Trading Desk Notes - May 18thSubmitted by Polar Futures Group on May 17th, 2019
From the Desk of Victor Adair
The US Dollar Index closed higher every day this week...the Chinese RMB and the Korean Won continued to tumble...the British Pound closed lower for 10 consecutive days...falling ~4% on endless Brexit uncertainty.
The DJIA futures contract tumbled to a 3 month low on Monday...trade wars and Iranian tensions...but bounced back the rest of the week.
Stock option implied volatility gapped higher last week (from ~11% to ~18%) with OTM put premiums soaring as, 1) investors paid through the nose for insurance and, 2) as bearish traders paid huge option premiums hoping that the market would tumble like it did last fall. This week, when the market rallied back from Monday’s lows, IV fell back to ~13%. Small changes in IV can have a BIG impact on an option’s price. As they used to say on the Chicago floors, “When they’re yelling you should be selling.”
Interest rates in major world markets continued to fall this week...the German 10 year Bund continued its relentless rally taking yields to 2 ½ year lows at minus 13bps.
Gold rallied above $1300 for the first time in over a month on Monday but dropped >$25 by Friday’s close as the strong USD (and weak RMB) and a rebound in the stock market pulled gold down.
Crude Oil jumped early Monday on US/Iranian tensions but tumbled nearly $3 intraday to close at 6 week lows. The market rallied back to make new highs later in the week despite bearish US inventory reports. I’ve written previously about the “in sync” movement of crude oil and US stock indices...we saw that again this week as crude and stocks both tumbled on Monday and then rallied the rest of the week.
The Canadian Dollar has been trending lower for 2 years...from 84 cents down to 74 cents...but during the past month it has been stuck in a narrow ½ cent range even as the Australian Dollar has fallen 3 cents to a 10 year low.
My short term trading: I came into the week long S+P call options...bought last Friday when the market rallied hard after hitting 6 week lows. I was ahead on that position at Friday’s close but weekend headlines caused the market to gap lower Sunday afternoon. I sold the calls very early Monday for a small loss...bought more calls on Wednesday...and sold them Thursday and Friday to be money ahead on the week.
I shorted gold Tuesday when it fell back below $1300. I added to the position Thursday when it dropped through $1290. The dominant chart pattern is the 4 month head and shoulders with a neckline around $1290. The price target on this H+S pattern is ~$1225. The strong downtrend from the February highs and the failure to close above $1290 the past 5 weeks adds to the bearish view. I have lowered my stops on both positions to lock in some gains but I don’t want the stops too tight. Open Interest has ramped up ~100,000 contracts (24%) the last 4 weeks...those buyers may turn sellers if prices drop through this year’s lows ~$1268.
I shorted the Yen on Thursday and again on Friday. It had made new highs for the year on Monday (flight to safety as stocks fell hard) but then started to fall back as the stock market rallied...and as the USD rose against nearly all currencies. I have tight stops on these trades...if the stock market swoons again next week the Yen will probably rally and I will not want to stay short.
I was in and out of WTI and MEX this week with very small losses and I closed a short CAD position at a wash. I’m going into next week short gold and Yen...which are both essentially bullish US Dollar trades.