What’s Next? Examining Active Trends and $ Risk Across Futures Markets

The S&P 500 Index settled at 2129.90 on July 8, 2016. Less than one point shy of the 2130.82 all time closing high recorded on May 21, 2015. Time to start sharing market thoughts!

This page is going to focus on executable ideas in traded futures markets. Specifically, the active front month futures contracts in equity indices, bonds, metals, energy, grains, livestock, and currencies. The goal is to be explicit and transparent.

There will be a more complete piece on methodology at a later date. Suffice to say, picking tops and bottoms is not part of this trend-following execution framework.

Let’s begin with a snapshot of the markets we’ll discuss:

US Equity Futures:

The cash S&P 500 Index is used to set a long term view before drilling down into the active September 2016 E-mini contract. The index is at a long term inflection point after a record weekly close. Bias is to bet with the recent trend higher. This uptrend targets 2375 and is active down to 2050. That equates to 245 points of reward and 80 points of risk from the July 8, 2016 close, a 3:1 ratio. Long term positions should only be initiated with an understanding that they remain active for 80 points of downside. On one E-mini S&P 500 contract $4,000 is at risk for $12,250 of potential reward. Should the risk level be encountered the stop is taken on a weekly close below 2050 followed by an open below 2050 the following week. Money management should be considered within this framework.

E-mini NASDAQ 100 futures are breaking out of their current range but remain below all time highs.

Nikkei Futures:

September Nikkei Futures are range bound within an existing downtrend. The active range is 15200 to 15800. Executions within the range should be biased with the existing downtrend. Risk is always to the other end of the range. Should a break of the range occur execute in the direction of the break.

Treasury Bonds:

Treasury bond futures closed at a record high of 177’03 on July 8, 2016. Executing within established trends is tricky. Whether riding the trend, watching the trend, or fading the trend it is important to have a defined approach to determine when the trend has run its course. The simplest way to determine if a trend is intact is to examine the high, low, and close of the most recent price bar against the high, low, and close of the prior bar. Within that framework the larger weekly uptrend is clear: bonds recorded a higher high, a higher low, and a higher close. Beyond the eye-test, tight moving averages are useful in trending markets. A simple five period moving average of the close shows the larger uptrend active down to 172’00. Any fresh long term trend following positions should be comfortable with 5 points of risk, or $5,000/contract (note this is greater than the $4,600/contract maintenance margin). Mean reversion traders may be able to construct lower risk parameters. On a daily basis, the same five period moving average process results in one point of risk, or $1,000/contract.

Precious Metals:

Year-to-date 2016 silver (+46%) and gold (+28%) are the best performing futures markets in our universe. Approach here is similar to the approach on bonds. Five period moving averages applied on a long term (weekly) basis, bias with trend until a weekly close below the five period moving average followed by an open below the moving average the following week. Risk parameters can be refined by applying that thought process on a daily basis. As a result the larger uptrends in gold and silver are active down to $1,320/oz and $18.50/oz respectively. Both markets get more interesting when looked at on a daily basis. Each recorded a low risk long entry on close July 8th. The inflection point on gold is at $1,360/oz and on silver it is at $20.10/oz. Money management must account for the fact that stops are only taken after a close below inflection followed by a close below the following day.

Energy:

Crude oil futures have broken their long term (weekly) uptrend. Structuring trades here requires a determination of where the near term downtrend ends. The trend line on the chart below illustrates that point at the round figure of $50/barrel. That is not close; risking $5,000/contract is not practical money management. Explicit trades in the direction of the downtrend require zooming in closer (not part of this post) or waiting for a better $ risk per contract on a bounce.

The near term and long term outlooks for Henry Hub natural gas futures are in conflict. On a weekly basis natural gas futures are in an uptrend above $2.750/MMBtu. On a daily basis natural gas futures are in a downtrend below $2.850/MMBtu. To bet with the longer term trend execute against the $2.750/MMBtu area on a weekly closing basis. For money management purposes the low of the week of July 4th at $2.697/MMBtu should be used as a hard stop. To execute against the longer term trend short against $2.850/MMBtu on a daily closing basis with open above the following day and press on a break of last weeks’ low below $2.697/MMBtu. Have a bias?

Agricultural Products:

Corn, soybeans, and wheat are each down ~100¢/bushel from their 2016 highs. The weekly trend is now down in all three markets. Long term risk levels are not close; risking 50¢/bushel in corn, 80¢/bushel in soybeans, and 40¢/bushel in wheat. The near term is where it gets more interesting. Corn and wheat each did enough July 8th to shift their near term picture positive. That gives clean near term inflection points for trades either way at 356¢/bushel in corn and 431¢/bushel in wheat. Beans are a near term short against 1075¢/bushel, in alignment with the long term trend.

Cattle markets are thinly traded. Both live cattle and feeder cattle are range bound near term against long term down trends. Executions within a near term range should always be biased with the longer term trend. August live cattle are in a range from 111.35¢/lb to 114.40¢/lb and August feeder cattle are in a range from 141.25¢/lb to 146¢/lb.

Currency Futures:

Using the moving average approach on a long term and short term basis 1) British pound futures and euro futures are both shorts and 2) Japanese yen futures and Australian dollar futures are both longs. A trend line approach agrees with the moving average approach on the pound, euro, and yen. Using a trend line approach the Australian dollar is a long term short against 0.7580. The Australian Dollar is the only market other than the SPX near a long term inflection point.

Summary:

When evaluating futures markets for directional trades the ultimate end game is executing a buy or a sell order. Here’s a summary of ideas discussed above, note there is no reward column; laser focus is trained on the risk side. The $ risk column is color coded so $ risk under $1,000/contract is green, and $ risk greater than $2,500/contract is red.