RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

In yesterday afternoon’s Technical Blog we discussed the bearish divergence in short-term momentum below 28-Feb’s 2357 smaller-degree corrective low.  This mo failure defines 01-Mar’s 2401 high as one of developing importance and a more reliable risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can be objectively based and managed.  Overnight, on an even tinier scale, the market’s failure to sustain losses below Wed morning’s 2373 minute corrective high confirmed a BULLISH divergence in momentum that defines yesterday’s 2354 low as the END of the decline from 01-Mar’s 2401 high and a MICRO risk parameter from which very, very short-term bullish decisions can be objectively based and managed.

Welcome to the world of technical and trading SCALE acknowledgement and the importance of knowing one’s personal risk profile around which to base and manage the risk of directional exposure.  All too often traders seek as small a risk as they can find BUT look for major profits.  This is a totally-luck-filled fantasy world that has been the domain of church and Little League raffle ticket forever.  Occasionally one can hit such a Lotto, but expecting such as a trading strategy is a losing proposition.

Very, very tight risk parameters are easy to identify, like yesterday’s 2354 low.  But there’s no free lunch and the benefit of such a tight and objective risk parameter comes in exchange for whipsaw risk.  There is nothing wrong with this, unless the trader doesn’t acknowledge this clear and ever-present relationship.

Emini 240 min Chart


Heading into the biggest, most important economic report of the month in about a half hour, the market’s reaction is a wild card that could produce a break or rally of 30, 40 or 50 points over the course of the ensuing week.  We have identified two specific, market-defined levels at 2401 and 2354 around which directional decisions can be objectively based and managed.  But let’s face it, seconds after this morning’s unemployment report the market could easily have blown through either of these levels, and possibly even BOTH of them.  This could render these “specific” decision-making levels moot.

To more safely take a directional stance, we discuss an interim bearish option play below that comes with negligible risk and could produce a sizeable profit if yesterday’s bearish divergence in momentum gets some legs.  In the meantime however we maintain our call from yesterday for shorter-term traders to approach the market from a neutral-to-cautiously-bearish perspective while 01-Mar’s 2401 caps this market as a short-term risk parameter.  A recovery above this level negates this call and reinstates the secular bull.  Longer-term players remain advised to maintain a bullish policy with a failure below 31-Jan’s 2262 larger-degree corrective low and key risk parameter required to negate this call.  From this longer-term perspective a not unexpected setback attempt to the 2340-to-2315-area is advised to first be approached as another corrective buying opportunity within the secular uptrend.

Emini Daily Chart


For a cautious punt from the bear side required against the backdrop of a secular bull market, we recommend buying the Mar 2340 / Apr 2250 Put Diagonal spread for a 1/2-point ($25 per 1-lot position).  This is a long-gamma strategy that with negligible risk if the major uptrend resumes straight away.  If, alternatively, yesterday’s bearish divergence in momentum is the start of an correction or reversal lower, the higher-gamma Mar 2340 puts will outperform the lower-gamma Apr 2250 puts per the P&L graph below.

The prospect for the Mar 2340 puts to go in-the-money is very reasonable under our technical outlook and may allow the opportunity to cover/take-profits on this trade around the 2340-area in the Mar futures when the Mar 2340 puts will contain a maximum amount of time premium.  If the market tanks in a more significant way these Mar 2340 puts will increasingly behave like an aggressive short futures position.

As always the biggest risk to long-gamma plays is boring, lateral, uneventful price action for the long-gamma benefits come in exchange for higher theta (time decay) risk of the long, front-month option.  If the contract flatlines in the remaining three weeks to expiration of the Mar 2340 puts, they will erode to zero, leaving a net short position in the Apr 2250 puts.  This could come back to haunt in a very risky way that we NEVER allow to happen.  With a generous three weeks to go before the Mar puts expire, we have ample time for the market to show its directional hand and act accordingly.  In the meantime this strategy allows for profiting if the market surprise on the downside after this morning’s unemployment report while assuming very negligible risk if the secular bull trend resumes.  Please contact your RJO representative for an updated bid/offer quote on the Mar 2340 / Apr 2250 Put Diagonal spread.



RJO Market Insights

RJO Market Insights specializes in forward-thinking analysis, focused on potential market-moving events and dominant factors driving price discovery. Detailed fundamental and technical coverage across multiple commodity sectors is combined with objectively-constructed trade recommendations to provide an industry-leading product for R.J. O’Brien’s Institutional clients, commercial hedgers, introducing brokers and individual investors free of charge. Content is distributed in both text and audio formats, with specialized service offerings provided by account type.
For more information on RJO Market Insights, contact your broker or RJO representative.