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Saturday, February 24, 2024

Two Thousand Dollar Thursday – Futures Profits While We Wait

Who says cash can't be fun?  

Yesterday, in the morning post, I noted the weak volume rally was a good shorting opportunity in the Futures – specifically the Russell (/TF) at 1,190 (pictured here, now 1,170 for a $2,000 gain!) and the Nikkei (/NKD) at 19,800 (now 19,635).  The Russell was good for a very quick $1,000 per contract gain and has hit $2,000 as of this morning (where we're done for now, expecting a bounce here) while the Nikkei took longer to grind out it's $1,000 win at 19,600 before bouncing back.  

A lot of traders have an irrational fear of trading the Futures (and options, for that matter) and it's one of the things we work on in our Weekly Webinars (replay available here).  The cost of initiating a Russell Futures Contract is $5,940 in margin (may vary by broker) and you simply bet long if you think the Russell will go higher or short if you think it will go lower and then you make (or lose) $100 for each point the Russell moves.  

The very great thing about the Futures is that you can play them in off hours, like yesterday morning – when we saw the Futures market rising for bad reasons ahead of what we thought would be a weak open based on the data that was coming in.  My comment at the time was:

The volume on yesterday's move up was a joke and this morning we're being pushed even higher in the Futures, back to 1,190 on the Russell (/TF) and 19.800 on the Nikkei (/NKD) along with 2,085 on the S&P (/ES), 17,800 on the Dow (/YM) and 4,660 on the Nasdaq (/NQ).  I listed the Russell and Nikkei first as they are going to be our key shorts – providing the others stay below their lines.

That's the real key to playing the Futures (and it's not very different with stocks or options) – pick a strong support or resistance line where several factors line up that lead you to take a stand and then, once you make your bet – get out quickly if things don't go the way you plan.  By limiting your losses, you live to play another day and, as you can see – the payoff from a single winner can make up for quite a few losses.  

This morning, the index Futures are more in between, so we're not making any bets but now a long play on Oil (/CL) is possible as it tests the $42 line ahead of what is widely expected to be a very poor inventory report.  I think oil will be lower next week but this morning, the $42 line has been good support in the past and we have an EIA Inventory Report at 11 am, into which we expect a small rally. 

So the play would be going long /CL (margin is $5,060 per contract, pays $10 per penny) at the $42 line with a stop at $41.95 ($50 loss) as our premise is simply that $42 is bouncy.  A move back to just $42.25 would pay us $250 per contract and $500 at $42.50.  The trick is to take the money and run ahead of the inventories – as it's not worth the risk – though we may change our mind during our Live Member Chat Session, depending on how things go between now and 11 or, if $42.25 seems to be holding (I doubt it) we may use that line instead.  

See, now you know how to play the Futures.  The margin is only held on your account as long as the contract is open (again, may vary by broker) and immediately releases when you "go flat" (end the trade with no more contracts).  In general, we use the Futures for strictly day-trading but it's nice to have them available if something market-moving happens after hours, overnight or pre-market and we want to shift the balance of our overall portfolio while the market is closed.  

Just imagine the advantage you have when you are able to trade almost 24 hours a day versus someone who has to wait until the market opens to act on information they got since the last close.  Pro traders don't want you to learn about the Futures, they like to keep that edge to themselves.  That's especially important considering how poorly Hedge Funds have been performing this year – they need every advantage they can get!  

In our case, once the market does open, we don't really need the Futures trades, as we already have our portfolio hedges in place in anticipation of a broader sell-off that's likely to come.  Of course, we have plenty of long positions but they are mostly long-term longs, nothing short-term as we're expecting more pain ahead before things get better.  

The Dollar maintains its strength near 100 and Draghi indicated more easing may be ahead for the EU while we wait for 6 Fed speakers today.  With Europe talking easing and our Fed talking tightening, we could see the Euro trading for $1 before the year is over.  

The stronger Dollar means a weaker Yen and that makes Japanese exporters happy, so we watch that relationship carefully when we're trading Nikkei Futures (/NKD).  Still, the weak Yen is the ONLY thing keeping the Nikkei alive as QE there has been much less effective than hoped.  In fact, just this morning Japan had weak Q4 guidance from the manufactuting sector and, as we noted yesterday, Japan's economy has almost certainly slipped back into recession – down about 0.2% for the year, with the official report coming on Monday.  

That forms our basis for shorting these Dollar-driven runs in /NKD and, of course, the weakness in China (which I'm tired of pointing out) is a huge drag on the Japanese economy – despite the advantage of the weak Yen.  Japan is an export-driven economy and China is it''s 2nd largest trading partner – not too hard to connect those dots…

Smart Portfolio Management is all about balancing your risk and options and Futures trades are simply tools we use to help us achieve that balance (see "Smart Portfolio Management" Parts (1), (2) and (3)).  Once you have a balanced portfolio, you are able to relax and look for new opportunities.  If you are spending your days in the market running around putting out fires – you are doing something wrong!  

We're doing a Live Seminar on Washington, DC this Saturday, specifically on setting up and managing a Butterfly Portfolio – one of PSW's steadiest tracking portfolios.  We don't swing for the fences with that one – we just look to drive a slow, consistent gain, month after month with minimal risk.  

Yellen speaks at 9:30 followed at 9:45 but the hawkish Lacker so expect a lot of volatility this morning and, of course, we're all waiting on the G20's proclamation next week – along with Japan's failing GDP Report.  Lots of good things to talk about this weekend – I hope to see you in DC!  



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