January 27th, 2009

See DeCarley Trading in the March Issue of SFO Magazine…”Trade Like a Girl”

Short covering ahead of FOMC triggers Bond and Note Rally

Treasury notes and bonds enjoyed a long overdue rally, but the sustainability of gains much beyond the FOMC meeting remains questionable.  We won’t deny the market’s ability to reach near term prices as high as 126′24 and 134′27 in note and bond futures respectively, but believe that the bears will continue to be rewarded in the long run.  With that said, it is important to respect the market’s ability to rally as the February time frame is seasonally supportive.

On the economic front, the Standard & Poor’s CaseShiller Home Price Index was reported slightly below expectations but interest rate products had little reaction.  A new record low in consumer confidence, reported at 37.7, was offset by upward revisions in previous month’s but did tilt Treasury trade toward the bull camp in early trade.

In yesterday’s newsletter, we pointed out that supply concerns have lured too many bears into the market and that the market has already priced in massive government issues of fixed income securities.  Accordingly, we warned of a large and swift short covering rally as the trading theme may switch from supply to an alternate market force.  Today, that assumption seems to have played out.  Much of the day’s gains were sparked by a decent amount of demand for two-year notes in today’s auction.  Let’s see how Thursday’s 5-year note auction goes.

While the day’s auction had a large hand in the buying, it is likely that many traders are reluctant to hold positions into tomorrow’s FOMC meeting.  As we all know, volatility can be somewhat high post announcement and those with large open profits on the short side had incentive to lock in profits.

Picking a direction post FOMC is like throwing a dart at chart.  While the Fed is somewhat predictable, the market’s interpretation of their comments aren’t.  We are looking for a possible continuation of the upswing to previously mentioned resistance levels but maintain the opinion that trade will eventually make its way lower to about 126 in the long bond and 120′16 in the 10-year note.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

December 17 – Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

• January 8 – If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract.

• January 9 – Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday’s report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

January 9 – If you didn’t participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs.

• January 15 – Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn’t consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price.

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Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
cgarner@DeCarleyTrading.com
1-866-790-TRADE
Local : 702-947-0701

www.DeCarleyTrading.com

*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.