Tuesday, October 2, 2012

Market Coiling - upcoming breakout move should be big

Historically, when the treasury market coils around a single price zone in a tight coil for multiple days in a row, the breakout from the center of value tends to be large. 

As you can see, the UST market is indeed coiling around the 133-14 --> 133-19 price area in ZN.  With employment data coming out this week, this coiling activity may continue until NFP on Friday.  This should create a pretty strong move post NFP and will make Friday --> next week an exciting time to be in the markets.  With the Feds recent 40bln MBS QE program, the 7yr sector of the treasury curve should see general support (average equivalent duration of MBS)...but as the richening of MBS has demonstrated...this flow based MBS QE will not trade 1-for-1 with treasuries.

While I never pretend to have a view on what the employment numbers will be...I am happy to create a trading plan for the possible outcomes for the employment data.  The ideal plan, as my prior postings articulate, include some type of rally / repricing in UST to the top of the bell curve that allows us to make a sale near the extended top of the bell curve (looks to be 134-15 in ZN).  I'll try to post again before ADP tomorrow morning with more detail on this plan.

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