December 11th, 2008

Happy Holidays from DeCarley Trading!

Bulls are still in control of Treasury trade.

A decent 10-year note auction and auto-bailout uncertainty kept some of the safe haven buyers in the market.  The massive supply of government issues down the road has yet to become a concern, but must eventually.  In the meantime, light volume paves the way for a highly volatile holiday trading season and seems to favor the upside in the near term. 

Keep in mind that many of the professional traders take off the month of December in order to regain their sanity, but more importantly to avoid the typically irrational trade.  Perhaps the sidelines, or at least a scaled down amount of trading would be prudent as the lack of economic data in the coming weeks will likely add to the large price swings. 

According to insiders, talk of a "Treasury bubble" have kept a temporary cap on the rally.  However, they also point out that continuous short covering is helping to keep the complex afloat.  As mentioned in previous newsletters, prior to the rally a majority of speculators were short the market...we all know that the only way to get out of a short position is to buy.  As painful as it is to be a buyer here, I would assume that there are still traders with short futures or short calls that don't have a choice due to margin or capital limitations. 

The Fed funds market looks to be pricing in a rate of 25 to 50 basis points going into next summer, while there are some that are calling for a target rate of 0%.  They are the fringe, but the thought is in the back of the mind of many traders. 

From a strictly technical standpoint, I can't help but think that the recent handful of consolidation sessions will eventually be another platform for a rally.  However, I do feel if this prediction is going to become a reality the market will make its move sooner rather than later.  The March 30-year bond futures are still looking higher toward 138'0 but my models are now suggesting that a little over 139'0 is a possibility (ouch!).  Projections in the note are pointing toward 126'11 but the possibility of 126'25.  If you are a 5-year note trader, look out for 119'24 in the March contract. 

Meanwhile, March Eurodollars are becoming an attractive short but I will give it a bit more time...we may see 98.50 soon at which point it could be a great shorting opportunity (with protection of course). 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

November 26 - Buy the January 10 year note 115 puts for about 15 ticks.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

·         If you aren't willing to rid this out to 138, you should be out of this trade.  The risks are high, taking deep pockets to ride this one out. 

November 20 - We were recommending to buy the December T- note 112 puts for about 19 ticks. 

·         November 24 - You can get in at a better price, you may want to buy the 113's. 

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.

Flat

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