Stock index futures on Tuesday declined to a five week low on the growing belief that the Federal Reserve will curtail their bond purchases next month. In addition, Tuesday’s drop in the S&P 500 was the first four day consecutive decline this year. Last week’s jobless claims came in at the lowest level since late 2007, which although seems good for the economy, has been too slow to offset the massive declines from 2008 and 2009. Traders are covering shorts ahead of Wednesday’s release the minutes of Federal Open Market Committee’s  July 30-31 policy meeting and the August 22-24 Federal Reserve, Jackson Hole, Wyoming economic conference. Wednesday, economists will scrutinize the data from the July Fed policy meeting for any hints as to when the Fed will curtail their monthly purchases of $85 billion of Treasuries and mortgage-backed securities.

The U.S. dollar is ignoring the bullish influence of the increasing probability that the Fed will taper their asset purchases in September, which is a sign of weakness. I believe this is where traders may find real value in regards to the mild correction we have seen in stocks. Since a high of 84.96.5 in early July, the greenback has fallen over 400 points to where it sits today, just below 81.00. A possible retest of the June low off the chart may provide the profit-taking bounce, where shorts in the market cover ahead of the aforementioned Fed meetings not to mention end of month covering, and possible covering before the September unemployment report.

THE TRADE

Therefore I am advising the following trade. I will look at buying the October U.S. Dollar 82 calls for a premium of .500, or 50 points, which in cash value would equal $500.00. A 38 percent Fibonacci retracement from July’s high from this week’s low takes the futures market back up to 82.26. The October option has 44 days until expiration, so there is enough time in my view for the trade to work without option time decay. Please keep in mind that the risk on the trade is the price paid for the option plus all commissions and fees. I will possibly hold the calls here until the September FOMC meeting. Please call me with other trade ideas and to be added to my daily report 888 391 7894.

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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.