» 30-Year Bonds 2010-12-20 Blog for Trading Success: Ray Barros

BarroMetrics Views: 30-Year Bonds 2010-12-20

The Bonds and the S&P appear to be lining up for a short trade.

You will recall that in a previous blog, I suggested that we had shifted from an inverse correlation to a direct correlation of Bond and S&P prices. If I am right we should see a rally into the end of the year for both instruments.

So you can appreciate the opportunity that is setting up, let me take you on a review of the 30-year’s price action.

Figure 1 shows a monthly chart with the linear regression bands, 1st, 2nd and 3rd standard deviations drawn in. Notice:

That for the most part Bonds stayed within the 3-standard deviation band.
The high at 141.275 on Dec 1 2008 was a 6-sigma event i.e. the Bond prices reached 6-standard deviations. Given that since the start of the up-move (May 1984) this has never happened, I marked this high as a probable secular high.
For this reason, I decided to sell the return to the 3rd std line.
This occurred in Sept 2010 and since the Sept high, I had been aggressively adding to my short positions.

Figure 2 shows that the target for my shorts was the Primary Buy Zone at 116.60 to 113.03 (basis CSI’s Perpetual Contract).However, as Figure 3 shows, I had strong monthly support coming in at 118.750. Moreover, the daily chart was showing a slowing of momentum as new lows failed to attract increased volume. For this reason, I placed a trailing stop for all my shorts above Wed’s high. On Friday I was stopped out of all positions.

This brings me to the opportunity I mentioned at start of this post. I see a high probability sell zone at:

The first, high probability resistance area is 125 to 124.22 (square theory) [Figure 3].
We see a confluence of retracement levels at 125 to 124.15. (Figure 4) and
We see a MIDAS line coming down that should reach 125 to 124 by end of 2011.

Should we see prices at 125 to 124 by Dec 31, I’ll be looking for a sell setup to take a trade.