Even the most bearish of the bears couldn't have predicted the bloodbath we've seen in the equity index futures markets since posting a August 18th high. As experienced futures brokers, we've lived through the 2008 financial crisis, the 2010 flash crash, and the August 2011 Federal budget crisis collapse; however, we've never seen a sell off quite like this one.
It is no secret that the U.S. equity markets were in desperate need of a "good" correction. In fact, many very smart (and otherwise successful) traders lost a lot of money attempting to time the down-draft. Nevertheless, it is difficult to rationalize this type of quick repricing in the absence of substantial changes in fundamentals. We certainly agree that the China story is worth monitoring, and will be a drag on the global economy but the truth is the U.S. economy only relies on exporting for 10 to 15% of GDP.
The futures markets are ultimately driven by people, who are driven by emotions. Once the panic and the margin calls work their way out of the system, we suspect the e-mini S&P futures will recover sharply into year end. With that said, bottoms are a process...and they are messy. We'll likely see a retest of yesterday's flushing low, or moderately lower (1800ish), before real buying comes into the ES futures contract.
Treasury Futures Markets: Have T-Bond Futures topped out?
We were dead wrong about the timing and magnitude of the ES futures correction, but our ideas in Treasury futures were pretty accurate. Going into the weekend we had noted that a move toward 164 in the ZB futures, and 130 in the ZN futures, seemed to be in the cards. We also added, the noted levels should offer sharp resistance. Nevertheless, I doubt many people were willing to swing the bat yesterday morning when prices were hovering at reversal levels.
We have a feeling there will be at least one more down-draft in the stock index futures, if we are right about that, Treasury futures probably have another run higher in them. If so, 164 in the T-bond future should be seen on the next trip up.
To be honest, the bond and note futures markets experienced relatively muted volatility in the face of the largest intraday drop in the stock market history. We wonder if there is another round of short squeezing still ahead as this complex plays catch up to the panic trade. The mid-157s in the ZB futures contract will be critical.
Treasury Futures Market Analysis
**Bond Futures Market Consensus:** We suspect there will be another round of buying. Watch critical resistance in the ZB near 157'15.
**Technical Support:** ZB : 157'15, 154'20, 150'31, and 148'13 ZN: 127'19, 126'12, and 125'22.
**Technical Resistance:** ZB : 162'26 and 166'0 ZN: 128'28, 129'28, and 130'13.
Stock Index Futures
The e-mini S&P 500 freefall was contrary to seasonals and option expiration tendencies, but it was overdue
We'll be the first to admit we were wrong about the timing and pace of the correction that is underway in the major U.S. stock indices. Nearly every historical stat we had consulted suggested another run at the highs before a bigger correction would be possible. Sometimes, human emotion trumps seasonal patterns and logic. This was one of those times. We'll take this as a lesson learned; when seasonal patterns fail, they do so miserably.
Sometimes stock index futures make a V-recovery and make their way higher from the depths of despair as if it never happened. However, more often futures markets retest the extreme lows before a sustainable reversal occurs. Accordingly, despite today's impressive bounce we have a feeling there is a little more pain for stock market bulls ahead.
Monday's dramatic low was near 1830, but we've noticed the monthly chart of the ES futures is pointing toward a bearish target of about 1800. We have a feeling, that price will be seen before the market firms up for the long run. If we are right, we just hope the ES futures contract gets there in a gentlemanly fashion.Stock Index Futures Market Ideas
**e-mini S&P Futures Market Consensus:**
The ES is dangerous right now (in either direction), so keep trades small. It feels like a retest of 1830, and probably move toward 1800 will be seen before the bulls get footing.
**Technical Support:** 1830, 1801, and 1782
**Technical Resistance:** 1948, 1971, 2024, and 2060.
**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: 1953, 1970, 1999, and 2047
ES Day Trade Buy Levels: 1961, 1831, and 1801
In other commodity futures and options markets....
May 14 - Buy an October sugar 1325 call, sell a 1425 call, and then sell a 1225 put. This should be an even money spread, or free trade, but involves margin and unlimited risk below 1225. The max profit is about $1100 before transaction costs.
June 16 - Buy back short October sugar 1425 call (part of spread) to lock in the profit. We'll hold the other legs of the option spread for now (which are under pressure).
June 29 - Go long the Aussie dollar via e-micro futures near 7640ish.
July 6 - Add to the bullish Aussie dollar trade with the purchase of another contract (e-micro for most). This dollar cost averages the position to a more favorable level.
July 21 - Buy December e-micro gold near $1106.