Emini and Bond Market Valuation
In case you haven't heard, the Emini is down 60 points in limited trade on Monday. The close was 1,265.50 which suggests we might get an opening gap down on Tuesday of over 50 points. The last time this happened was after 9/11, shown below. Remember this will be shaking out volume and playing into the hands of the smart money.
Extreme Opening Gap Down: 9/11
John K. sent me an email asking about my bond market valuation comment here. With Bond markets rallying the Emini valuation against Bonds is very attractive now. The updated Bond market valuation chart is shown below. The over-valued areas are painted white and under-valued areas painted red.
Emini and Bond Market Valuation
You can read more about the Bond Oscillator and Bond market analysis here.
Good luck with your Emini trading.
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Bond Market Turning Points and the Emini
It's happened again! The Bond market nails a significant Emini turning point.
Bond Market with 20 Day Delay Line
I've posted previous articles about the correlation between the Bond market and the Emini here. Back testing shows significant turning points in the Bond market are often followed by turning points in the Emini 20 trading days later.
The chart above shows the Bond market with a blue vertical line showing what Bonds were doing 20 days ago. And right on cue the Emini took a tumble today, just like the Bond market did 4 weeks ago. The run up that we've had in the Emini over the last month also mirrors the run up that the Bond market saw leading to the turning point in early September.
If you're interested in the TradeStation EasyLanguage code for the vertical line and other Bond market indicators you can download them from this article about Bond market analysis and indicators.
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Bond Market and Emini Valuation
Bond market continues to advance and the Emini valuation becomes over sold. The Emini continued its decline, closing down 38.75 points at 1,443.00 on Friday. Meanwhile, the Bond market continued to rally in expectation of a rate cut.
Bond Market Chart
The chart above shows the Bond market bottomed in early June and broke into an uptrend in mid July. Bonds have now closed above 110, a previous support level. Trend lines on the Bond chart are drawn automatically with TradeStation code and colored red for uptrend, green for downtrend and white for consolidation.
Bond Market and Emini Valuation Chart
The chart above shows the Emini with valuation indicator added. The valuation level has now dropped to -11.3 and is at the lowest level since February 2003. Valuation levels below -6 are oversold and colored red on the Emini price bars. Overbought levels above +6 are colored white. You can read more about the Bond market and Emini valuation indicators here.
Bond market valuation shows Emini is oversold but …
The Emini has now dropped into oversold territory and looks attractive by historic bond market valuation levels. In addition, the latest Commitment of Traders data shows professionals continue to be long. So the fundamentals look good for an Emini rally. In addition, Emini volume has been at record levels over the last 2 weeks - another bullish signal. However, cyclical indicators have yet to complete on the downside and turn. So my best guess is that we have a few more days to go before we can start taking long trades.
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Bond Market Correlation and How to Measure Emini Valuation
Since April, the divergence between the Bond and Emini markets has been widening. The chart above shows the Bond Oscillator that measures Emini valuation against Bonds. This has stayed stubbornly above zero (over-valued) and peaked above +5 multiple times. These over-valued peaks are plotted as white bars; under-valued troughs (below -5) are plotted as red bars.
Over the last week the Bond market has bounced, while the Emini appears to have peaked and started a down move. As a result the Emini valuation against Bonds is coming closer to equilibrium. The current reading is +2.6, equilibrium would be zero. My best guess is that the Emini will continue lower over the next few days and we will reach the equilibrium / zero level this time.
You can read more about using TradeStation and Bond inter-market analysis here.
The Emini closed down 22.00 points at 1,527.00 on Wednesday. Yesterday's TRIN bearish divergence signal worked out well. GeorgeK wanted to know what the TRIN Oscillator was doing, so I've included the chart below. As you can see the TRIN Oscillator peaked on Friday and turned down on Monday (turning points are shown with white and red dots). So everything was lining up nicely for a short move - Bearish Divergence and TRIN Oscillator down.
An update on positions. The last trade was short 2 contracts from 1,523.25 on 8 June 2007. One contract was closed out at the 10 point profit target. The second contract had an open profit of over 19 points but never reached the stretch target of 1,500 and ended up being closed out at break even. Net result 5 points profit per contract. Greed got in the way of good judgment that time.
In after hours trading last night we got short 2 contracts at 1,553.00. One contract has already been closed out at the 10 point profit target. The second contract has an open profit of 26 points and we're looking to take profits at 1,525.00. Good luck with your Emini trading.
Thursday 7 June 2007Bond Market Nails the Emini Turning Point
The Emini closed down 28.75 points at 1,503.75 on Thursday. In yesterday's post I said "the Emini might not have bottomed quite yet" and "we have yet to see climactic volume on the downside." Well today we had a huge sell-off and volume was very large at 1.9 million contracts traded. Is there more to come? We need to see the Emini bounce and then test today's lows before the next upswing starts - a process that could take a couple of days.
Unfortunately, we were out of the market having taken profits on Wednesday. We were looking for a bottom to form today in order to get long but the Emini just kept sliding all day. As I've mentioned before - my biggest fault as a trader is being too early. In this case I was too early taking profits. I hope you made the most of today.
Finally, today's chart is of 10 year Bonds with the 20 day delay line superimposed. Turning points in the Bond market appear to lead turning points in the Stock market by about 20 days. As you can see from the chart the Bond market made a major high just over 20 days ago which we now know has been replicated in the Emini market. Once again, this proved to be an excellent timing tool for anticipating this last market downswing. Check out the article on Bond market analysis and how Bonds can be used to trade the Emini.
Wednesday 30 May 2007Bond Market Turning Point Nears
The Emini closed up 11.00 points at 1,533.50 on Wednesday. Huge 22.25 point rally from the low with well above average volume at 1.6 million contracts traded. Classic Larry Williams Oops trade today - with the open below yesterday's low and short covering driving the market up all day.
The long trade entered yesterday has worked out well. Took profits on half the position at our 10 point profit target. We're still long on the remainder of the position.
This upswing is not over yet and based on John Ehler's Hilbert Sine Wave has at least a couple of days to go. We are also approaching a Bond market turning point that happened 20 days ago, as shown on the chart above. The vertical blue line shows where the Bond market was 20 days ago.
I have written before about the 20 day lag between the Stock and Bond markets - in fact I recently wrote a long article about Bond inter-market analysis here but have not had the opportunity to reference it before today. The article discusses this lag, explains how to use TradeStation to do inter-market analysis and includes FREE indicator code.
The important point is that we potentially have a cyclical top coinciding with a Bond market turning point early to mid next week. We'll have to see how this turns out.
Selloff, Bond Market and Exhuastion
The Emini closed down 56.75 points at 1,396.00 on Tuesday. What a day and I hope everyone who follows this blog was short. Like Elliott Gould (Reuben Tishkoff) in Ocean's Twelve says:
"What, you think the stock market is some great mystery beyond the realm of human understanding? Didn't you see the signs? I saw the signs."
Well enough of that. Let's concentrate on what is going to happen NEXT. Remember, the focus of Emini-Watch.com is swing trading and holding positions for about 5 days on average before reversing. We made good money on the last leg down - is there more downside to come or should we be looking to go long for the next upswing?
The first chart (above) shows the huge Emini volume today - 3.2 million contracts traded, a record. I've also superimposed a Fibonacci retracement tool, starting at the low last July and ending last week. It shows we're close to the 61.8% retracement level of 1,384 - where we would typically see some resistance.
The second chart (above) is one I've never published before. As you may know I use 4 non-correlated, leading oscillators to measure trend. This indicator, labeled Trend Signals, is the combination of all 4 trend measures. It catches peaks and troughs quite nicely and signaled the down trend last week. It now shows we're heavily oversold and currently reads -213, on a scale that typically goes from +150 to -150.
The third chart (above) shows John Ehler's Hilbert Sine Wave on Emini daily bars. I've extended the time frame on this chart so you can see when the Sine Wave indicator declared this market in an uptrend - September 2006 (red colored Emini daily bars and above the breakout white dotted line).
In January the trend was broken and we went into a cyclical topping pattern, shown by the Sine Wave and alternating red and white dotted lines superimposed on price. The trend turned down 2 days ago, shown by green colored Emini daily bars. What is important is that the Sine Wave is about to cross and signal a cyclical bottom - most likely tomorrow or Thursday.
The last chart (above) shows the Bond market and two indicators. The first one, labeled Spread Oscillator, measures the valuation of the Emini versus Bonds. In short, we're now massively oversold. Today cash flooded into the Bond market as a safe haven and pushed Bond prices way up - and this is on top of an uptrend started at the end of January. The second indicator is the blue line superimposed on Bond prices. I have found in my analysis that equity prices tend to lag the Bond market by 20 days - and 20 days ago the Bond market bottomed and started it's current up trend.
In summary:
- Climactic selling volume today
- Emini close to 61.8% Fibonacci retracement level
- Trend indicators have bottomed but not ticked up yet
- Cyclical low either tomorrow or Thursday
- Emini valuation versus Bonds now very attractive
- Bond market in up trend and turned 20 days ago
A long post today, I know. I hope you find it useful. Good luck Emini trading tomorrow.
Wednesday 25 October 2006Bond Market Hypothesis
Discussion of 30 year bond market hypothesis today. Emini closed up 4.5 points at 1,389.25 on Wednesday. The advance continues in a very measured way. In this post, I would like to put forward a bond market hypothesis. Interested?
Emini waited for the Fed today
Today's action was almost identical to yesterday's. The Emini opened down 2 points at 1,382.75 and then dipped during the morning to hit a low of 1,381.25. Once again the Emini rallied quite strongly in the afternoon to hit a high of 1,389.75 by the end of the day and close at the highs at 1,389.25. Both range and volume were again below average at 8.5 points and 900,000 contracts respectively.
Fed policy statement came out today and as usual I didn't bother to read it. The lack of activity that we saw in the morning was the market waiting for this release and once that was out of the way the market was able to make a clean break upwards. Days like this affect traders differently - some enjoy the unusual volatility and trade like demons, while others step away and don't bother to trade at all.
Let's test an Emini vs. Bond relationship
In fundamental terms there is definitely a connection between the Emini and the bond market. When interest rates fall bond prices rise and falling interest rates are bullish for the stock market. However, if you look at a long-term chart of the S&P 500 and compare it with the 30 year bonds - they do look different.
What I have found though is that turns in the bond market precede turns in the Emini market and the lag is somewhere around 20 days. I certainly don't use this observation as a means to trade, but I do keep it in the back of my head. 20 days ago the 30 year bond market peaked, consolidated for a week and a half before dropping quite precipitously. The bond chart is shown above with a solid blue line indicating 20 days ago. Let's test this observation over the next couple of weeks and see if my hypothesis has any merit at all.
And lastly …
We did get the John Ehlers Hilbert sine wave “complete” pattern last night – across all 3 timeframes which is quite interesting. Again, just an observation, not a signal - just wanted to follow up on yesterday's comment.
Follow this link to read an article on the relationship between the Emini and the Bond market.
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