Wednesday, August 22, 2012

New trend confirmed in bonds...undersupply condition

This was sneaky pattern that I didn't see right away.  I'm reducing the number of filters I use so this pattern won't escape attention again.

Yesterday morning there was heavy trading around 132-10 in ZN that lasted for 4 hours.  The market traded vertically from out of that level to 132-20 and then went sideways.  This technically is a "P up" of initiating buying.  Normally, this doesn't take 4 hours of sideways activity (the buying) before the vertical movement takes place.  However, we can now see yesterday for what it was.  Today we saw a supply distribution as yesterdays sellers (the liquidity providers to yesterday's large buyers) were stopped out of their positions, which has repriced the market higher in both price, time, and volume.  This process of liquidity providers covering their positions via short-covering is a cascading it creates a new population of liquidity providers, and potentially, a new population of short covering...potentially. 

So, what's the trade from here?  Wait for the bulb of today's "P" to form, and attempt to buy the bottom of the bulb of that "P."  In an undersupply condition, there is no guarantee for another supply distribution...however, there is a "guarantee" that there will not be an initiating selling event tomorrow (well, as much a guarantee as trading provides). So, the worst tomorrow should bring is a range bound day...and the best is another "P up" day followed by a vertical supply distribution.

At present...the bottom of the bulb of the "P" looks to be 132-28.  So, all things being equal, that should be the next buy zone where i'll try to get long.

govttrader out...

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