A Longer View on the E-minis

ESZ3 Daily 3009813Good Morning, Friends. Equities and equity futures are soft this morning. The cause is generally conceded to be the possibility of a shutdown by the Federal government, although as traders we know that the magnitude of the move depends on how other traders are positioned. As my first FX head trader was fond of reminding me, “All you need to know is who’s long, who’s short, who’s under water, and who’s nervous.” That still strikes me as pretty good advice.

The institutional investors to whom I speak are a bit nervous about a potential shutdown, but if that all that we get – a few days of headlines, followed by a deal – they’re inclined to see it as a buying opportunity. If, on the other hand, the debt ceiling isn’t raised, more particularly, if there is even a hint of a default on Treasury securities, that will be regarded as a disaster. A default will raise the government’s borrowing costs for a very long time to come, and will have an impact on fixed income markets generally, since most bonds are quoted in terms of spreads over the equivalent Treasury yields. Those spreads can contract or expand, but odds are that interest rates will move higher across the board. The market hates uncertainty. “Uncertainty”, however, is a synonym for “risk”, and we’re in the business of taking risk and managing it intelligently in order to make money.

As citizens, we may have views on the politics of all this; as traders, our job is to make money, and if the actions or inactions of politicians  and officials make that easier, it’s something to take advantage of. A default, if it occurs, won’t happen until later this month, but if the days grind on without a resolution, it will become more of a factor for the financial markets. Being long volatility and long gold could work, as could short positions in the Dollar and Treasuries, as well as stocks and stock futures. 

Please note that all we have thus far is a pullback within an uptrend in the E-minis, although the pullback is becoming more pronounced. The 1660.50 level in the E-minis, roughly,  marks a confluence between Fibonacci retracements drawn from two lows; a break below 1660 would suggest to me a potential change of trend from “up” to “down”. The implication if that occurs is that rallies should be sold, rather than dips bought. It’s easy to get bearish when the market is coming lower, particularly when it’s getting hit hard and the talking heads are preaching disaster; one of the many benefits of Todd’s courses is that we’re taught to analyze market trends objectively. At the moment, the uptrend is faltering, but remains an uptrend. If and when that breaks, I’ll be delighted to look for opportunities on the short side.

However all of this plays out, best of luck!

About the Author kevin


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