Fed Auctions on Tap
Fundamentals
Traders are gearing up for what could be a volatile week for the equity markets, dominated by the Fed meeting on Wednesday and Treasury auctions of $104 billion worth of two, five and seven-year notes. The Fed's policy statement will be of particular interest, given the improved economic indicators over the past several months. The improvement of these conditions may cause the Fed to reign in some of its more aggressive policies, such as the treasury buyback program and quantitative easing. The buyback program offered support for treasuries when it was announced in March, but the program has done little to reign in interest rates in recent weeks. The inability of the Fed to keep interest rates at bay could be seen as a negative for both the equity and fixed income markets. The turnaround in banking stocks has largely been driven by lower interest rates, which has led to a boom in refinancings and offered some stability to housing. Higher interest rates could derail this recovery. The T-Note auctions this week will give traders greater clarity regarding interest rates. If the auctions are unsuccessful or cause interest rates to jump, equity prices could pull back on fears that higher interest rates would damage the fledgling recovery. Crude Oil prices have fallen back in recent sessions, which has been supportive of equity prices. Prices may have moved up too quickly, which like rising interest rates and high unemployment, could be seen as a force that could stifle economic growth.
Trading Ideas
The fundamental and technical outlooks for the equity market show plenty of indecision among traders, but this does not mean that traders should necessarily remain on the sidelines. Some traders may choose to take advantage of lower volatility and resulting lower option premiums by entering a long strangle, possibly buying the August 1500 call (NQQ91500C) and the August 1400 put (NQQ91400P) for a combined premium of 80 points. A possible point to exit the trade would be at 150 points, prior to expiration.
Technicals
After trading relatively flat for the early part of the month, the September E-mini Nasdaq pulled back to its trendline. The uptrend is still intact, but the chart is showing some signs that prices may pull back. After dropping from recent highs above 1500, prices moved sideways for much of last week, indicating prices could weaken further. Friday's close below the 20-day moving average suggests that a near-term high may be in place. The September contract has held support near 1434.00 to this point. Failure to hold this level could result in the market testing support at 1400 or, possibly, 1350. The 1350 level can be seen as the most significant of these support levels, as a close below 1350 would likely result in a long-term reversal.
Rob Kurzatkowski, Senior Commodity Analyst
