Wednesday 25 October 2006

Bond 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 Bond Image

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.