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Treasury futures short squeeze is on!

Tips for day traders from Carley's Stocks & Commodities column, Futures for you: http://www.traders.com/Documentation/FEEDbk_Docs/2011/01/fut4you.html
 
December 17th, 2010
 
Treasury futures short squeeze is on!
 
As is typically the case, December trading in Treasuries is chock full of excitement (some good and some bad).  After a rough week, shorts in the long bond looked to begin exiting positions yesterday into the late afternoon dip but as the pendulum began to swing the other way,  the bears began to scramble. 
 
One of the day's key events was a sudden decline in the Euro that sent the currency over 200 points from its session high.  The selling was triggered on the conclusion of a European Union meeting in which the details of a previously celebrated agreement in regards to permanent support of the region.  Also, a downgrade of Ireland by Moody's triggered a moderate sense of flight to quality.  Nonetheless, the stock market has become seemingly immune from European downgrades.  Adding to the volatility was a severe lack of liquidity here and across the pond.
 
Bonds and notes were dramatically oversold, and as we have been pointing out in this newsletter...small speculators had accumulated large short positions while large specs (managed money...smart money?) were long bonds.  Additionally, Friday's tend to often see counter-trend trade and this Friday in particular is ahead of what will likely be a low volume holiday trading week.  All of these things were pointing toward a large short-covering rally but even the bullish of the bulls (us) were beginning to second guess the market.  Naturally, one trading day doesn't make a trend and the Treasury bulls aren't out of the woods yet...but there are a lot less trees!
 
As short as the market had gotten leads us to believe that (aside from some Monday morning back and fill trade) the squeeze has room to run.  In the March 30-year bond we are looking for prices to see the 123's in the coming sessions and if you are trading the 10-year note this translates into just under 122, and in the 5-year note the mid-118's. 
 
Next week is expected to be very thinly traded, yet there is a healthy number of economic releases.  If at all possible, it is a good idea to cut back on your trading or even move to the sidelines completely...unless of course you are a glutton for punishment!
 
* 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.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software.
 
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
 
Treasury Bond and Note Option and Futures Trading Recommendations
**There is unlimited risk in naked option selling.
 
November 15- Clients were recommended to purchase a 5-year note futures near 119'19ish and purchase a 119'5 put for about 49.  This trade enables traders to hold a long futures position for 40 days with risk limited to about $850 plus commissions (more or less depending on fill prices).  This prevents traders from being stopped out prematurely and provides unlimited profit potential.
 
December 7 - Clients were advised to sell the February 117 puts for 27ish (some fills were coming back as high as 30.  This replaced the original order to sell the 116 puts at 27 (which turned out to be a great idea).  If you have the margin and the guts, adding on a 116 at the noted price could prove to be a good idea. 
 
December 9 - Those participating in the 5-year note trade were advised (assuming they had the margin available and were comfortable with the risk) to exit the long put which was acting as insurance.  The approximate profit on the put was $1,000 before commissions but this leaves a naked (unlimited risk) long futures and a sizable paper loss to overcome.  The move makes it "easier" to recoup should the market decide to turn around. 
 
 
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
cgarner@DeCarleyTrading.com
1-866-790-TRADE
Local : 702-947-0701
 
 
*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.
 
There is substantial risk of loss in trading futures and options.
 
Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.