The latest Traders in Financial Futures report released last Friday showed Leveraged Funds have net purchased over 25k Futures contracts - This 4wk change scored a very strong 86% Relative Strength score on a 18m basis, and took their overall net position to a 92% 18m score.
However, when analyzing go forward performance once Leveraged Funds have hit bullish extremes in positioining in the 30yr, it is actually quite negative. 20 days forward, after a 90% + Net Position score is hit, we see that prices move higher by at least 1.0625 points and lower by at least (1.9375) points 70% of the time.
And this is exactly what we have seen over the past week - Price fell by 2 + points from 145 to a low of 142' 21/32 - So the predicted 70% decline has been achieved - However, the expected 70% price advance has yet to be achieved . If Bonds continue to follow form, we would expect to see a move back towards 146 in the next 3 weeks.
Even though the intermediate and long term picture for the 30year looks terrible, we are seeing some bullish technical developments.
1) Our Adaptive 23wk Channel is flattening after trending down over the past 8months, with price closing above the low channel line for the past 7 weeks (i.e. intermediate bottom type action)
2) Oscillator did not confirm the May 14 lows - This divergence signaled a weakening of the downtrend.
3) Reverse Head and Shoulder pattern being painted on the charts - This argues for a completion of the right shoulder at the 147.5 level, and a breakout could send the 30yr back towards 155 ,confounding bond bears.
We believe this bond selloff is almost over and are looking to position long here. You can go long bond futures at 143, and hedge this with a 142 by 140 put spread, as we believe the May lows will hold through the next 2 months at least, and possibly much longer. Once we get a 2 point rally, sell a covered call 2 points OTM which would basically offset the cost of your hedge.
This gives us 4 points upside vs 1 point downside for 4:1 R/R.
If we are wrong and prices reverse and close below 141, stop out by covering your short put and selling a 143 covered call. In this scenario your loss would be approx 1.5 points vs 4point upside for a still respectable R/R of 2.5:1.
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