Time to shift trading strategy

Month-end for September has come and gone, and now it is time to look forward.  The Fed has just released its schedule for the next month of UST POMO purchases, and it is bond heavy.  However, the next concentrated market transaction will be the 10yr and 30yr auction the week of Oct 11.  Between now and then, selling strength in UST should be the order of business.  We have a full week before NFP, so hopefully, Monday and Tuesday (POMO 10yr and 30yr) will see a pop of strength that we can sell into.

Mode shift - time to get long

With 133-15 the new ZN mode, i am going to try to get long around 133-09, which just so happens to be the original mode from yesterday, in addition to being the bottom of today's initial bell curve.

There is a battle in stocks..tyvm

While some would say that every day in the market is a battle, today is especially so.  Today's dip buyers in stocks are trying to run the early morning short sellers.  Unfortunately, the real shorts were set yesterday afternoon, and I don't see how they will be run today.  However, I'll thank them for the effort...and hopefully, combined with todays 5yr auction will provide enough push down on my 7yr notes to bring us back down to the 133-09 mode in TY (that might shift up to 133-12 in an hour).  I'm supremely confident that stocks won't make a full reversal today, but I hope for a valiant effort.

govttrader out...

Sold another unit of 7yr notes @ 99-24+

The market is still random (with a bullish bias going into month-end).  The 5yr and 7yr auctions should temper the rally.  I'm not looking for a selloff..just a small retracement.  Avg price of my short 7yr position is 99-23.  Returning to the mode should take 7yr to 99-20.  The other side (if there is a reversal in stocks) would take 7yr to 99-15.

Out of my 7/10 curve trade

Just exited my 7/10 curve trade at 60 bps (initiated at 62.5).  I'm not planning on putting on a steepener...in fact i'll probably look for another opportunity to leg back into the trade.  However, we are at the top of the bell curve and i like getting short the market up here...so exiting a bullish trade makes sense.  I am left short 7yr notes from 99-22.

Still hanging on to my 7/10 trade...unwind tonight?

With the late day selloff in stocks and resulting bull flattening rally in UST, my 7/10 trade has worked out nicely.  There was very little risk, and the trade has returned about 6% so far (trading a leveraged account  2bps on the curve (from 62.5 --> 60.2), and 28 ticks on the outright duration (98-23 --> 99-19)).  I'm thinking that because the late day movement in the markets took place after Europe went home, there will be a community of traders who find themselves off-sides when they login tonight / tomorrow.  I'm hoping this will provide another bid to the UST market, however short lived it may be.  If this happens, then I will sell my 2 units of 10yr notes...and then bid below to buy back my 7yr notes in the expected volatility...thereby legging my way out of my 7/10 trade.  I'm really not sure what levels to use here.   My gut says that 10yr notes could get as much as another 6-10 ticks higher in price in a low volume rally (99-28 ??)...which is what i'm hoping for during Tokyo hours.

Stocks vs bonds should provide a good trade in the next week

With the long-end of the UST market staying strong for the last 5 days, and a strong month-end extension coming up this week, I expect to see a solid divergence continue to build between the S&P and 10yr yields.

While its much too early to set anything in stone...i expect to make a sale in treasuries either late Friday afternoon, or sometime next Monday.  Theoretically, the divergence model would indicate selling both stocks and bonds to play for the correlation trade...but if the divergence come the end of the week looks more like the opposite of mid August, I expect most of the movement to come from the treasury leg of the trade.  Way too early to decide on this..but its good to keep the trade in focus as we approach month end so I can watch the price action for hints in market sentiment.

govttrader out...

USTs remain strong as the mode continues to shift higher

Monthly cyclical forces continue to push treasuries, shifting and re-shifting the mode higher as we go.  I am still sitting on my trade of long 2 units of 10yrs vs short 2 units of 7yrs (not DV01 weighted...so net long 0.5 units of 10yr with a 7/10 flattener).  With the grind higher type of price action we have seen over the last 2 days, my primary trading style of fading the edge of the bell curve has missed much of this uptrade.  I'm considering adding another cyclical trade to my portfolio (small size...perhaps 0.5 --> 1 unit out of 6) to hold for almost the entire month (short for  half - long for half).  I'm targeting 58 bps for my 7/10 curve trade...but I plan to be out of the trade before month end

govttrader out

So i'm sortof flat...but not really

I just sold 2 units of 7yr notes at 99-02...which leaves me net long 0.7 units of 7yr notes (or 0.5 units of 10yr notes)...and in a 7/10 flattener.  If the market sells off, i'll be tempted to buy back my 7's leaving me long my 10s again.  If i had to be long, i still want to keep my long in 10yr notes, as they have recently cheapened, and there are Fed POMO buybacks next week.

more later...govttrader out

7/10 flattener??

I'm still long my 2 units of 10yr notes from an avg price of 98-176...i would have liked to sell them in the uptrade just after the 11am buyback, but 10yr notes have cheapened on the curve today.  With the 7/10 curve at 62.5 bps...i just think that is too steep.  So, when i get flat today i will most likely sell 7yr notes instead of 10yrs, putting myself into a 7/10 flattener. 

I'm not trying to be greedy...so i'll only be aiming to make 1.5 bps on this curve trade (though I'd feel justified aiming for 3bps).  For the moment, i'm still long my 2 units of 10yr notes (the equiv is 2.7 units of 7yr notes).  I'm hoping to sell 7yr notes at 99-01+...if stocks trade down 2 points (1455.5 on ES) we should get there.

Bought 1 more unit of 10yr notes on the london open

There was a quick dip right as the Bund markets opened at 2:10AM and 10yr notes traded down to 98-14+, so we bought our 2nd unit at 98-15. 

I still expect the high mode above the market to reign us in.

govttrader out...

Just bought the dip in 10yr notes

The treasury market is still random (with a bullish bias given we are approaching month-end), and the dip we just saw after the 10yr TIPS auction was from TIPS traders who found themselves needing to sell duration after they bought more bonds than expected in the auction.  This has happened before, and the result was the same...downtrade post auction for the next few hours.  The last time this happened in the same type of setup, the entire post auction downtrade was entirely reversed by the following morning.  I expect the same to happen this time as well.   I just bought 1 unit of 10yr notes @ 98-20+ (the equiv of buying ZN @ 132-13).  The ZN center of value is 132-22+...and i expect that level to reign in the market sometime before tomorrow morning.  That should put 10yr notes around 99-00.  If there is another leg to the downtrade, then i would expect to buy another unit of 10yr notes around 98-15...still confident for the downtrade to reverse by the following morning.

Will the mode shift today...probably

Given the move in stocks and all the volume that has traded today, its likely that today and Monday will result in a new center of value.

FYI..beware 3pm today

If the market does not get some serious reversal going soon...the 3pm hit on the 30yr bond will be massive today.

So a long liquidation it is...

Yesterday's buyers at the bottom of the bell curve...they just went / are going thru a long liquidation. 

So lets ask the question...what do we expect now?   After the last long liquidates...there should be a vacuum which sucks the market back up to the high mode / center of value.  The model doesn't have a place for initiating selling near the bottom of the bell curve.  I expect the lows to be in for the day...and I will try to buy a dip to get back to some ZN mode around 132-07 (at least once).  This is not the highest of probability trades...there is a lot of confusion in the markets today, and a lot of volume is trading hands.  I'll be trading with 1/2 units today.

Not so easy to read this morning

Lets try to explain yesterdays price action combined with the price action this morning.  The initial down trade was a long liquidation (7's had richened on the curve going into FOMC...so i understand unwinding that position).  There was probably some momentum selling from those who were disappointed that QE3 didn't involve additional treasury purchases, but that should be inconsequential in the whole of things.  Once the long liquidation was complete, there was a vacuum, filled by buyers, buying the bottom of the bell curve, and no marginal sellers.  Taking the market back to the top of the bell curve..also understandable as all the long liquidation had been completed, and there were no more sellers.  The downtrade this morning means that the buying at the bottom of the bell curve yesterday did NOT create an under-supply condition.  This would mean that the market is random now, seeking out a new center of value.  Its still unclear what yesterdays bottom buyers plan to do.  Stay tuned for that.

I'm still flat...just waiting for more clarity.

Back to Market Profile - forget the rest

Duration traders - If you were just looking at a chart of 10yr futures yesterday (or for the whole last week), and didn't see or know about any of the headlines, what would you think?  Lets rewind to pre-NFP and see if we can tell a story: 

Going into NFP, there was an over-supply condition in the treasury market - a large player sold the market the day before, and the market distributed lower overnight as that large seller held their position...going into NFP at the lows...NFP surprised, the market gapped up thru where the sellers had originally set their shorts and those shorts were forced to short cover.  After the short covering was over the market slowly fell back down over the next 3 days as we headed into long end supply.

Going into the next "unknown" risk event, the FOMC statement, the market was "random" (ie...there was no over or under supply condition embedded in the market from a levered player).  The price action post FOMC statement went from the top of the bell curve (where we entered FOMC) all the way to the bottom of the bell curve on the "re-price event."  When the bottom of the bell curve was offered, it was bought in size (heaviest volume was on the way back up around 132-06 +/- 2 ticks...lets call it at minimum 100k contracts bought by a single player).   Then, not only did the high mode of 132-14+ reign in the market, but the market continued thru the high mode all the way back to the top of the bell curve.

If we go back to our model trading rules, we will see that fading the first move to the outer edge of the bell curve during "re-price events" when there is no embedded supply condition, is the bread and butter of the model.  The second rule we will notice is that when we watch the market travel from one extreme edge of the bell curve to the other, we need to watch for the possibility of large initiating positions.  Yesterday saw large buying near the bottom of the bell curve, which took the market all the way to the top of the bell curve.  You might say that yesterdays buyers post the FOMC "re-price event" got a "P" up.  The next question is, will their buying create an under-supply condition?  We'll be able to figure this out by sometime today.  If today's sellers are unable to take out yesterdays buyers, then the buyers position will be cemented, locking in the under-supply condition, and allowing us to enter the market buying dips.  The key level should be the mode prior to entering FOMC...which was 132-14+...if that level holds today (which i expect it will), then the buyers are in control and we will need to find a way to get long the market.

govttrader out...

So Treasury traders are dissapointed...while Stocks and MBS traders are happy

Can Market Profile help us trade this volatility?  With the 2 day ZN mode of 132-14 and today's volatility, it looks like 131-30 should be the bottom of the bell curve, with prices below valued as "too low".  The big question is...was the selling in ZN enough to create a new oversupply condition creating a new trend, or will the day's high mode of 132-14 reign in the market?

30yr auction comes thru 1.5 bps...no big surprise

Just like we talked about...there was a significant short base going into this auction, and a healthy concession both outright and on the curve.  I wouldn't call this result a big surprise to anybody.

Next up, Bernanke at 12:30...which should be much more interesting for price action.

What does "be afraid" mean today?

A number of people have asked me...what did i mean when i said "be afraid"? 

My meaning is thus...dealers are required to bid for their pro-rata share of the auction...so..with 20 primary dealers and 13bln bonds being auctioned..each dealer is required to submit bids for 1/20 * 13 = 650mm bonds.   If everyone goes into the auction short bonds (it certainly feels that way), and many of these participants choose to "bid thru" to cover their short position, then the probability of the auction "coming thru" (also referred to as "stopping short") gets pretty high.  In these instances where the auction comes thru, participants who sold the market just before the auction and cover in the auction lose money (the difference between their avg short cost and the auction stop).  Most participants who go into an auction short submit "thru bids" to ensure they don't miss the auction (they do this because in a Dutch auction, everybody gets the same auction price...thus the potential for a tail).  In cases where this happens, there are usually some traders who "missed" the auction, and they tend to scramble to buy bonds in the secondary market.  These types of misses can be very costly, as the 30yr bond can get very jumpy when the market feels a short squeeze coming.  This type of price action (lots of selling pre-auction) is great for prop traders who don't actually bid in the auction...but trade the setup, get flat for the auction, and trade the post auction price action instead.

I'm not saying this auction will stop short...i'm simply saying that the outcome of the auction is a gamble with  hard to predict outcomes...and if your short position was not established from much higher prices...then you are playing with fire bidding in the auction to cover your short.  If the auction comes thru 3 basis points (not uncommon) thats roughly 21 ticks...which tends to sting if you don't have a chunk of change in the bank.

The main purpose of this blog is NOT to try to call every move in the market.  Rather, the purpose is to identify high probability trading opportunities with low risk vs high reward scenarios.  Bidding in today's auction to cover a short is not low risk.  I would call it high risk / high reward.  Now, if the auction tails (a dealer dream) then the secondary market usually provides a chance to buy bonds close to the auction stop shortly after the auction.  This is not always the case..but it happens more often than not.

Scary price action in front of the 30yr bond auction

Price action like this, where the 30yr bond's price action is almost the same range, in TICKS, as 10yr futures, is just ridiculous.   Everybody and their mother wants to sell strength in the 30yr bond (including me)...so there is NO strength to sell.  On the curve the 30yr has just steepened another basis point on very low volume, while 10yr futures (ZN) are at the top of their bell curve.

When the market has this much consensus, rarely do good things happen for the dealers.
Be afraid...be very afraid...

30yr auction setup

With 8 hours to go until the 30yr bond auction, its time to talk about setup.  The long end of the treasury market has seen a pretty decent concession built it, with both 7/10 and 10/30 curves steepening over 4 basis points in the last week.

Combine this with the outright drift to lower prices in the market ahead of what the stock market seems to be an imminent announcement of QE3

It took treasuries a week to get back in line with stocks after that massive short covering event on friday.  However, the movement in stocks was all based on QE3...which should be both stock and bond positive.

Now, while i expected (and called) for these 2 lines to converge, the Fed watcher in me thinks that the market is of 2 separate minds.  If the market wants to price in QE3...well stocks are doing that already.  QE3 would be mostly a mortgage led event, which most closely resembles 7-10yr UST paper...so the 7yr paper relative strength is not surprising...but I would like to go so far as to say that I expect much more 7yr strength than we've seen for pricing in QE3.  Since that hasn't happened, there is no reason to think that 30yr paper will be treated any different over the next 8 hours than it has been for the past 72. That is to say, nobody seems to want it.

With that background in mind, lets turn to market profile.

Even in the 7yr sector (no 7yr auctions this week), Market Profile has seen the center of value walk down and down to lower prices for this auction week.  This means that QE3, while a risk, has not been the focus of market participants. With the largest DV01 auction coming up this morning, I don't think most market participants will be coming out of the auction long the paper they bought...most will want to come out flat, which means more auction concession selling.  We are just about at the top of the micro bell curve in 7yr paper as i write this at 4am, but the 30yr has barely budged (7/30 curve has steepened 2 bps so far today).

With a 13bln 30yr auction coming at 11:30, there is no reason to buy 30yrs in the secondary market.  So, using 10yr futures as our guide to selling 30yrs is difficult today, because of the QE3 implications.  The 30yr bond has already sold off and cheapened on the curve, which means most of the setup for this auction has already taken place.  The best trade setup for those not yet involved would be a pop in the 30yr from a profit taker before the auction.  There is no guarantee we will see that, but it is something to keep an eye out for.

This is probably just a long winded way of saying, i plan on selling strength today in the 30yr and covering in the auction.  I'm pretty confident that i'm not the only one with this plan.

govttrader out...

10yr auction comes on the screws with 0.5 bp tail @ 1.764

No surprise here.  Now lets start thinking about tomorrows 30yr auction.  Lets hope for some strength that we can sell into.

govttrader out

Important Calendar Item - early 30yr bond auction

Tomorrow's 30yr bond auction takes place at 11:30 AM (not the normal 1pm time slot) because of the 12:30 FOMC meeting announcement.  I'm sure that a lot of market participants are not aware of this odd scheduling item.  This should make selling strength after today's 10yr auction a viable strategy for setting up for tomorrows 30yr bond auction.

more later...govttrader out

pre-10yr auction thoughts

The setup (UST selling) for today's auction has lasted 3 solid days post-NFP, with no real backtracking or short covering events.  So, there is a pretty solid short base going into this auction.

This creates a significant community of short traders who will probably cover their shorts in today's 1pm auction in 35 minutes.  This argues for a strong auction...probably coming on the screws  If i was going into this auction short, as all of my dealer friends are, i would be bidding thru to cover my short and come out flat.  I have a hard time today predicting the post-auction price action at the moment, so i'm not involved yet.

With the FOMC statement coming out just after tomorrows 30yr bond auction...that will be a much more interesting and difficult auction to trade.  More thoughts about that later today / tonight.

govttrader out.

For all those correlation traders out there

I mentioned this stocks vs bonds trade on Friday after the post-NFP short covering event (trade was selling stocks and selling 10Y UST).  Its time to wrap up this trade and take profits.  ES is 3 points higher, and 10yr yields are 14 bps higher.

Just for fun, lets calc the P&L of this trade on 1mm notional.
1mm 10yr notes requires 45k of capital (standard treasury market capital ratio)
1mm ES exposure = 14 ES contracts = 14*4375 = 61,250 CME initial margin requirement

so, $106,250 was the initial capital required to put on a position of 1mm notional (short 1mm 10yr notes and short 14 ES contracts)

If this position was unwound at current levels
10yr + 14 bps  P&L = 900*14 = +12,600
ES + 3 points  P&L = -3 * 14 * 50 =  -2,100

net P&L = $9,500

9500/106250 = 9% gain

not bad for 4 days of sitting on ones hands.

anyway...

The recent selloff in US Treasuries is wholly accountable to this weeks 10yr and 30yr auction setups.  The majority of those setups are complete (still some last minute setups currently taking place, but they are in the minority)...so don't let these auctions pass without exiting the short ES and short 10yr UST correlation trade unless you want to have a trade on thru tomorrow's FOMC meeting.  Once these auctions are out of the way, I don't see a significant trend taking us to higher yields.

While I (like most people) am bearish on the US economy in general (its hard not to be with so many people unemployed and underemployed), I don't think fighting the central banks ability to print money (thereby creating inflation in risk assets...aka ES) is the best idea for a day trader.

Also, with the FOMC meeting occurring before tomorrows 30yr bond auction, there's no reason to hang onto the trade thru the FOMC risk event if you don't know what the FOMC statement will say.

The risk of a QE3 announcement  tomorrow (however unlikely i personally may think that to be) makes having this position a "coin flip risk."   That is to say, I don't like taking coin flip risks...especially when I am trading with leveraged money.  I prefer 80% or better risk vs reward ratios...and betting on FOMC statements just doesn't fall into that ballpark for me.

And, just to make my position clear...i think the FOMC will disappoint tomorrow (no QE3)...which should be bearish for both stocks and UST...so that gut call would mean keeping this trade on.  However, I've learned my lesson regarding gut calls...they are fun to talk about...but as a rule i don't trade them in my leveraged account.

govttrader out...

Going home flat

If i was still at a dealer, i might go home still a little short the long end, but, i'm not at a dealer anymore.  Hopefully there will be some volatility early next week allowing me to reset my short.

govttrader out...

Short covering complete

So trading volumes in the bond market are tapering off, and it feels like the large short trader from yesterday has covered their position.

So how do we trade the market now?  With no levered supply condition embedded in the market, i expect some high mode to develop and reign in the market.   However, there are still auctions next week to contend with.  There is a community of traders who don't begin their pre-auction setup until after NFP...so if we sell strength now, we should find community in that effort.  I'll be waiting for another opportunity to sell strength...the day is young.

govttrader out...

If you ever wondered what violent short covering in the treasury market looks like...

Not going to repeat here what you can read over at zerohedge.  However, if you ever wondered about what govt bond traders can do to a market when they want to exit a position...here it is

For all those correlation traders out there...i can feel you licking your chops.  Yes, this looks like a good opportunity to sell both treasuries and stocks.

govttrader out...

So what happens after short-covering?

Today's NFP print of 96k repriced the market too high for yesterday's shorts to hold onto their position.  As i write this, they are in the process of covering their short position in a very small window of time...its just how it works when you have a position of 200k 10yr futures.  Its impossible to tell exactly how high this short covering will go.  However, we do know that after the last short covers, the market should fall back down.  So, we just need to wait for the price action to show this before we can get involved.

I agree with the chatter that this NFP print increases the probability of QE3 from the Fed, but really, Market Profile doesn't care.  Price action is price action.  Now i just need to wait it out and see what the next high probability trade is.

govttrader out...

Market popped too high - i'm not selling this

We might see yesterday's large sellers go into short covering mode...which will be a violent vertical uptrade.  I'm not selling into this.  Just watching for now...

So we have good news and bad news - which do you want to hear first?

The good news - we didn't lose any money...after-all, we were trying to sell the market, and we correctly identified the oversupply condition...so pat on the back...strategist job well done

The bad news - i didn't sell the market because there was no strength to sell into.  I think if i had woken up before 2:45am  i would have realized this and sold the bulb of the "b" which was 132-23  (for some strange reason, i've had difficulty waking up early lately...maybe its the whole "summer in NY" thing).  Unfortunately, i didn't, so i didn't.

However...next trade.  Non-farm payrolls comes out at 8:30, and this usually creates some volatility.  With the oversupply condition firmly in place, there is a large community of longs out there who don't want to be long.   My call for the post NFP price action is the same as my prediction for last nights price action...sell into strength.  There is no guarantee that there will be strength...but if there is, i want to sell into it.

PS...one more thing...somebody slap me on the upside of the head for not getting short at least 1 unit at the bulb of the "b" after an oversupply condition.  We only get 2-4 of these a month, and they would pretty much make my year all on their own.  Next time....


govttrader out...

1st "b" down logged - next step is to sell strength overnight

Now comes the waiting game...waiting for some market participant to "call the bottom" and try to buy the market.  There is no guarantee this happens...but this pattern is what gives bell-curve market-profile traders like us the chance to sell a "pop"and enter into a position with the best possible risk vs reward.  If the market does not "pop" then we will deal with that outcome overnight..possibly by selling the bulb of the "b".  However, it is too early to call for that.

For now, the "pop" would be something on the order of 132-26+ --> 132-28+.  If this is a real oversupply condition, then the next leg down should be on the order of 12-14 ticks from the bulb of the "b"...taking ZN to around 132-10.  Recall from earlier this week we described the potential outcomes of a supply condition.  While there is no guarantee of a supply distribution taking us to 132-10, there is a 95% chance that the outer edge of the bell curve (in this case 132-28+) will hold.  So, pray for an overnight lift giving us a chance to get short.

govttrader out...

Could today's selling create an oversupply condition in bonds?

With stocks screaming, its no surprise that treasuries are selling off.  However, the important question is...has enough paper been sold in the bond market to create an oversupply condition for tomorrow?  You can see from this chart that the volume traded this morning during this downtrade is well above average (high volume amid vertical downtrade = indicates heavy selling). 

With stocks moving in the same direction as 10yr yields, there is no macro reason to fight this potential new short term trend.

The model has picked up today's activity as a potential initiating selling event, thereby creating the possibility of an oversupply condition.  In an oversupply condition,  the next event would be sideways consolidation, followed by another leg down.  This also happens to be occurring during the auction setup period (another reason to be short the 30yr bond).  As we have reached the bottom of today's extended bell curve bottom (132-24), i expect some sideways price action before the next potential leg down.

If all i'm saying is,  the trend is your friend, then why blogging at all today?  Well, there are a few people who have asked me if i expect the high mode to reign in the market again.  My response has been, not this time, the market looks like it has turned and we could easily see another 7-10 bp selloff in the longend.  With payrolls tomorrow, imagine a large community of players unwittingly long from today's heavy sellers.  These semi-unwilling liquidity providers are now HUGE long, and they don't want to be.  That long liquidation will be the catalyst for the next leg down.

My only hope as a trader to get involved is for some sideways consolidation to take place, creating some volatility down here in the bulb of the "b."   This hopefully would allow me to sell a small pop.  Not sure what price that is just yet...time will tell.

govttrader out..

Looks like the ZN mode is shifting down

While its too early to tell for sure, it appears that the treasury market is coiling around a lower price base today.  I expect by the London morning that we will have a new mode, probably closer to 133-12 than 133-17.

Wow...perfection...the high mode reigns in the market AGAIN!!!

BBG leaked headlines out of the ECB about Draghi's plan caused a very short lived market spike...but the bell curve holds

I'm flat again...133-16+/17 still the high mode..still price controlling the market.

govttrader out

A perfect bell curve day

I was eating breakfast and i missed the 2nd half of the morning...looks i might be in the market for an intern.  The bottom of the bell curve holds and the high mode reigns in the market AGAIN (should have bought that dip to the bottom of the bell curve VAF).

Anybody with ideas on where to hire an intern who wouldn't mind working from 5am-->12 noon in NY?  An intern who wouldn't mind doing things like getting breakfast, watching TV and keeping me entertained during downtime so i don't wander off the reservation?

Next big event should be the 11am 10yr buyback...


good luck trading...govttrader out

Just covered my ZN short @ 133-15+

Just another random churning morning session.  The early morning bell curve was a pretty little picture of symmetry today.  I'm not sure if the market will go higher or lower from here...so i got flat just a tick below the mode @133-15+ (my avg sale price was 133-21+).

From here its a crap shoot.  The market could trade all the way down to the bottom of the bell curve...or we could go back up to test the highs.  Without more price discovery, its prudent to get flat, take profits and wait for the next high probability entry.  Perhaps today's 10yr buyback will provide another opportunity to sell new highs...that would be my favorite trade setup.

govttrader out...

Sell the top of the bell curve? I just did.

So the market seems to have given us a pretty symmetrical bell curve thus far (with today's high mode just a couple ticks lower than yesterdays high mode).  The top of today's bell curve thus far is 133-22, and I just sold 1 unit there.

The market has drifted higher this morning after some PMI data out of Europe and comments by Van Rompuy (comments which seem to be empty to me...perhaps the market was expecting something more substantial).

With the 10yr buyback at 11am today, I don't expect the market to fall apart (that happened already with yesterdays 7yr buyback).  So, my expectation (and the models) is for for the market to return to the mode (133-16+/17) at which point I will be getting flat.  This is a small range (only 5 ticks) so only using 1 out of 6 units of risk.

good luck trading....govttrader out

After the undersupply condition is alleviated - what next?

Recall when we talked about the monthly bond cycle...the 2nd half of the month is dedicated to playing from the long side as the market rallies into month-end.  Well, now we are in the 1st half of the month, and that means playing from the short side in preparation for the bond auction.  The Fed POMO buyback schedule complicates this dynamic a bit, but on the margin, the concentration of the auction should overcome the spread out nature of the Fed purchases.  Combine that with the knowledge that a large position was sold into the market today (long liquidation of sorts).  This should make selling pops the trade du jour.  So, first we wait for the center of value to pronounce itself...then we figure out the market volatility, and then we sell the top of the bell curve.

This completes the first course in Market Profile and Bell Curve trading.  If enough people convince me, maybe i'll write a book or do a lecture series.

Later dudes...

What happens after the model identifies an undersupply condition?

Recall that we identified an undersupply condition earlier this morning...and there was another on Aug 21 (2 weeks ago).  So, now that we have identified the condition...how do we trade it?  There are a few possibilities, and they are all .

1. The large buying overpowers the market, and the shorts experience unduly large amounts of fear causing massive cascades of short covering.  This creates a supply distribution (vertical price movement)..normally the same size or larger than the original vertical price movement.
2. The undersupply condition does not create massive fear in the shorts.  This results in sideways price action.  In this situation, the large buyers that still need to exit will be the offer in the market all day long to exit their positions whenever there is strength.
3. The day after the initiating buying, there is an attempt at large selling.  In this case, there are 2 possibilities.

•  The sellers overcome the short fear in the market...forcing the large long to "long liquidate."  This is just like short covering bursts, but in the opposite direction.

• The sellers are NOT able to overcome the short fear in the market, and the day's sellers throw in the towel, taking the market back to the top of the bell curve.

You should notice that the majority of these possibilities are still dependent on price action.   The only thing that is guaranteed when we identify an undersupply condition is that the first trade cycle will provide an opportunity to exit a long position above the mode.  We don't know until the trading day has progressed which type of day it will be.

Why this lesson today?  Because today is one of those days where the undersupply condition will not last past the day.  The large longs are the offer in the market today.  They are selling into any strength.  How do we know?  That's going to have to stay one of my secrets for now.

For the moment...the trade now is to sell the market if it gets to the top of the VAC (which is now 133-22)

good luck trading...govttrader out

Following the model, just bought 1 ZN unit @ 133-16+

At the very least, I expect ZN to now trade up to 133-22+.

Not much else to say, except...here we go again....

Market Profile Signal - Undersupply condition confirmed - buy the dip

Unfortunately for Friday mornings large buyers, when Draghi briefed the EU Parliament on Monday, these were the headines:

*DRAGHI SAID BUYING SHORT BONDS NOT STATE FINANCING, GAUZES SAYS

Sept. 3 (Bloomberg) -- Buying short-term bonds isn’t state financing, Draghi told European Parliament panel, parliament member Gauzes says.
●    Draghi spoke to closed-door meeting today

 This means that, if Draghi is correct, then the ECB can and will be printing unlimited Euros to finance state governments (Spain and Italy) for 3 years at a clip.  This would of course mean that Europe is saved and the global depression solution has been found.  I'm sure the Germans won't be happy about this, but hey, if the EUR isn't dissolved, then printing really is the only way out.  This has caused a decent selloff in German Bund futures (3/4 of a point).

The corollary in the US bond market is similar (we have sold off a bit as global bond yields tend to move together...but not as much as Germany).  We will know more details about the ECB's plans in the days to come.

Moving on to Market Profile, we see in the US Treasury market that a new mode has formed in ZN @ 133-18+ (Dec contracts).

This would put the bottom of the bell curve @ 133-12 (the overnight low has so far been 133-14).  I bought a few ZN contracts at 133-14 (just a lucky guess) before they returned to the 133-18+ mode.

As things stand now, I see 3 forces in the market from Draghi's comments, all dependent on confirmation from Germany.

1. Potential solution from the ECB will make peripheral European govt bonds rally
2. Global stock markets will rally from the expectation of Europe being saved 
3. Safe haven securities such as German govt bonds and US Treasuries selloff.

This "printing" would of course cause a pretty hefty currency devaluation..but hey...thems the breaks.  Hopefully, the Swiss would have bought some chunky amounts of gold with their EUR reserves.
 
However, there is another force, and that is the undersupply condition that I believe is now embedded in the US bond market, caused by Friday morning's large buyers @ 133-02+.  These large buyers bought so much paper (creating so many shorts) that the US bond market should have no choice but to trade to higher prices as these shorts will need to flatten out their positions before non-farm payrolls number on Friday.

The comparison between these 2 forces (Draghi vs Friday's large buyers) is simple...fear of the future vs positions held now.  While fear of the future may indeed prove to be correct in the long term, in the short term, its positions that matter...and positions are short (except for that one pesky large buyer).  Also of note is the yield spread between US Treasuries and German govt bonds.  This spread has been holding around 25-28bps...and just recently has compressed to 17bps...i believe due to the undersupply condition embedded in the US market from Friday's buyers.

(note the "vs DE" column = yield spread to German 10yr in bps)

So, the mode has been set, the undersupply condition confirmed, and we now just need to buy any dip below the mode.  The micro bell curve around this mode (so far) puts a micro bottom at 133-16+, and a real bottom @ 133-12.  So, If we get another chance, that's where I will try to buy the market in size this morning.  Recall there is a new POMO schedule, with 2 buybacks today (7yrs and then 30yrs).  These POMO buybacks combined with the undersupply condition should prevent the market from selling off beyond the bottom of the bell curve as just identified.

Month-end cyclical dynamics.  Recall that the cyclical trend in bonds is to rally into month end, and selloff into the 30yr bond auction.  As we are now past month end, there are those who sold the pop on Friday playing the cycle.  While these shorts from Friday's high may prove to be correct by the bond auction, that is too far away.  For today, right now, there is an undersupply condition in treasuries, which means the short term trend should be to higher prices.  I expect this undersupply condition (and thus the short term bull trend in bonds) to be over before Friday morning, and probably before the end of Thursday.


good luck trading...govttrader out