Great results in US Treasuries

As a long-term stock bear, I am being forced, with a painful expression, to watch stock markets zoom upwards. But no matter what I do I just cannot force myself to trade from the long side. It must be one of my trader biases that I write about!

But better to keep powder dry than to risk an uncertain trade. I simply have not been able to find a decent entry point in the Dow using tramlines.

The flip side is that the US Treasury market – in particular, my favourite 30-year long bond – has been trading inverse to stocks (in true ‘risk-on’ mode) and has been falling. And it has been presenting some mighty good trading opportunities! My trading methods have really been working here, thankfully.

The market followed my analysis

In early December, I had positioned short. From there, the market declined by over 400 points in a clear five-wave Elliott pattern. That confirmed the larger trend was down.

The third wave contained five minor waves and there was a positive momentum divergence at the low.

If I was trading in the very short-term, I would be looking to take profits in the 146-147 area.

But I decided to stay with this trade and look to add to positions on a rally, which duly appeared.

The reason was simply that I am long-term bearish the bonds and wish to build up a long-term position.

Here is the chart:

US Treasury bonds spread betting chart

(Click on the chart for a larger version)

The market has reached very high levels over 150 and my analysis suggested that the market would turn from around this level to start a long-term downtrend.

I watched the market rally in an A-B-C (tan bars) to the Fibonacci 50%-62% area where I was looking to position short again.

And indeed, the market turned and started down.

The reason behind the large gap

When the stock markets opened strongly on 2 January, Treasuries opened with a large gap down. Because of near-24 hour trading, we do not often see gaps in the charts – trading is almost continuous. But because of the extended holiday, orders were piled up ready for the opening. The majority of sell orders created the gap down.

In the olden days (before 24-hour trading), gaps were common (in fact, individual stocks are not traded 24 hours and do display gaps).

Typically, a major gap (as this was) is filled in before the trend is resumed. That caused me to look for a rally back towards the gap. And if the rally could turn near a Fibonacci level, I would look again to add to my two short positions.

US Treasury bonds spread betting chart

(Click on the chart for a larger version)

And sure enough, the rally was a clear A-B-C and turned just above the Fibonacci 50% level where I added another short trade.

The market made it back only to the underside of the gap, leaving the gap unfilled. This is significant, and shows the market really wants to work lower.

So far, it’s textbook.

Keep an eye on all markets

As I write today, what are the prospects from here?

US Treasury bonds spread betting chart

(Click on the chart for a larger version)

These are my excellent tramlines on the hourly, showing the clear A-B-C rally.

With the market having just broken the centre tramline, I must be looking at a move down to the lower tramline. Conveniently, this is also the area of chart support marked by my pink bar.

But there is quite a lot of congestion in the 145 area, so I must be prepared for more work in this area.

What could get the market moving lower is an immediate corresponding rally in stocks. But with the Dow pushing the giddy heights at 13,600 and flashing bright lights of “Overbought!”, this may not occur right away.

I missed the boat on the Dow, but am making up for it in the T-bonds. I advise all traders to keep an eye on all markets that are connected to your favourites – they may be offering you great trading opportunities that you may be missing.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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  • Bronco Bill

    Sorry John I dont follow the US Treasuries so forgive me to comment on the Dow.
    The close today was of great interest as it is up against the top of a downward sloping “tramline” for the fourth time.
    This to me is important as its shown on a long-term monthly chart.
    The bottom tramline is drawn connecting the lows in 1998, 2002 and 2009. Copied and moved up the line connects the high made in 2007 and the two in 2012 and today.
    Also since 2011 the RSI is near overbought and has been diverging with every new high made on the Dow.
    I can only think that if the Dow goes much higher than todays close of 13650 and stays there for the next month or two I shall have to rethink my bearish stance.

  • Mike S

    Hi John,
    Thank you for all of the extremely helpful commentary across a number of markets.
    I was wondering if you have or could explain a little more how you use the COT figures when assessing sentiment.
    Do you generally take the opposite stance to the Non-Commercial herd? i.e. if there are more shorts than longs you would be looking at long trades rather than short?