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

A string of poor economic data fuels rally.

Treasury trade has been ignited by position squaring ahead of this week's event risk as well as a string of disappointing economic data.  The result was a four handle rally spanning two trading sessions.  The erratic nature of the reversal seems suspect and may not be capable of supporting a long term recovery in bond prices. 

After a shockingly weak ISM manufacturing report earlier in the week, the ISM services index was reported this morning to be weaker than expected but manageable.  The index was reported at 44.4 despite consensus outlooks for 47 and the prior month's reading at 50.2. 

Similarly dismal, the typically inaccurate ADP employment estimates of the U.S. government figures due to be announced later this week were reported at a draw of 157,000 jobs.  This was a miss of the expected 100,000 and far worse than last month's reading of 26,000.  Nonetheless, analysts are calling for the non-farm payroll data to show a contraction of about 200,000 jobs. 

The December 30 year bond endured a volatile but overall friendly trading session.    It seems as though path of least resistance will be higher as Friday's employment report approaches.  However, bonds and notes are quickly reaching levels in which my trading models are pointing out as significant resistance levels.  My first target in the long bond is 118'03 then again near 118'12.  Barring an equity meltdown, the market should take a breather at such levels.  With that said, the overall seasonal tendency in Treasuries points to choppy yet higher prices going into December.  It doesn't pay to be overly bearish during this time of year. 

I still like the short side of notes near the mid 116's but caution that there is significant room to move on the upside should equities fail to stabilize.  In fact, a weekly chart suggests that 118 may be in the cards.  Thus, any bearish trades should be looked at as short term ventures...overstaying your welcome may prove to be painful. 

If you took the Five year note trade, I am not recommending stop orders at this time.  If you are uncomfortable with the risk, contact me for ideas on protective calls or call spreads. 

If you took the Eurodollar recommendation below, be patient.  The risk is limited due to the long call option.  If you are aggressive, you may consider selling the call on additional strength and holding the short futures.  Naturally, this increases the risk along with the profit potential.  Contact me for details. 

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.

November 4 - Sell 1 December Five year note futures at 115'16.

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.