Never before has the political process been so transparent; good or bad traders must be prepared for volatility.
Coming into the week, the stock market was pricing in the best-case scenario regarding a trade deal (at least in our opinion). Despite the downturn, the worst-case scenario is far from being priced in. Nevertheless, we doubt the market will have to worry about that. In true political fashion, we will likely see a can being kicked down the road by trade negotiators, and that will be enough for a recovery rally.
If we are wrong and the deal completely falls through, we wouldn't be shocked to see a move into the 2650ish area in the S&P 500 within a week. If things get ugly, prints in the 2400s aren't out of the question...but we aren't counting on that. Instead, we believe the odds are in favor of the 2840ish area holding, followed by a run to 3,000. In any case, make sure your bets are small and hedged. It is a jungle out there!
Treasury Futures Markets
Treasuries don't seem to believe there will be "no deal".
We have to believe if bond traders expected a complete political failure in the talks between the US and China we would be seeing much more motivated buying. That said, there was a 10-year note auction yesterday that was a huge disappointment and there is some concern that one of the largest buyers of US debt (China) is closing its wallet.
We haven't had a strong opinion in Treasuries for weeks, but we would love to have an opportunity to get bearish the ZB in the mid-150 to 151'0 area.
Treasury futures market consensus:
We see resistance near 149'0 and again in the mid-150's and expect these levels to hold.
Technical Support: ZB : 146'16, 144'20, 142'30 and 141'28 ZN: 122'21, 121'10 and 120'02
Technical Resistance: ZB: 149'05, 150'14, 152'28, and 115'16 ZN: 125'01 and 126'04
Stock Index Futures
We could see fireworks in the overnight session.
Brokerages are increasing overnight day trading rates in response to what could be a wild night in the equity futures markets. It kind of feels like election night 2016, but we doubt the volatility will come anywhere close to that. If it does, traders could be in store for a long night.
We admit the market isn't cheap, but "sell in May and go away" hasn't worked well in recent years. The real selling has been coming later in the summer. With that in mind, and the fact that the market failed to reach trendline resistance (3,030), or even the psychological 3,000 area, we think there is one more leg left on the bull. If this is the case, the 2840ish will need to hold (keep in mind, a quick probe to 2820s isn't a deal breaker if the market recovers).
Stock index futures market consensus:
We aren't sure the highs are in, but there is no reason to be aggressively bullish. The best trades will likely be from the short side at higher levels. In the meantime, look for support near 2840 to hold.
Technical Support: 2840, 2823, 2792, 2756, 2715, 2638, 2445, and 2358
Technical Resistance: 2969, 3000, and 3032
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: 2883, 2898, 2940, 2969, 2977 and 3000
ES Day Trade Buy Levels: 2835, 2821, and 2795
In other commodity futures and options markets...
September 12 - Roll the September Bloomberg Commodity Index into the December contract.
December 13 - Roll the December Bloomberg Commodity Index into March.
December 27 - Sell July corn 390 put and purchase the July 350 put for insurance.
December 28 - Go long July soybean meal, sell a July 320 call and buy a March 290 put for insurance.
January 2 - Buy the July coffee 115/125 call spread, and sell the July 95 put. Then buy the March 90 put for insurance.
January 23 - Go long the June euro currency future near $1.1520, then sell the May $1.15 call option and purchase a March $1.11 put for protection.
February 9 - Buy back the July 95 coffee put to lock in gain, then sell the July 102.50 put and purchase the April 100 put for insurance.
February 19 - Buy back July coffee 125 call and sell the April 100 put to lock in gains. Purchase an April 95 put to replace the insurance.
February 20 - Sell diagonal put spreads in wheat using the May 475 put and the April 460 put (about 11 cents).
February 21 - Exit half of the Bloomberg Commodity Index futures position (we added on a dip in January).
February 25 - Buy back the May natural gas 2.55/2.30 put spread to lock in a profit.
March 1 - Sell April wheat $4.60 put to lock in gain and replace it with an April $4.35 put.
March 7 - Roll short May euro $1.15 call into June euro $1.15 call to collect more premium and better our hedge. Purchase an April $1.1150 put for insurance.
March 8 - Sell another June euro $1.15 call to bring in another 65 ticks in premium and provide a better downside hedge.
March 8 - Purchase May coffee 90 put replace expiring April put.
March 15 - Roll March BCI into June.
March 19 - Sell diagonal call spreads in cattle (sell June 128 call and buy May 130 call) to collect roughly 1.00 or $400 per lot.
March 21 - Exit May wheat spread to lock in a small loss.
March 21 - Establish a fresh position in wheat using a covered call (buy July future near $4.70, sell a July $4.70 call and buy a $4.00 put for protection) for a net credit of about 20 cents ($1,000).
March 21 - Sell diagonal call spreads in hogs (sell June 110 call and buy the April 85 call for insurance) for a net credit of about $940.
March 28 - Lock in a quick profit on the hog spread (roughly $400 to $500 for most clients depending on fill prices).
April 2 - Exit the long euro futures contract and replace it with a short June 112.50 put (then purchase a May 115 call and a May 111 put for insurance).
April 3 - Buy back short June cattle 128 call to lock in a profit of roughly $400 per contract (hold the long May 128 call in hopes of a rally).
April 9 - Sell July crude oil 69 call and then buy the June 72 call for insurance. The net credit should be roughly 60 cents, or $600 before transaction costs.
April 9 - Sell June hog 110/80 strangles and buy the May 107/69 strangles for insurance. The net credit should be close to $1,000 before transaction costs.
April 10 - Swap the May coffee 90 put for the June 90 put to refresh the insurance.
April 17 - Buy back one of the June euro 115 calls to reduce risk.
April 23 - Buy back hog strangle to lock in profit on this part of the trade (about $400 to $500 depending on fills (before transaction costs and prior to considering the open loss on a long strangle).
April 23 - Replace long ZM future with two diagonal put spreads (July 305/June 295).
April 23 - Roll euro strangle lower to rebalance (buy back June 115 call and 112.5 put and sell the 114 call and 111.5 put.
April 30 - Exit euro strangle and move to the sidelines ahead of the Fed meeting.
May 2 - Buy back July crude oil $69 call to lock in gain.
May 8 - Roll the June coffee 90 put into a July 87.50 put.
May 9 - Roll the long 3.50 July corn puts (part of a credit spread) into June 3.45 puts to prepare for a potential reversal.