30 Yr Bonds 07-22-2008

In yesterday’s blog, I laid the foundation for today’s analysis of the 30 Year Bonds. I am most comfortable with a trade when the price action for a secular (long-term) trend accords with the economic picture.

I have said this in earlier blogs, but it’s worth repeating: I subscribe to the Austrian School of Economics. Their basis is a simple but profound one: Humans Act; and because it is human action, we’re unlikely to be able to place economics in the same category as the physical sciences – i.e. we won’t be able to reduce economics to a set of formulae. It’s for this reason that I subscribe to the approach.

The assumptions I made in yesterday’s blog were:

  1. Because of massive increases in M3 since August 2007, we’ll see higher inflation numbers in 2009. I expect to see double digit inflation threaten as measured by the US CPI.
  2. Since the US economy is already weak, this turn of events can best be described as stagflation in the making.
  3. Under stagflation conditions, bond prices and stock prices can move in the same direction i.e. there is no flight to quality.

With that under our belt, let’s turn to the charts. Figure 1 shows the 12-Month (yearly trend), CSI Perpetual data.


FIGURE 12-M 30-Year Bonds CSI Perpetual

The 30Yr bottomed in 1981; from 1981 to date, we have seen a 28-Yr bull market. But, the inability of the market to get to the top of the channel since May 2004 suggests that the turn down from January 2008 will mark the beginning of a bear phase. Note that this is an unproven statement. After all, the market could turn north and hit the top of the channel. But given the assumptions yesterday, and the position of the 13-Week (quarterly trend), I rate the move North as an unlikely event.

Figure 2 shows the 13-W position (quarterly trend).


Figure 2 13-W US Bonds, CSI Perpetual

Figures 2 & 3 show a number of behavioural parameters:

In Figure 2, we have acceptance below the top of the Value Area, 118.90. The 80% Rule states we should see the market go to the bottom of value, 109.9 before we see re-acceptance above the top of value. If the down move is to stall, it will most likely stall at the Point of Control, 113.75. So, any shorts instituted above Value, will have exposure i.e. the worst that can happen is a scratch trade.

Figure 3 shows:

The Ray Wave Count on the 18-D (monthly trend). We see a Running Correction at Wave 2. One close above 117.52 would be a warning the move is aborting. So we can center exit strategies around this price.

There are two areas where the move may abort:

  1. The confluence of 100% of the H&S and one of the First Wave price zones, 108.34. Note that this is below the bottom of Value. Once we have acceptance below the bottom of value, Market Profile Theory suggests the market should move to the 13-W Primary Buy Zone, 105.82 to 103.36.
  2. The confluence of a First Wave Price Zone and the minimum target for Wave 3 where Wave 2 is a running correction, 104.63 to 105.06. Note that this price area is within the 13-W Primary Buy Zone.

FIGURE 3 18-D Ray Wave Count 30-Year Bonds, CSI Perpetual
The statistical targets are not relevant at the moment. The normal 13-W impulse move runs for 26 to 52 weeks and for a move of 25.33% to 17.17%, I’d consider them after (and if) the 30-Year Bonds move to the 13-w Primary Buy Zone.

One last point. Last night’s price action shows that the majority of trades in the 30-Year still seem to be tied to the idea “S&P down, Bond Prices up”. We will need a number of high CPI to break the ‘flight to quality nexus’. So, it’s important to pick your spots to enter under these conditions.

Summarising this blog, I’d like you to notice:

  1. I explicitly set out my assumptions. This makes it easier to identify where a trade has gone right or wrong.
  2. I treat chart patterns as behavioural parameters i.e.they can fail. So, it’s important to identify the price zones and conditions under which I believe they are failing. These form my exit strategies.
  3. I identify my target areas for profitable exit. With the information, I’ll calculate my Risk: Reward. In addition, the targets play a part in my position sizing

From the questions I have been receiving, it’s clear you are using the blog as a trade advisory service. Not a great idea,folks. One of the reasons why 80% to 90% of newbies fail even though there are quite a few great services is because:

  • a ) The time frame may not suit the subscriber
  • b) The stop risk exposure (stop levels) may not suit
  • c) Most importantly in my case, I am not providing position sizing and trade management information – info that is critical to your success.

If this blog is to provide a public service, it is as a coaching tool. It’s best you treat this as that.

3 thoughts on “30 Yr Bonds 07-22-2008”

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  2. Hi Ray
    a couple of questions if I may impose.
    Can you go into a little detail on the area of ‘ucoupling’ of the bond/stockmarket inverse relationship. After a quick peruse of charts during my trading history, I realise that it is something that I haven’t witnessed in my trading timeframe. Flight to quality seems to be embedded in my belief system, ie it is a given, bsed upon my observations. I need to get a grip on how that mechanism changes. Is it a shock change, or does it go from inverse to neutral, to correlated in steps?
    Although the pattern shows up in the 30’s, is it the best instrument to trade. I know that you have in the past done analysis on the DOW, and traded the SP500. Is there any benfit in analysing the 30yr’s and trading say the 10yr’s that have greater volume, or the aussie 10yrs that have a lager point value and the inherant larger exposure to commodity induced inflation.
    Basically, it is a fascinating tie in with technical analysis, and the fundamentals of a situation and posssible outcome that is new to me, and I dare say a lot of investors. Does this add the initial momentum of the move? The expectation of flight to quality the doesn’t happen.
    I have been bumping my head on short trades in the Aussie 10yr bonds for over 4 years, wwith lots of scratch trades, and small profits, with the expectation that inflation will raise its ugly head sooner or later.

  3. Hi Stuart

    The latest decoupling goes back to the US recession of 1966 to 1982. Within that period there were instances in the DJIA and 30-year bonds. I’ll send you the periods by e-mail.

    I still trade the 30-yrs. I did a correlation check for you and found that given the correlation between the two, analysing the 30s and trading the 10s is feasible.

    I need to do a correlation between the 30-year and Aussie 10s. Will get back to you. But even if feasible, Australia would need to be in a stagflation situation and that is not the case at the mo.

    I’d bet on inflation in the US rather than Aussie – unless our new PM does something silly. Hawke/Keating and Howard/Costella did keep M3 below productivity, so inflation ought not to be the problem it will be in the US.

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