Wednesday, October 17, 2012

How to explain today's price action in bonds

Between 8:30 and 8:45 AM, over 100,000 ZN contracts were sold into the market.  This is the most important piece of info we need to explain what is happening in UST space.  The avg price of that sale was 132-16.   The "liquidity providers" seem to have turned over their positions to fresh the looks of it at an avg price of 132-11+.  So, we have shorts siting in the money from 132-16, and slightly underwater longs sitting at 132-11+.  So far, the longs have been unwilling to try to run the shorts out.  Ultimately, one of these players will need to force the hand of the other.  For the moment, its hard to tell who that will be, but the pressure is on the longs.  I won't be adding to my long position near these levels because the probability of correctly determining the winner isn't better than 50/50.  I should be able to tell by the price action if one side makes a run for the other...but that will require staring at the tape for the next few hours.  The only reason to hold the position as we sit at the lows is because we are below the bottom of the inner bell curve using yesterday afternoons value area. 

If we use the extended bell curve, ZN can go all the way down to 132-00 before bringing in fresh buyers.  There is no way to know beforehand if that will play out.

So, to attract fresh buyers. either ZN goes down to 132-00, or stocks take a dive in the next couple hours.  Otherwise, given the positive housing data, we will need some bad headlines out of Europe, or something of that nature to reverse the downtrade in treasuries. 

On the flip side, if stocks stay strong, then today's longs will either blow out or just sit there. If the longs blow out, then the morning sellers will get their "b down" and potentially an oversupply condition.

The perfect "FU" trade today would be a pop in stocks which scares the longs, forcing them to long liquidate and sell into weakness.  If that long liquidation in turn brings the market down to 132-00 (it probably would) where fresh buyers come in to challenge the morning sellers....well that would be the perfect "FU" to the longs such as myself.

Going back to our trading rules, is it possible that today's sellers will create a "b down" and get an oversupply condition?  Its always possible, but this doesn't tend to be what those days look like.  Unfortunately, only time will tell.  Sometimes the supply conditions develop slowly, and the same can be said for reversals.  Those tend to be the harder days to trade.  Today is shaping up to be one of those days.  In either case, patience is required to find the answer.

govttrader out...

No comments:

Post a Comment