Thursday, August 9, 2012

Lets get Micro - the micro value area floor of today's bond market

Given the lack of large moves today both stocks and bonds, I thought it appropriate to take a look at the smaller micro bell curve.  In my previous post, i described the larger range for the past couple days..indicating 133-00 on ZN would be the bottom of the extended bell curve.  Well, if we zoom in onto today's bell curve..we see that 133-06+ is the bottom of todays micro bell curve

Again, the million dollar question (literally), which bell curve is controlling the market today.  So far, we are hovering at the micro value area floor of the bell curve.  I read this 2 ways.  First, nobody wants to sell the market below this level (who wants to sell something cheap...logic dictates buy cheap...sell rich).  For that reason, we probably won't get below the micro value area floor before we go into the 1pm 16bln 30yr bond auction.  For those who are short from above, this is the smart place to cover your short.  Of course, there are always some who decide to buy their bonds from a dealer before the auction..those who don't like the uncertainty of tail vs stop risk averse types.  They will push bonds above the micro value area floor...but that price action tends to be short lived.  The real question though, is "will the auction tail"?  Market profile can't answer that question, but it can provide a structure for the question.

Here is the Market Profile structure.

1) Is the market below the center of value (yes)
2) Are there global macro trends pushing this price action (no)  (stocks are unch...Europe is quiet)
3)  Has something occurred to change investor sentiment (don't know)

If there was demand for UST paper right now, we would be going into the auction either at, or above the center of value for some part of the treasury curve.  That is not the case.  It might be scary, but this argues for a tail.  Then again, for those gamblers out there...this auction might be the best chance to buy some cheap paper.

And there is the rub...this is a gamble.  If i was still sitting in my dealer seat...i'd bid to come out of this auction long (getting to buy the bottom of the bell curve after a sweet 2 week concession...nice)....however...i'm not.  How the market performs post auction will enable us to determine how we will trade treasuries for the next 2 weeks.  So even for those who will not participate today, there is plenty to learn from the markets price action.

good luck...govttrader out

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