Friday, October 26, 2012

Am I the only one who sees the weekly mode asserting itself?

This is the last 30 days of profiles.  I've drawn white boxes around the recent congestion zones that would make up multi-day profiles that could be combined into a single bell curve.  Note that each recent congestion zone lasts about 7 trading days.  While this is not a rule, it gives us a simple yardstick to measure the current trading region, and should help us answer the question, "what next."

Seems to me that we have probably completed the bell curve for this region (at the least, the most recent regions bell curve has been well defined).  The important question is, which way will the market break next.  Classic bell curve / market profile theory states that the market will look to fill in gaps that were left behind from moves away from previous longer period bell curves.

Since bloomberg only keeps 30 days of this data, I'll use my imagination and draw equivalent price region boxes on the 10yr note price graph going back 3 months.  We can just imagine the profiles with some common sense. 

Even with this added information, we still don't know with certainty where the next period's bell curve will setup.  The general pattern of selloff into 10yr and 30yr auctions followed by rally into month-end has not taken place yet in October.

I've talked to a number of rates strategists who think the extra-small Oct extension of 0.02 combined with the uncertainty in the Nov-6 election may mute the month end rally in UST that we have grown accustomed to.  If that is the case, then the current price region will continue to grow (range trade) until the election.  This would mean a very large move after the election as the concept of "filling the gap" will play out with even larger discrepancy between the current bell curve size and the "gap". 

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