A Tradable Rally in Equities, Risk Aversion Takes a Reprieve, and Key Levels to Determine Sentiment for the Week

Market Overview for the Week of December 8-12
In the current trading environment we are navigating, understanding the key drivers behind price action and sentiment goes a long way in determining one's profitability. It's been well-documented the correlation between a number of carry-related currencies and performance of the equity markets as the deleveraging process that has unfolded this last month has left very little unscathed in its wake. With that said, recent price action developments from last Friday suggest to me a tradable rally is upon us in both global equity markets and carry-trade related currencies.

Gold - One of the best performing commodities on a relative basis over the last 5 months (since the global wealth destruction took place beginning in Mid-July). After rallying through Thanksgiving week to test a key 830 level. Friday's selling lead the metal to hold and close above a key .618 Fibonacci retracement at the 748 level on the February COMEX contract. I have a straddle position on right now in this market and am currently long after being delta negative into Friday's NFP data. It's important to note gold has rallied in terms of pounds, euros, Aussie, and other emerging market currencies (in many cases making all time highs). As such, I am stepping off the gas from the short side and any delta hedging I do against my straddle in the first part of the week will be only to rebalance my book and not to setup any particular short position. I see a pop to 800 this week as a distinct possibility and will use 750 as my point of control to see who is in control between the bulls and bears. Any price action below 750 necessitates further shorting on bounces, while trading above this levels should be seen as a market that is trying to put in a tradable bounce. 

30 year treasuries - The 30 year bond, in particular the NOB Spread (30 year treasury futures vs. 10 year treasury futures) has just blown out these past few weeks as we saw a historic price move to the 3% yield. NFP on Friday saw us flash the 135 level before fading with the pop in equities and weakness in the yen. I think the best way to play a move in treasuries is to setup a Calendar put spread with the 127 Jan-Feb puts by selling the Jan puts and buying the Feb puts somewhere towards the middle of the week. The P and L graph looks much like a straddle but I think after this tradable rally in equities subsides the bonds will put in one last rally higher before coming under pressure in the first part of the year. By owning back end gamma on this calendar spread you can really set youself up for a flier in January as the Jan puts expire Dec 23 and the Feb puts expire on Jan 23.

Yen - USDJPY - While the retest of the 92 handle lacks the vigor of the move of January, any price action below 95 (key long term trend line and Fibonacci resistance) needs to be respected as part of the general downtrend as those that borrowed yen continue to close out of positions and keep a meaningful offer on a market that can't rally to save itself so far. As I outlined at the top of this letter though, I do think equities are poised for a nice rally and this should spill over into USDJPY, possibly taking us back near the 98 handle where the weekly chart sets up well for a low risk short entry through some option trades.

Mini Russell/Mini S and P Spread - One of my favorite spreads to chart on CQG is the spread between the Mini Russell 2000 futures contracts and the S and P 500 futures. One of the main drivers of this sell off is the lack of liquidity and how that has put a meaningful portion of the economy on lockdown. Small cap firms, like those in the Russell 2000 are even more vulnerable to the liquidity spickett running dry. The ratio between these two has seen those that were short the Mini Russell and long the S and P do very well over the last three months, but this if one of the first places I foresee a vacuum move up and takes out a lot of systemic or market risk that would impact the three aforementioned positions. 

Conclusion
The easy money on the short side appears to be gone for now as the market feels like it has caught a bid across a number of fronts and the approach is two fold. The first is to use shorter term charts, like 60 minute and 15 minute to play it from the long side. The second is to wait for the ES to rally back to 1000, the USDJPY to 98, Gold to 850, and Bonds to 127 handle to enter on the side of the longer term trend.

Good luck in the markets and more to follow soon...