Bear Trap Set - Bonds Set to Rally

CBOT:US1!   T-Bond Futures
The Long Bond has seen a sharp 6.5 point selloff during the past 20 Trading days.

This has turned technicals and trends down, (including our own Trend indicators)- and you can be sure the trend following algos, Hedgies, and CTAs are piling on the shorts here.

Not so fast though for Bond Bears - We are seeing a number of signals that at minimum a over sold rally is due.  Lets take a look at the setup.

1 - This 6.5point 20 day sell-off is long in the tooth Statistically speaking. Since 1993, over 6.212 trading days, our Actuarial Tables show us that over a 20 Trading Day Interval, this decline ranks in the 93rd percentile. This doesn't signal a end to the fall, but it does show us this decline is due to expire soon.

2 - On the Terrible jobs print on Friday, a bear trap was set - Running all stops and getting the trend followers short on the breakdown, only to immediately reverse.

3 - The COT report shows that Commercials bought/covered over 50k contracts last week. This scores a 100% on a 18m+5yr basis. So Dealers are on the buy here. One concern here is that historically, Bullish Commercial weekly positioning correlates with <em>negative</em> price action in Bonds- Meaning they have been early when buying big. It must be noted that this is the chink in the proverbial armor of the Bull case.

4 - Similar action was seen in safe haven currencies Gold + Yen.

If one is short bonds, you can't feel very comfortable with this action. As a trader, put yourself in their shoes - you'd want to protect the sizeable gains on short bets over the preceding month.

Expect to see short term trends turn positive and the algos to kick in their trailing stops - This should be good for at least the standard 38-50% Fib retrace which would take us to approx 155, or 3 points higher. Here is a low risk way to play this.

1 - Buy 1 Dec ZB Future at 152 currently

2- Buy a 152 by 150 Put Spread for approx DR of .78 or 25/32. A selloff from 158.3 to 150 or 8.3points within a 40 trading day interval, would put this decline in the 93rd Percentile of all selloffs in that Time Interval going back to 1993.

3 - Sell the 155 Call for 38/64 or .593.

The Net cost of protection down to 150 is therefore .187, while we leave ourselves 3 points upside.

Exit the entire structure on any hourly close below 150. Your R/R here is minimum 3-1.

Please visit our blog for more detailed analysis and Alchymist Charts and Actiarial tables

Good Trading,

very good analyse !
Where did you find COT report for US Bonds and the Bund (German bond) for example (FGBL) ?
Mr_Dent pring

Thanks -

The CFTC issues the weekly commitment of traders which you can download from their website - This has all US futures including the US 30yr bond, although I am unsure about the bund.

I developed a proprietary Tracking and scoring system for this across all commodities, along with many other tools, in my platform Alchymist. You can see more on my company blog and website.

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