Friday, August 20, 2010

8-20-2010 Futures Techical Update!

Today is options expiration and as we left it yesterday we noted that there tends to be a postive slant in prices, but we did not say why. Markets tend to trade up on equity option expiration due to arbitrage funds covering short equity positions (i.e buying stock) as they close out their option hedges and roll to the next month. This does not however change my bearish stance as one day means nothing. All week I have been sending out updates and price targets to the downside with the wishy washy exception of /HO, which has the potential to be added to the bearish camp today.

Before I go into the futures update I want to talk about market themes and what drives prices. If we take a look back at the rally off of the March 2009 lows we will recall that it was all about the dollar, meaning if you could figure out what the dollar was doing you could figure out what equities and commodoties were going to do. The relationship was inverse to each other, we new if the dollar was down that equities and commodoties were going to trade up and vice a versa.

Then if you recall back a few month ago it was all about the Euro. This one did not last quite as long as the dollar theme but nonetheless it controlled market moves. Currently driving the market are bonds. Everywhere you turn people are talking about bonds. Here is what you need to know about bonds, they have an inverse relationship to equites (bonds go up equities go down). Just to give you an idea of how this relationship has played out equities put in their highs in April of this year and have since been selling off, while bonds but in their low in April and have since traded higher (see chart below).

TLT ETF (Tracks 20 year treasuries)

In my opinion bonds have moved ahead of equities and are indicating a bigger sell off to come. With further downside in equities and the strong correlation they have had with the oil complex this spells lower prices to come. This continued rally in bonds tells me that there is still fear and uncertainty in the market.

Now lets take a look at futures.


In the begining of the we identified the resistance level of 196-1.97 that has held and has been confirmed to resisitance. The trend is down and we have a current downside target around 1.81, based on its current projectory we could see this level as soon as Sep 1st. The smart trade here is short. I would look to get short between 1.94-1.96 using a stop of 1.97. This trade offers a nice risk reward of around 1-3 cts of risk for 11-13 cts of reward.


HO is currently traded below the 1.99 support level that we identified earlier in the week. As the rest of the market turns I am ready to through this one into the bearish basket with the rest of the junk. I think the higher probability and higher reward trade is on the downside here with 1.90 being the downside target.


 $76.6 ish is the new resistance level and 72.50 is still the downside target on Crude. We will reavaluate this one once we hit this target or market complexion changes.

What's driving the screen?

Asian and European markets have all sold off after the weak job numbers that were reported in the U.S yesterday. Domestic markets are off about 0.50%. This morning we are seeing some follow through selling from yesterdays sell off, but the day is still young. Futures are down across the board.

It is a light news day and the only catalyst to the upside is that it is options expiration day. But as it looks right now markets are poised to close lower by days end.

Overall risk is to the downside and shorts have a favorable risk/reward vs longs, but you have to pick you entries.

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