Bonds becoming bearish

August 16, 2016 03:14 PM

Finding trades, opportunities to make money, is what technical analysis is all about. Therefore, it is often very beneficial to combine long- and short-term analysis to improve timing, and therefore gain better control of the “risk of ruin” when initializing trades. The 30-Year Treasury Bond monthly offers a good example of this technique.     

In June, prices closed at a new long term, monthly high for prices. The June high and close are above the old January 2015 high.  Therefore, in Wyckoff terms, is the monthly price action a “breakout,” and the beginnings of a “jump across the creek [JAC],” which could substantially extend the rally. Or instead, is it an “upthrust,” which is an ending price action than will end the trend? Notice what happens next. The price spread for June 2016 is “wide” but the price spread for July 2016 is “narrow.” The wide price spread in June represented “demand,” nonetheless, the narrowing price spread in July is an indication that demand quickly weakened.  

The inability of T Bonds to record two “wide" monthly price spreads, back to back, as a breakout [JAC], implies that the new high is most probably not a “sign of strength / jump across the creek,” but instead, the new high is more likely to be, or to become, an ending action, “upthrust.”  Note, however, it could take more time before the developing price action becomes a completed “upthrust,” or as always, the price action may improve and change the initial impression.  

To better define the shor-term price action, switch to the September daily bar chart. Having changed to a shorter term time frame, be careful not to confuse a short term indication as a long term indication. Nonetheless, the switch allows one to be looking for a short term indication, which -- when combined with longer term price action -- will validate the longer term price action, or otherwise, reject it.  Using this improved technique, when applied correctly, a trade can be initiated, which will often have substantial “implied odds,” and “greater risk control.”        

Referring to the daily bar chart, price action weakened intra-month during July. After the new high, prices declined, but subsequently, prices rallied again at month end. Nonetheless, prices still closed below the early monthly high, creating a narrow monthly price bar, which is a potential indication that the month's price action is bearish.  

The intra-month correction in July, having created the narrow monthly price spread in upthrust position, is an indication of a long term bearish price action. As a potential additional indication of current price weakness, prices have initially declined in August, which continues to confirm the indication of poor demand, but importantly, prices are still holding above the “old long-term high,” which was recorded in January 2015.

The “week” that starts on Monday, August 8 appears to have the potential to add important longer term information to the developing long term analysis.  Previously, prices had weakened on Friday, August 5th [employment number]. Friday's wide daily price spread and poor daily close implied that the 1st week in August had positioned prices -- in the still developing “monthly price bar” -- to immediately continue to decline.  

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About the Author

Robert Burgess has been a broker and trader, and published the Burgess Technical View, a newsletter featuring his technical views on stocks, bonds and commodities, which developed an extensive subscribership, which included large financial institutions, pension funds, and Fortune 500 companies.  He continues to keep a watchful eye on markets.