Monday, August 13, 2012

Market Profile Update - 133-23+ is still controlling ZN...for now

Lets do a quick review of the past week, and present a trading plan for today.

Over the last 2 weeks, the long end of the US bond market priced in a concession for last weeks 10yr and 30yr UST auctions (see how the 10yr yield collapsed up to meet stocks on the 9th, the last day of UST auctions).

After the last auction (the 30yr on Aug 9th), treasury yields outperformed stocks, also as expected, alleviating the auction concession (auction concession = dealers front-running the US treasury).

Given this mornings volatility, the top of the range for ZN is now 134-00...this should be too high if the 133-23+ mode is still controlling the market.  I would like to see ZN go sideways in this 133-23+ area for a couple hours to verify there was not large buying this morning around 133-17/19 area.  If we do not go sideways around 133-23+, then selling 134-00 will be difficult psychologically.  On the flip side, this mornings weakness in the bond market (ZN traded below the Micro VAF [Value Area Floor] before returning to the mode) will also make getting long ZN difficult if we do not go sideways at 133-23+ for some amount of time again, validating its high mode status.  For those who were buying ZN during this morning's dip at and below the VAF (133-19+ --> 133-16), Market Profile and Bell Curve rules dictate getting flat at the mode (133-23+). 

While seasonals are generally positive for bonds (Month End Extension in 2 weeks, and Fed POMO 10 out of the next 15 trading days remaining this month), Market Profile indicates that the market has moved sufficiently in price to normalize the undersupply condition that was created in the 30yr bond auction.  So, our bias will be to buy sufficient dips in the long end of the treasury market and get flat at the mode, rather than getting long just anywhere under the mode.

Why this hesitancy to not just get long if the seasonal bias is to be long?  That's because, as traders, its our job to find trades where the probability of losing money is as small as possible.  It is a mistake to try to answer the question "how much money can i make".  The smarter question to ask is, "what position can i take that has the smallest probability of losing money, and might also be sufficiently profitable?"

So what does all this leave us with?  The easy money to be made was buying ZN at and below the VAF (133-19+) this morning (7:00-->8:30 AM) and getting flat back up at the mode of 133-23+.  This has come and gone (Rule #1 --> first trade of the morning is always the best trade).  We now need to wait, give the market some time to breathe and figure out if 133-23+ is still price controlling the market.  If the ZN market shoots up to 134-00 without some prior activity that would be described as "being pulled back down to the 133-23+ mode" then i don't think i will be selling it, thou it would be tempting.

more later..govttrader out...

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