Bonds have duped bears once again, signalling that the obituary that has been so widely written, might once again be premature.
We've long held the view here at 3ptCapital that bonds can continue to rally, alongside equities, just as we've seen since the election last year, and moreso, going all the way back to the depths of the financial crisis.
So while analysts and traders look at the Fed & rates for clues to the next direction for bonds, we simply point to the unprecedented (and continued) ramp up of Central Bank balance sheets, and the resulting distortion to all types of asset classes, including fixed income. This printing will be continuing into next year, and many years to come afterwards, which means we'll have plenty of chances to trade both the long and short side in this market.
Currently we are seeing signs that it is time to go short. Lets take a look at the setup.
First let's look at the technical picture for a couple of clues:
1 - This recent sharp, snap back rally, has seen price advance 4.5 points in 9 Trading days, from lo to high. Looking at our actuarial tables, measuring all rallies over a 10 Trading day interval going back to 2004, this rally ranks in the 92nd percentile. While this is not a sell signal in and of itself, it does show how extreme this rally has been.
2 - In looking at the above chart we can see typical algo action where price rips through a prior high (or low) and then stalling. We can use this as a pivot for trade entry for our short.
3 - Our proprietary oscillator is flashing a sell, further confirming the overbot status.
4 - Lastly, lets zoom in to a hourly chart to see what the algos are painting currently:
We can see a mini Head & Shoulders top now being painted by the algos - This topping pattern should lead to a 1 to 2 point retrace if/when the neckline is broken.
After a sharp 10day rally, we can expect the inevitable retrace to occur, commencing any day.
Bearish traders can short March Bond Futures at 153, and hedge this with a 153-156 Call spread which should cost approx 1 point.
Close the entire position on a hourly close above 154 1/2, basis March Futures. Our target here is 2 points to the downside, for a R/R of 2-1.