Wednesday, August 8, 2012

Market Profile seems to indicate coiling around value

Staying with our favorite ZN contract, it looks like the market is coiling around the center of value (133-20+ now) (this is what we expect when the market is tethered to a value area).  With global stock index futures seeming stable (melting off perhaps..but not moving vertically), perhaps we will have another bite at the apple to sell the bond market before today's UST 24bln 10yr auction (1pm NY time).  The probability of this trade working is greater than 50%, but not as high as was the first opportunity at 5:30 AM this morning.  So, given that, If ZN trades up to 133-23+, I'll take a shot and sell 1 unit (rather than the max of 6 units).  So, to recap, the goal will be to sell ZN @ 133-23+, and then get flat at 133-18+.  We'll just have to wait and see how the market performs over the next couple hours.  And just for everyone's FYI...the absolute top of the value zone is 133-26+....this is the level where we would attempt to make a sale using all our remaining leverage...assuming the market reaches this level from random "low volume float" and not from large volume buying.

I also want to reiterate that this is no longer a maximum high probability trade.  I read the probability as greater than 50%, which is why I will attempt the trade (selling ZN @ 133-23+), but I will not use my maximum leverage, as that is reserved for maximum high probability trades like the one described last night and then occurred earlier this morning.

-Market Events-
There are 2 significant remaining market events today, and 1 tomorrow
Today, there is a 1.5-2bln 25-30yr FED buyback at 11AM, followed by a 24bln 10yr UST auction.
Tomorrow, there is a 16bln 30yr UST auction.

These 2 auctions tend to generate some amount of selling interest as dealers tend to go into the auctions short, and then buy in the auction to cover their short.  Since everyone knows this, there is always the possibility for market participants to try to run the dealers out of there position in an attempt to cause a short covering event.  This doesn't happen every-time, but when it does it tends to be quite painful for the primary dealer community (and anybody else who goes into the auction short).  As we have not yet seen buying interest in the market (from observed trading volume), we can say that this has not been attempted yet.  Its always a risk of course, so something to keep an eye on.  On the flip side, the dealers tend to take down 40-50% of the auctions, and so some amount of that of selling is already "baked into the cake" so to speak.  Now, whether the dealers have already setup their short positions, or if they still need to...well that is something that we won't know until later.

With the 30yr buyback at 11AM occurring just 2 hours before the 1PM 10yr auction, there is a certain inclination to wait for that event to be over before selling the market in anticipation of the 10yr auction (the 10yr auction is also a much larger duration event).  However, this is repeat game theory in a poker like setting (when everybody has the same information ahead of time, there is natural pressure to attempt to game the system), so these things can never be assumed or taken for granted.  Its reasons like these that make trading with a model during the overnight session so attractive.  This poker / game theory type trading environment only occurs during NY hours, because that's when the large institutional volumes are active in the market.  This allows technical models like mine to perform above expectations during the overnight (mostly London) session as the market movement tends to occur on very low volume.  When we say very low volume, we're talking in the hundreds of plenty of volume for small guys like myself...but not enough for the multi-billion dollar funds that tend to dominate the popular media.

Anyway, back to the regularly scheduled program.  ZN contracts have been circling 133-20+ for the last 3 hours in an ever tighter coiling pattern.  You just never know....anything can and will happen.

good luck trading...govttrader

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