Per our latest 10-Jun Technical Blog, only a glance at the weekly (above) and daily (below) active-continuation charts is needed to see that the market has yet to provide any evidence needed to even defer the secular bear trend and our long-term bearish count, let alone break it.  On a longer-term scale pertinent to institutional players, commensurately larger-degree strength above 26-May’s 120.31 larger-degree corrective high and key risk parameter remains required to expose a major correction higher.  Former lower-117-handle-area support is considered near-term resistance.

From a shorter-term perspective however, the 240-min chart below shows the developing potential for a bullish divergence in short-term momentum resulting from yesterday’s continuation of the bear.  Yesterday’s portion of the bear leaves yesterday’s 116.03 high in its wake as the latest smaller-degree corrective high the market now needs to sustain losses below to maintain a more immediate bearish count.  Its failure to do so will confirm a bullish divergence in short-term momentum, break the downtrend from at least 07-Jun’s 118.17 high and possibly from 26-May’s 120.195 high in the Sep contract and expose a correction higher that could surprise in scope.  Per such, this 116.03 high is considered our new short-term risk parameter from which shorter-term traders with tighter risk profiles can objectively rebase and manage the risk of a still-advised bearish policy and exposure.  This tight but objectively risk parameter may come in very handy heading into this afternoon’s release of the latest FOMC meeting minutes that will include the amount of the latest rate hike.

These issues considered, a bearish policy and exposure remain advised with a recovery above 116.03 required for shorter-term traders to take profits and move to the sidelines in order the circumvent the heights unknown of what we’d then suspect is a more extensive correction within the still-arguable long-term bear trend.  A bearish policy remains advised for long-term players with a recovery above 117-1/2 required to pare exposure to more conservative levels and commensurately larger-degree strength above 120.31 required to jettison all remaining exposure.

For traders looking for a cautious but favorable risk/reward way to basically try to “pick a bottom” that might be instigated by today’s FOMC announcement, we discuss a call diagonal strategy below.

The strategy reflected in the P&L graph below is the Jul 116-1/4 / Sep 119-1/2 Call Diagonal.  This strategy involves buying the Jul 116-1/4 Calls around 28/64s and selling the Sep 119-1/2 Calls around 25/64s for an initial cost of about 3/64s ($46.875 per 1-lot).  This strategy provides:

  • a current net delta of +15%
  • a 3:1 gamma ratio
  • negligible risk if the secular bear trend continues to tank straight away
  • profit potential of over 3-full-pts (over $3,000) on a sustained reversal above 116-1/4.

As always with such long-gamma strategies, the key risk is theta, or time decay.  The gamma advantage the Jul calls enjoy over the Sep calls comes in exchange for TIME as the Jul calls expire in only 9 days, versus 72 days to expiration for the Sep calls.  This is a short-term favorable risk/reward bet purposely executed just before today’s FOMC announcement on the expectation that this announcement will result in a surprising reversal higher.  If the major bear trend in the underlying Sep contract continues, the risk to this bullish spec is negligible.  If the market reverses higher, the high-gamma Jul 116-1/4 Calls will increasingly behave like an aggressive long futures position that will severely outperform the losses on the short Sep 119-1/2 Calls.

The biggest risk to such diagonal spreads is lateral, flat-lining price action in the underlying contract that will eventually see the long Jul call erode to zero, leaving a naked short position in the Sep calls that would then pose infinite risk.  Traders and brokers are warned to NEVER let this strategy reach that point.  If this market doesn’t move big, either way, in the next few days as a result of this afternoon’s FOMC announcement, this entire spread should be covered for what should be a small loss by this Fri or early next week.

Please contact your RJO representative for an updated bid/offer on the Jul 116-1/4 / Sep 119-1/2 Call Diagonal Spread and good luck on today’s numbers.

RJOF Editorial Team