Quick video this weekend on the Bond Market. Are we about to see a breakout in yields and a collapse in prices? If we do see this, personally, I don't think it's being driven by inflation expectations but more by the declining credit worthiness of the US and other developed economies.
If you're reading this article via email or RSS reader, then follow this link to view the Bond Market video on the website.
HIGH DEF VIDEO – MAY TAKE 15 SECONDS TO LOAD
Bond Market – Breakout in Yields? (8:57)
And here are the monthly yield charts for the 30 and 10 year US Government bonds. They're both butting up against resistance levels. Will the next Fed meeting cause a breakout?
Bond Market – Breakout in Yields? (30 and 10 Year, monthly)
Hope you're enjoying your weekend and good luck with your Emini trading next week.
I have no idea why this works … but significant lows in the Bond market are followed by significant lows in the stock market 20 days later. The chart below shows the Bond market and the blue vertical line shows what was happening 20 days ago. You can read more about the Bond market and Emini trading here.
Bond Market with 20 day Delay
My swing trading oscillators (TRIN, Put Call Ratio and Smart Money) have now all turned up. Check out the Emini daily chart below – Better TRIN early again.
Swing Trading Oscillators (Emini daily)
At the beginning of the month I was expecting a pullback in the Emini on the 135 minute chart. That pull back rally turned out to only be a one day event and we never got the pull back signal. This time I think we’ll get it – volume over the last week has been huge, sentiment is at an extreme low, the crude oil rally has cracked and valuations against the bond market are attractive.
Hilbert Sine Wave (Emini 135 minute)
Having said that, there was a lot of high volume churning going on at the end of today’s trade. We could see the Emini fall back at the beginning of tomorrow’s trade and I’m looking for support around the 1,230 to 1,235 level.
More Professional accumulation today around the 1,335 level – and we finally got the "End of Trend" signal on the 135 minute time frame (primary swing trading time frame).
"End of Trend" Signal (Emini 135 minute)
The "End of Trend" signal sometimes marks the absolute low (or high) almost perfectly – particularly when it coincides with a cyclical turn in the higher time frame (actually 2 time frames higher). However, in this case the weekly Hilbert Sine Wave is some way off making a cyclical low and so we’re probably going to enter a period of cyclical or range trading – as opposed to starting a strong trend move up.
Read the original article about "End of Trend" setups and multiple time frames here.
Final chart shows the Bond Oscillator which measures over- and under-valuation of the equity markets compared to Bonds. The Bond market appears to have found support but is not yet in an uptrend. The chart below shows the fundamentals might be starting to line up for a bullish medium term scenario.
Bond Market Valuation (Daily data)
You can read a longer article about Emini trading and the Bond market here.
We had a shallow retracement today then pushed higher
So what’s the problem? Well … Bonds fell hard today.
Bonds have been in a consolidation zone for 10 days (white bars) but dropped through a rising trend line today. If Bonds are on the way down, then the stock market is likely to follow – after a suitable delay.
Bond Market Drops (Daily bars)
Turning points in the bond market can forewarn of turning points in the stock market 20 days in advance. If that’s the case we could see a turning point in 2 trading days time or possibly in 9 trading days. However, these turning points in the Bond market are not well defined – so I might be reaching a little here.
In any case, I’ll be watching the Bond market to see if this decline continues.
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.
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.
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.
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.
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.
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.
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.
