Strange markets and extreme prices, this can’t end well

We keep asking ourselves who is buying into a market at an all time high; the answer is always the same.  It is scared money; the bears are likely playing a bigger part in this rally than the bulls are. 

Remember, prices changes are largely based on motivation not necessarily the quantity of buyers and sellers. Traders jump on the bearish bandwagon on every little pullback in the S&P, but they’ve been burned so badly this year that they aren’t willing to risk much. As the market starts to creep higher, they panic and buy back positions without regard to price (in other words, the bears become highly motivated buyers bidding prices up).

On the other hand, because this is one of the most “hated” rallies of all time; money managers are scrambling to get sidelined cash into the market.  These traders are panicking to get in the market and are willing to buy shares at lofty prices because they feel like they can’t afford to wait for the dip that never seems to come.

We don’t know how long this frenzy will last, but we do know that scared money rallies and performance chasing rarely ends well.

Mixed auctions and stronger stocks shrugged off

This weeks 3-year and 10-year note auctions were less than impressive, but today’s 30-year bond auction picked up the slack.  Today’s auction drew a 2.53 bid to cover which is just under the 12 auction average.  The rate was 2.98% and drew decent demand from indirect bidders (believed to be foreign investors).

Apparently the demand was more than enough to absorb the new  supply and hold prices at historically lofty levels.  Coming into the week we felt like the odds favored a flush out in this complex that would have brought the 30 year (at minimum) to the mid to low 145s; in light of the unbelievable equity rally we are shocked that it didn’t materialize. 

This is just another glaring reminder that there is something amiss in the financial markets.  The hard and fast trading rules of the past have simply been tossed to the side.  It is imperative that traders avoid taking excessive risks, or marrying a position.  The key to surviving irrational markets is to trade less and be nimble.
 

Treasury Market Ideas

**Consensus:** We’d rather be a buyer on large dips in this market.  Trade is breaking the conventional rules, so we recommend being patient.  The mid 145′s in the ZB could be on tap.

**Support:** ZB: 145’12 and 144’17 ZN: 132’12 and 132’01

**Resistance:** ZB: 149’12, 149’29, and 150’30 ZN:  133’01, 133’22 and 134’07

Position Trading Recommendations

*There is unlimited risk in option selling

April 4: Sell a June 5-year note futures contract near 124’14 and buy a June 124.5 call for about 19 ticks to limit the risk on the trade to about $300 to $350 depending on fill prices.  This trad has little, to no, margin and offers theoretically unlimited profit potential.

The pain was palpable as the ES moved into the low 1630s in afternoon trade

We could actually hear the cries and feel the heart-break of the bears as the ES slowly ground into the low 1630s in afternoon trade.  However, after reaching a high of 1632.25 (a resistance level defined by several technical schools of thought and noted in this newsletter), the market quickly retreated.  The ES simply ran out of buyers, and blocks of sell stop orders were quickly triggered. 

Is this THE top? It is impossible to know until after the fact, but I’ll tell you what…the sudden collapse in the currency market, followed by rare selling the the S&P, certainly feels like the making of a top.  With that said, topping out is a process; it isn’t a moment.  If you are a bear, don’t chase prices lower…look to establish positions on sharp rallies and be prepared to take profits on the dips.  Don’t marry your trade!

From Wednesday’s newsletter but still valid:

They say the trend is your friend until it ends.  Well, this market has certainly been friendly to the bulls.  In fact, complacency is running rampant among bulls and the bears are starting to “cry uncle”.

According to our sources on the trading floor of the CME, it seems as though most of the buy stops have been elected (meaning most of the shorts are squeezed out).  They also noted lingering sell stops lining the downside of the market.  This doesn’t guarantee the market will pull-back but it increases the likelihood.

All corrections start with a little profit taking, continue with running of the sell stops, and then ends with panicked selling.  We aren’t sure if we will get it, or when, but any slightly bearish catalyst could send the snowball rolling down the hill.

With that said, this market is not behaving like anything we’ve ever seen before.  If you are playing the downside, be sure you are leaving plenty of room for error.  Our models suggest the highs should be in or near, but others are looking for prices into the 1630s and even 1650s before all is said and done.

Stock Index Futures Market Ideas

**Consensus:** We’ll admit that we didn’t see 1630s as a probable outcome.  Nonetheless, it feels like scared money chasing prices. We are cautiously bearish.

**Support:** 1607, 1593, and 1581

**Resistance:** 1634 and 1652

Position Trading Ideas

May 3 – Sell June 1635 ES calls for about $10 in premium or $500.

May 9 – Add to short call position in the ES by selling the June 1660s for about $10, or $500. 

Day Trading Ideas

**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**

Buy Levels: 1612 (minor), 1606, and 1594

Sell Levels: 1612 (minor), 1607 and 1594

In other markets….

March 26 – Sell June crude oil 101.50/68.50 strangles for about $1.00, or $1,000.

April 12 – Buy back 101.50 call to lock in about $300 profit on that leg of the trade.

April 15 – Buy back 68.50 put back at a loss of a little over $1,000 (not including profit on call), roll into the July $97/81 strangle.  This adjustment will potentially recoup premium lost on the June puts and turn a nice profit if volatility dies.  It also slows down the trade and spreads the risk

April 26 – Buy back July 81 put and sell the July 86 put to re-balance the strangle.  The resulting trade is a short 97 call and a short 86 put; this trade is has a moderately bearish bias.

May 8 – Buy back July crude 86 put to lock in profit of about $400 on that leg (there was a profit of about $800 taken on the 81 put). We’ll hold the 97 call which is underwater. 

May 9 – Buy back the 97 call at a loss of about $1200 (offset by put profits above) and replace the premium with 2 short 101 calls and 2 89.50 puts at a net credit of about 80 cents.

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

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

Is the S&P putting in an intermediate term high, similar to September 2012?

The news continues to impress

This week has been stellar in terms of economic news and today didn’t disappoint.  The latest estimate of fourth quarter GDP was an increase of .1%.  Clearly this is not a great number in itself, but it is better than most expected and in a market that has set the bar low that is enough reason to celebrate.  The Chicago PMI was reported at a better than expected 56.8 and jobless claims were over 20,000 less than most were looking for. Accordingly, the stock market bulls maintained an edge in today’s session. 

From yesterday, but still valid

Being a Las Vegas resident, and an unlucky owner of a rental property in what has been called as “the hardest hit zip code” in the country…seeing sharply better housing numbers brings a smile to my face.  Apparently, the market likes it too!

We mentioned the blockbuster new home sales and Cash-Shiller data yesterday, but confirmation came with today’s pending home sales.   For the money of January, pending home sales were up 4.5%.  Obviously, the housing market has a long way to go before crawling out of the hole that has been dug but this is a good start.  Eventually, higher home prices will encourage consumer spending as the “wealth effect” kicks in.  Naturally, this will take several months to progress.

Treasury bulls were overwhelmed by bearish news

Italian bonds posted gains for the second session in a row on widespread expectations of government stability.  After an inconclusive election, lawmakers are working to form a broad coalition government.  However, we’ve seen this movie before; although the outcome will likely be a positive one markets can be susceptible to violent reactions to the smallest of headlines.  In other words, this is no time to be complacently short Treasuries.  If you are playing the downside, it is best to have a hedge in place…despite the opportunity cost of doing so. 

Similarly, the markets have essentially ignored tomorrow’s sequester in the U.S., perhaps rightfully so.  The sequester will amount to $85 billion in automatic federal spending cuts which the current administration warns will cut off the recovery.  Any surprises surrounding this event could breed investor panic. 

We’d rather wait for more clarity in this market before picking a direction.

Our opinion hasn’t changed from yesterday:

We aren’t willing to sell naked options in this market because implied volatility is rather low.  But we’ll take a peek at the five year notes in the morning; it might make sense to have a synthetic put )long a call and short a futures contract.  Stay tuned.

**You should be trading the June contract, March is going into delivery.

Treasury Market Ideas
———-

**Consensus:** The market fell short of 147, we’ll plead the fifth and see what tomorrow brings.

**Support:** 143’18, 142’06 and 141’23(30-year Bond),  131’18 and 130’28(10-year note)

**Resistance:** 146’28 and 148’23 (30-year Bond), 133’02 and 133’18(10-year note)

Position Trading Recommendations

*There is unlimited risk in option selling

Flat

1530ish will be the real test

Shorts have been squeezed, nearly to death, in the ES; and late comer bulls are scrambling to get long.  The current pattern feels a lot like what turned out to be an intermediate term top in September.  There were wild swings in both directions before the S&P finally succumbed to a 100+ point correction.  Accordingly, as great as the market has looked in recent sessions we’ve got to lean lower into rallies into the mid to high 1220s (possibly as high as 1230). 

We distributed a DeCarley Perspective newsletter this morning highlighting the risk of a Euro currency fall-out; if we are right about the Euro breaking below $1.30, it will likely take the S&P down with it.

Not much has changed from yesterday

Bernanke’s testimony essentially re-filled the “free money” punch bowl.  We all know that the Fed can’t continue with this policy forever, but according to the Fed chair there are no signs of inflation…and thus no reason to stop.  Accordingly, it seems reasonable to call this the “Bernanke Bounce”.

We cannot deny there was some technical damage done to the equity market in recent days, but we also cannot deny the fact that it might not matter in the short-run.  Investors tend to have a tendency to satisfy their cravings now, rather than look ahead to the consequences.

I wish we had a crystal ball, and the magic words to go with it…but we don’t.  All we can say is that futures traders MUST be willing to take profits, or at least protect them, when they present themselves.  In recent sessions the market has traveled 140 points in the S&P, or $7,000 to an e-mini trader, yet it is only 15 points from where it started!

Stock Index Futures Market Ideas

**Consensus:** 1530 is possible, but we can’t help but grow bearish from there.

**Support:** 1482, 1474, and 1466,

**Resistance:** 1526, 1535 and 1544

Position Trading Ideas

Flat

Day Trading Ideas

**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**

Buy Levels: 1501 and 1495, 1482

Sell Levels: 1527 and 1534

In other markets….

**February 21 -** Sell May crude oil $102 calls and $82 puts for about $1.40 in premium, or $1,400 (some clients were filled much better).

**February 27 -** We advised clients to offset their short crude oil strangles to lock in a profit of about $500 (or higher for some with better fills on the way in).   We’ll consider reselling the strangles if volatility picks back up.

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

DeCarley Trading
Twitter:@carleygarner
info@decarleytrading.com
1-866-790-TRADE(8723)
[www.DeCarleyTrading.com](http://www.decarleytrading.com)
[www.CurrencyTradingtheBook.com](http://www.currencytradingthebook.com)

Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. 

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

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