Web’s Weekly Roundup Knowing the Future(s) June 6, 2015 Presenter: Web Begole

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Web’s Weekly Roundup Analysis of /ES (S&P 500 Futures) and forecast Analysis of /DX (US Dollar Futures) and forecast Analysis of /6E (Euro Futures) and forecast Analysis of /CL (Crude Oil Futures) and forecast Analysis of /GC (Gold Futures) and forecast Knowing the Future(s) – A Surface Primer on Futures

/ES Futures (S&P 500) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: Notable Pattern: Near the bottom of June’s value area and noting a pattern of the same low move at the beginning of each month in Forecast: As the monthly-initial-low- move pattern continues, I can only call for a bounce from these levels. First target to the up-side is First target to the downside is

/DX Futures (USDollar Index) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: 9.235pts Notable Pattern: Started June well above value, has come down and tested below the POC for June. Forecast: Having seen moves like this before in other underlyings, I tend to distrust a rally like this. My target is down to over the next few weeks. Upside target

/6E Futures (Euro Futures) YTD Opening Price: Current Price: High: Low: O/C Change: pts H/L Range: 0.165pts Notable Pattern: We’ve explored the entirety of June’s value area now – an area that gapped up from May. Forecast: If my expectations in the /DX are correct, I believe there is more upside from here with VAL acting as firm support. Upside target 1.18 Downside target limited to 1.11.

/CL Futures (Crude Oil) YTD Opening Price: Current Price: High: Low: O/C Change: -0.30pts H/L Range: 17.11pts Notable Pattern: Chop continues just barely below value for June with resistance living at the arachnid at 60. Forecast Should the /DX fall back lower I expect Crude to find support and rally higher to the area as first target. Lowside target at 55.43

/GC Futures (Gold Futures) YTD Opening Price: Current Price: High: Low: O/C Change: -14.5pts H/L Range: 167.6pts Notable Pattern: Trading below June’s value area, we are at the lowside of the building consolidation zone. Forecast: Given the above information, again I see support in /GC portending a decline in the /DX. Upside however looks limited to and downside target is

Looking Ahead Overall: Good jobs numbers lead to a significant boost in the Dollar on Friday, but interestingly Crude oil (which should move inversely to the dollar) also got a large boost on Friday after OPEC’s meeting determined everything will stay as it is and rig counts continued to decline. The Greek bundling of payments to the IMF for the month lead to weakness in the Euro further boosting the Dollar index. While the S&P continues to flounder, my focus is very much on the USD which gives me technical and global reasons to be a bit suspicious of the recent strength.

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Knowing the Future(s) A Primer on Futures The futures (like options) are a derivative product based on an underlying. Futures are contracts that can be written and bought and traded much like options – there is no limited supply except for the liquidity of the market. Futures are traded for a number of reasons: Commercial Hedgers – These are industries that have a vested interest in the buying/selling price of the product and use the future to lock in prices now for the future. Speculators – The leverage involved in using a derivative product like the futures allows the futures market to act as a strong but typically short-term speculative vehicle. Market Hedgers – The futures can be used to hedge against a portfolio that may be heavily weighted in certain categories. Like options, futures have an expiration date. There are many types that can basically be lumped into: Index, Currency, Commodity, and some others Unlike equities, the futures are actively traded (on the whole) 23-hours a day Monday-Friday The CME has official pit sessions for futures and each category has different opening/closing times. Each future contract has its own unique qualities – the USD amount per tick (fraction of point), USD amount per point, expiration dates, and the confusing aspect of Contango & Backwardation 11

Knowing the Future(s) A Primer on Futures Buying a futures contract allows you to buy the underlying item at expiration for the price the contract was purchased at however there is no exercise or assignment risk as it extremely rare that a futures contract is held through expiration. (Your broker will not be happy if you’re holding a contract through expiration) Futures are highly leveraged products. Using them, one can participate in the movement of an underlying by putting up little more capital than the CME over-night margin requirement (many brokers provided discounted margin for intra-day trading). EX: E-Mini S&P Futures Control 50 Shares of SPX With the SPX at 2100 that’s a notational value of $105,000 of capital under control The current overnight margin for one contract is $4,600 Because of the margined leverage, not only are there large profits to be made in the futures, but the risk is just as substantial. Without proper hedging, losses can mount in the futures very quickly and beyond any “initial investment” (as arguably, there isn’t any.) Other notes: Contango & Backwardation: Contango: When the back month futures contracts are trading at a higher price than the front month Backwardation: When the back month futures contracts are trading at a lower price than the front month Many futures also have options that are tradable any time the futures are trading. Futures options are an effective way to speculate on a direction in the futures with less exposure to algorithmic stop running as well as having a defined amount of risk. 12

Knowing the Future(s) Just some of the most actively traded futures are: 13 ON Margin ReqValue Per PointTick SizeValue Per Tick E-mini S&P Futures (/ES)$4,600$ (4/pt)$12.50 Gold Futures (/GC)$5,500$ (10/pt)$10.00 Copper Futures (/HG)$3,410$25, (2000/pt)$12.50 Natural Gas Futures (/NG)$2,200$10, (1000/pt)$10.00 WTI Crude Oil Futures (/CL)$4,675$1, (100/pt)$10.00 E-mini Nasdaq Futures (/NQ)$3,960$ (4/pt)$5.00 Dow Futures (/YM)$4,290$51 (1/pt)$ Year Bond Futures (/ZB)$3,740$1,0320’01 (32/pt)$ Year Bond Notes (/ZN)$1,485$ ’005 (320/pt)$15.63 VIX Futures (/VX)$6,215$ (20/pt)$50.00 Euro-Dollar Futures (/6E)$4,299$125, (10000/pt)$12.50 Pound-Dollar Futures (/6B)$2,145$62, (10000/pt)$6.25

Knowing the Future(s) A Primer on Futures Other notes on futures: Derivatives On Derivatives: Many futures also have options that are tradable any time the futures are trading. Futures options are an effective way to speculate on a direction in the futures with less exposure to algorithmic stop running as well as having a defined amount of risk. One must take care to note the unique properties of the options in a particular futures contract EX: A /CL Call marking $1.99 will actually cost $1,990 to buy (not $199 like an equity option) Futures options also expire typically a few days before that particular futures contract expires. The expiration happens at the official pit close of the final trading day of that option, not necessarily at the end of the market day. Notably many brokers will provide some margin relief of a futures position if paired with opposite deltas using options on the same contract. (ie: Covered Calls, Protective Puts/Calls, Verticals, etc.) Contango & Backwardation: Contango: When the back month futures contracts are trading at a higher price than the front month Backwardation: When the back month futures contracts are trading at a lower price than the front month 14

Knowing the Future(s) A Primer on Futures Other notes on futures: Contango & Backwardation: Contango: When the back month futures contracts are trading at a higher price than the front month Backwardation: When the back month futures contracts are trading at a lower price than the front month EX: Contango /CLN5 (July 2015) Trades at /CLQ5 (Aug 2015) Trades at /CLU5 (Sep 2015) Trades at The price of crude oil in the near term is cheaper than in the future. EX: Backwardation /ESM5 (Jun 2015) Trades at /ESU5 (Sep 2015) Trades at /ESZ5 (Dec 2015) Trades at The expected future price of the S&P higher in the near term than the future. They will all move at some relative in the same direction, but the difference between the contracts will change over time. Some traders will track the movement of the months in relation to eachother, and by going long the front month and short the back month (or vice versa) simply play the spread between the months (a futures calendar). This has some margin relief as well. 15

Knowing the Future(s) A Primer on Futures Other notes on futures: The Roll (Contract Change Event) As I stated earlier, brokers are not happy with traders holding futures through expiration (I suppose some commercial hedgers may) and this causes significant action around contract expiry. The roll happens when the amount of active volume increases in the next month futures contracts and surpasses the current month’s – sometimes days before expiration, sometimes on the day of expiration. Think of the roll like this: If you have a short contract on /CL and need to roll your contract to maintain your position, you will need to buy back the current month’s contract and sell the next month’s. If the overall sentiment on a contract is short – ie: if speculators are all short – one may see a massive up-bid in the front month contract and sell-off in the next month contract during the roll. The action can be quite volatile. (This could be an opportunity for a calendar spread, buying the front and selling the back month) 16

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