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...

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". 

Lets start it up again

So where does the market stand now?  Value has been setup lower today in UST.  After the weekly mode @ 132-04 attracted the market one time, today's high mode @ 131-27 has pulled the market back to its center of value.  A similar situation has occurred in stocks as 1407 has acted like a center of gravity for the past 3 days.  It isn't clear yet which way the UST breakout will go, so for now, I'm planning on waiting for the next move away from the mode to determine what my next trade will be.  On the 6 month timeframe, everything other than oil has converged...so no good info there.

Just for fun

If I had indeed sold ES @ 1417 (a dream) I would cover here @ 1402.  And, to add salt to the wound, if I'd got long 10yr notes again @ 98-05 (i thought about it), i'd get flat those here too @ 98-13.

Not that I did either of those things...tisk tisk...

Trying to play the chop...just sold my 10yr notes @ 98-07

So I'm flat and looking for the next trade (i won't retire on 6 ticks, but its more than enough to pay the rent).  The 29bln 7yr auction eclipses the 5bln 10yr POMO buyback in duration...so i'm content being flat for now.  Ideally, i'll have another chance to buy a dip later today, as I am still bullish on UST and bearish on stocks.

govttrader out...

1416.75 was the high in ES....i mised by 0.25

...maybe next time??

Update - i just bought 10yr notes @ 98-01

At the bottom of the weekly bell curve because of economic data, and there is 10yr POMO in 1.5 hours...feels like a good trade to me.

govttrader out...

Back to Micro Bonds- We hit the bottom of the weekly bell curve...BTFD

With 132-04 being the weekly mode..and yesterdays high of 132-16...lets do a little simple math.  16-4 = 12.  So, 132-04 - 12 = 131-24.  Where was the low his morning?  131-23+ before the Durable Goods number.  After the Durable Goods data (strong headline number - horrible internals, as the only strength was in a Boeing Aircraft order), the market dipped below the bottom of the bell curve (a gift) and has rebounded back inside up to 131-28 at present.  I'm expecting the weekly mode at 132-04 to reign in the market at some point today, so i like buying dips.

I'm still bearish on stocks (i'm selling ES @ 1417 if we see it), but this dip today in UST is a buy to me.  I'll bet that tomorrows GDP report will show the weakness that was hidden in today's Durable Goods internals.

govttrader out..

One of these things is not like the other....

Does this chart really need explanation??   Who is the odd man out??