Yesterday marked the third session following Friday’s employment report big sell-off.
The decline in the Eurodollar March 2016 contract was a 2.7 std dev move, the likes of which had not been seen since January of 2011. There was no meaningful recovery over the three sessions following that decline. One of our confirmation signals when contemplating a trend change is the ability for a strong price move to be maintained. Said differently, we like to see a trend make and hold new ground. When too much ground is relinquished following a strong move, we tend to discount the implications of that "strong" move.
As is, there was only minimal probing into the lower end of the range from Friday during the Monday-Wednesday period. All else equal this leaves us with a greater level of confidence that the decline on Friday is meaningful and a likely precursor to additional declining price action. We would note however, that the decline on Friday followed additional bearish technical developments and a test of a Jan. 15-16 high.
This morning, EDH6 has reached above the Tuesday and Wednesday high and may be attracting some bottom fishing following the weaker than expected retail sales and jobless claims reports. We would be more inclined to look at strength in EDH6 as a selling opportunity.
The short-February Eurodollar options (underlying EDH6) expire tomorrow. The 98.875 put trades 0.5 / 1. With a delta of -0.20, clients might consider hedging the prospects for a strong University of Michigan sentiment number tomorrow working bid side o.5 (half tic). Otherwise, consider a longer dated (29 day) short March 98.875 / 98.625 put spread for 5 / 5.5. -0.30 delta. I would recommend working the bid side on either or both. In combination, clients might consider bidding 5.5 for both. For guide, the bid side of the for the 1 day 88p should trade with futures trading at 98.945. Otherwise, the combination (both together) might trade at 5.5 slightly earlier.