January 25, 2012
Click here to sign up for our next Free trading webinar...FOREX Trading Math!Fed pledge rallies assets of all types
As was WIDELY expected, the Fed refrained from making any interest rate policy changes. In addition, the Central Bank issued an accompanying statement nearly identical to that of the December meeting. However, there was a slight, yet significant, difference...a pledge to extend their forecast for "zilch" interest rates from mid-2013 to late 2014.
With economic news seemingly improving, traders were likely a little confused by the extension of aggressive growth policy. Similarly, speculators concluded that although the term QE wasn't used, it (or a similar program such as Operation Twist) was a likely tool to keeping rates at record low levels. As a result, asset priced of all types (including Treasuries) rallied as the Dollar tumbled.
Our stats "guy" (Wayne Whaley), tells us that large up sessions on FOMC days are typically followed by consolidation in the coming two session. Our gut tells us, the buyers might be remorseful after they think things through. After all, if the Fed is essentially flooding the market with money to give the illusion of prosperity. We've seen the market's rally on such for years, but with the market technically extended it might be difficult for prices to sustain themselves (yes, we know you've heard that before and the market continues to prove the critics wrong).
In yesterday's newsletter we stated: "... the chart suggests there is risk of more rally to the 1326 area. However, fading late day Fed rallies seems to work more often than it doesn't." The high of the day was near our 1326 area, and so we have to lean lower for now in hopes of some sort of pullback. As we've been saying, greedy bears can't make money in this market but for those willing to sell into resistance and lock in a quick profit this range bound slight up-trend has likely been a gold mine. For instance, a normal pullback suggests prices could see 1312 by early tomorrow morning but even the low 1300's can't be ruled out. This market has been trading within an expanding wedge and until it proves otherwise, it has to be respected. If we are wrong about tomorrow, the next resistance is 1332. Don't forget, buy the dips sell the rips!
From yesterday but still valid:
Our expectations of a pullback haven't come to light, but our support and resistance numbers are working. Like we've been saying, despite the lack of pullback the patient bears selling into resistance areas should be doing well as long as they are willing to buy back near support. Don't forget, catching several small moves is just as good as catching the watershed move if you can do it "over and over".
If you are looking for a way to play the downside without jumping in front of the train, you could buy the February NASDAQ mini 2360 puts for about 20 points ($400). Or, you could put a more aggressive spread together. For instance, a trader could buy the 2430 put, sell the 2330 put and sell the 2500 call for total cost of about $200 to $250. Risk above 2500 is unlimited, and profit potential is limited to $2000 minus what you paid to get in...but it gives you 50 points to be wrong.
Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading
Position Trade -
1-18 We recommended that clients sell the March S&P 1370 calls for about $9.00 in premium or $450 per mini contract.
In other Markets...
1-17 Clients were instructed to sell a March futures contract near 123'20 and to purchase a June 123.5 call option as insurance. This trade offers limited risk and unlimited profit potential.
1-23 Clients were advised to lock in a profit on the short 5-year note futures contract near 123. Depending on fill prices, this leg of the trade netted about $550 to $600 per contract before transaction costs. We are still holding the long call that was purchased for protection.
1-23 - Clients were recommended to sell the March Bond 134 puts for about 29 ticks, or $453.
1-23 - Clients were advised to sell March Euro strangles. It was recommended that those holding long 137 calls (as a flyer just in case of a short covering rally) sell the 136.5/123 strangles for about 69 ticks or $862.50. Traders without this long call, sold either the 138/122 strangle or the 127.50/122 strangle for about 44 ticks or $550.
1-25 - Clients were advised to buy back their short 134 puts for about 13 ticks prior to the Fed announcement. Assuming an entry of 29 and exit of 13, the profit was $250 per contract before commissions.
1-25 - It was recommended that our clients re-sell the 5-year note futures contract (bought back at a profit on Monday, see above) near 123'23. In light of the profit on the first entry, this is now nearly a free trade (ignoring transaction costs and slippage), limited (almost no) risk and unlimited profit potential from here.
1-25 - Clients were advised to sell March strangles using the 137 puts and the 147 calls for about 47 ticks or $735.
(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)
Senior Analyst / Commodity Broker
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*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.