Futures Market Volatility Is Abundant
Carley Garner | Jul 05, 2016 03:18PM ET
Futures market volatility is abundant with payroll data and earnings around the corner.
Investors are on edge ahead of event risk
Thus far the summer of 2016 has been highly volatile, and we don't see any signs of this changing anytime soon. From grains, to energies, to currencies and, of course, the financials, there have been fortunes made and lost in the markets. We suspect this trend will continue well into the fall months. Accordingly, it is generally a good idea to try to keep speculative bets on the small side.
Risk-off assets such as Treasuries and gold are highly overextended despite the fact that equity market are hovering at relatively lofty levels. In our view, this offers a glimpse into the minds of investors; it is clear they are far from comfortable with the current environment. We can't blame them; we've yet to resolve the Brexit vote implications and we will soon be forced to endure the latest US employment report and, more important, it's potential impact on the Fed's interest rate policy. Soon after, the second quarter earnings season will roll out. With all of this in mind, it might be worth unloading some risk where possible.
ZIRP is triggering a hunt for yield
The new buzzword in the global financial markets is ZIRP (Zero Interest Rate Policy). Despite the Fed's efforts to normalize rates, monetary policy in Japan and Europe forcing rates into negative territory has lured global investors into what are relatively fat yielding US Treasuries. In turn, it has forced domestic interest rates lower. It is hard to believe, but 1.35% over 10-years sounds good in some parts of the world, so they are moving money into the US to take advantage of the "opportunity".
As we've noted in previous newsletters, Treasuries generally move higher during the summer so seasonal tendencies side with the bulls. However, from a charting perspective. the upside in Treasuries feels limited. We are starting to see technical oscillators creep into the (insanely) overbought territory. This doesn't guarantee a reversal, but it certainly increases the odds of one.
When or where the market reverses, is questionable given the fact that we are at all-time highs. Simply put, there are no notable resistance areas because we've never been here before. Nevertheless, what has been the best investment on the board (US bonds and notes) might soon become the worst. Even a monthly chart is reading an RSI in excess of 70. This has only occurred two other times in the last 16 years, and both were eventually met with massive selling.
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Treasury Futures Market Analysis
**Bond Futures Market Consensus:** We have a feeling the jobs numbers will turn the Treasury market around. The upside "should" be somewhat limited from here.
**Technical Support:** ZB : 169'24, 167'17, 164'16, 162'02 and 159'19 ZN: 131'31, 130'10, 129'03, and 128'17
**Technical Resistance:** ZB: 176'20 and ??? ZN: 134'10 and 136'15
2070 is the key for ES futures
We now know the holiday short squeeze dried up near 2105. Since then prices have migrated back toward 2070 which represents a relatively neutral price point. In fact, this will act as the market pivot; if prices travel below it in the coming days the market turns bearish but if the bulls successfully defend 2070 support, they maintain an edge. Other than that, we don't have much of an opinion until we can see what the market does with this level.
Stock Index Futures Market Ideas
**e-mini S&P Futures Market Consensus:** We are neutral, but hoping for a sharp employment report rally. We would be comfortably bearish from the 2130ish area.
**Technical Support:** 2069, 2010, 1981, and 1951
**Technical Resistance:** 2089, 2120 and 2135
e-mini S&P Futures Day Trading Ideas
**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**
ES Day Trade Sell Levels: 2089, 2105, and 2120
ES Day Trade Buy Levels: 2070 (minor), 2044, and 2021
In other commodity futures and options markets....
June 8 - Sell September corn 520 calls for about 10 cents.
June 14 - Sell September 10-year note 135.50 call for about 18 ticks or $437.50.
June 14 - Sell a November Fed Funds futures contract near 99.57.
June 20 - Sell October live cattle 100 put near 1.20.
June 21 - Buy back September corn 520 calls to lock in profit of anywhere from $300 to $250 per contract before transaction costs.
June 22 - Buy back short ZN calls to lock in small profit and cut risk ahead of Brexit.
June 23 - Go long corn futures near 392 using mini contracts (the beginning of a scale trade). Full-sized contracts can be used if available margin and risk tolerance is appropriate.
June 27 - Sell September ZN 136.50 calls near 26 ticks.
June 27 - Add to bearish Fed Funds futures position by selling a December FF contract.
June 29 - Buy back October cattle 100 puts to lock in a quick profit.
June 30 - Buy September mini (or full-sized) wheat near $4.47.
July 5 - Exit the November Fed Funds futures contract to lock in a profit of roughly $230 to $250 per contract. We'll hold the November contract for now.
July 5 - Add to the long mini corn (or full sized) near $3.45.
**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. 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. 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. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.
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