The Day of Reckoning

Folks we have the ‘Day of Reckoning’ in the US interest rate market.

The swing chart below shows:  For yesterday, a daily range (including Globex) of 3.42. To place the range into perspective, the current weekly range is around 2.9 with a standard deviation of around 0.90.

In short, in one day we saw a daily range that mirrored the upper boundaries of a normal 5-day range!

US Bonds (CFDs) Daily 18-day and 5-day Swing

What caused the volatility?

The tanking of US stocks. Traders were covering shorts and going long. Are they betting the FED will cut rates? Recent FED history suggests that if we see a downdraft in the stock market, the FED will come to its rescue.

The problem for the FED is it has little room to move. In its view, the economy is picking up steam, and it still has all those reserves sitting in the St. Louis Fed.

Asset Monetary Base

Notice that before QE (2008), the deposits grew at a steady rate. After QE, deposits rose parabolically. At some point, they’ll need to repatriated or moved into Main Street. The FED needs to do this release gradually enough to hit its inflation target without causing hyperinflation.

My belief is it will do nothing – at least for the moment. It may delay the expected rate rise in March – that’s about three weeks away, so we’ll see. But, it’s unlikely will see a rate easing before then.

So, what we have is the US Bond market in an 18-day downtrend AND incredibly overbought. If the FED does not intervene, we should see a test of the lows – even if the downtrend is to abort. Great place for a short – which I effected just before the last night’s close.

The 290-min chart shows the ideal stop (CFDs) would be above 150.36; that’s too big a risk for me. So, I have lowered them to above 148.90. I also have a ‘soft’ stop – a stop based on what I don’t want to see if my scenario is incorrect.

US Bonds (CFDs) 290-min

My target is 142 (H&S target on the 18-day).

I may exit part of the position at yesterday’s low. I’ll do this if the Linear Regression Band shows momentum divergence on the 60-minute or 290-minute.

And oh….I almost forgot – I’ll talk about US Stocks tomorrow.