Wednesday, October 31, 2012

This storm will be a good test of Market Profile

The 10yr treasury future (ZN) has 3 days of "price discovery" all agreeing on a single price zone as the new weekly mode (132-20 --> 132-22) with volatility 8 ticks below the lower mode region and 10 ticks above the higher mode region.

So far, it seems to me that the market (and market profile) are telling us that we have a new medium term center of value.  If this becomes a weekly mode (highly probable), then we should have a good 18-24 ticks of range trading opportunity over the next few trading days.  Since there was little opportunity for traders to front-run the month end buying trade, it will be interesting to see what this afternoon looks like, since the US Treasury index extension is so small (0.02)  In Market Profile terms, the market looks like it is filling in a gap in the recent months price action.

There is a very good video at the cmegroup that describes how the market tends to fill-in gaps in the building of longer term profiles.  If we combine that model with our own, we can see that the move from one bell curve to another tends to occur from large buying /selling activity.

Just by eyeballing the past weeks price action, it looks like on Friday Oct 26, there was large buying activity with heavy volume between 8:30 and 10:00  AM around 132-10 that pushed us out of the prior bell curve and into this current bell curve.

My expectation is for this current bell curve to hold for the rest of the week (range trade for the next couple days), but next week the next round of auctions will start to weigh on the market.  I'm hoping there will be a pop towards the end of this week providing a good entry to setup a short for next weeks 10yr and 30yr bond auctions.

govttrader out...

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