Stable equities and Dollar pressure Treasuries


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October 15th, 2010

Stable equities and Dollar pressure Treasuries

Fresh data reminded traders of the implications of parking funds in low yielding assets and money flowed out of Treasuries. The long end of the curve suffered the brunt of the selling at the hands of what seems to be a delayed reaction to yesterday's poor auction and signs of inflationary pressures in producer prices.

All of this week's three key Treasury auctions were met with lackluster demand. CNBC's Rick Santelli ranked the note options in the "C"s and gave the bond option a D-. As we noted in yesterday's newsletter, it isn't shocking to see money fleeing the safety of Treasuries while risky assets are flying high. It is hard to imagine an overwhelming bond bid until the commodity boom goes bust...and looking at the charts, it might to be too far away (or perhaps underway).

Don't forget that seasonal tendencies play a big part in Treasury trade. Last week we pointed out the seasonal weakness typically witnessed in mid-October; however, things tend to firm up middle to late next week. If you are holding bearish positions, now is probably the time to lighten the load, tighten stops, or take other action to protect your profits. What the market giveth, it can taketh just as quickly.

Coming into the session, we were looking for a slide to 131'20ish; the market delivered...and more. The next area of support lies near 130, and we feel like this will eventually be seen. That said, however, given the pace of the sell-off it seems the market could be ripe for a small bounce before moving lower. The long bond can bounce as high as 133'05 resistance without compromising the downtrend.

Still waiting on the mid-125's in the note, in the meantime...a bounce to 127 is possible before turning back down.

Here is the tentative schedule for the next round of Fed buying:
* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Treasury Bond and Note Option and Futures Trading Recommendations
**There is unlimited risk in naked option selling.

October 8 - Clients were advised to purchase the December 121.5 call and sell the futures. The total (limited) risk on the combo is ranges from $500 to $600 depending on fills. This trade has 50 days to expiration and opens the door for theoretically unlimited profit potential.

*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.
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