Thursday, September 6, 2012

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..

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