way lower to 110'25 based on today's failed rally.  Conversely, the 5 year note must close below 113'05 before the bears will have an edge on trading. 

If you took our recommendation to sell the December Eurodollar at 97.79, you would have been filled in today's session.  Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy.  Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees.  The profit potential is theoretically unlimited!!

Boo!

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

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.

October 29 - Sell 1 December Eurodollar at 97.79

·         October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy.  Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees.  The profit potential is theoretically unlimited!!

There is substantial risk of loss in trading futures and options.