The Trump Overreaction/Bonds/Trade Setup

 

 

 

Trader Scott’s Market Blog

December 3, 2016

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There will be a couple of upcoming posts discussing the almost hysterical overreaction in markets to the Trump victory. And which of these markets are reacting counter to the bigger trend, and which are “confirming” the bigger trend. First up is the bond market and once again this will be “method heavy” as the questions about the method keep coming in. As mentioned to our great subscribers a few days ago, I had been expecting December to be a very volatile month, which will create some excellent opportunities – both trade and investment entry points/turning points/setups. And right on cue, the bond market finally setup well with a selling climax. I had been repeating to wait for 10 year yields to get above 2.4% to begin to set up the best entry point. And in my approach, these “exact” points, refer to where I expect the selling climax or the buying climax to show up to mark the “best” entry points. Meaning, to patiently wait for the market to trade below that point for a selling climax (buy zone). And in the case of a buying climax (shorting zone), to patiently wait for prices to trade above that point. It doesn’t mean this will happen, but what it does mean, is I refuse to enter a market unless we trade above or below those points and the market also shows ending action (climax). It’s my way of lowering perceived risk and increasing perceived probabilities on each potential opportunity. I don’t care about missing trades, only about entering at the “best” time/price. So step one was to wait for bonds to trade above 2.4%. Step 2 was to wait for a selling climax in bond prices (top in yields). As better depicted in this annotated chart, my expectation had been that when yields did trade above 2.4%, then the “logical” spot for a selling climax in bond prices to occur was somewhere in and around the higher resistance point in yields (2.49%). So when those two steps occurred, along with time frame work, the trade set up well to take a position, as discussed in Thursday’s intraday blog post (subscribe above). And once again, I don’t buy because I’m bullish, but because the strong hands are becoming bullish, the weak hands are freaking out,and the trade sets up. The strong hands begin their buying as a market is going down, as the weak hands sell/short. So just because the strong hands are buying doesn’t mean a market isn’t heading lower, but it is a warning sign to begin paying attention.

The following charts will help to depict this discussion. And to explain, these general principles can be used on all time frames, from short term to an investment time frame. But what will be different is exiting strategies. A more detailed view of the previous chart is annotated here. The chart shows the trade setting up as ten year bonds moved into the yield resistance areas. There was finally a selling climax on Thursday with a fairly explosive rally. There will likely be some retesting. And here is a look from a yield perspective with the push right into the top of the resistance area at 2.49%. There is very stiff resistance there, the market became very oversold, and some big buyers stepped in immediately when bonds hit it (yield top/price bottom). This can be viewed once again here showing the explosion off the bottom (climax). So basically, my approach to markets is about anticipating where the climax events in markets will occur, and then patiently waiting for the preliminary steps to give the warning signals. Of course the hardest part is to have the guts to step up during the fear phase, when the market appears to be the most bearish (or bullish around the highs). And a warning – there is always something a bit different in each situation just to make this not at all easy.

So while the short term picture for yields is brighter with the hysterical bond crash talk and the technical situation, the much bigger picture for bonds is far from rosy. As can be seen from the chart, the 2.4%-2.5% area for the ten year yield is a solid resistance area. I do expect it to be broken eventually, but the drop in yields from here could be surprising. The next big area is around 3.05%, which will likely be another short term trade area to take the other side. But this is what we are now facing in the world as we enter 2017. Really the beginning stages of a very long term bear market in global bonds. As discussed many times, the higher yields will not mainly be driven by inflation expectations, but by credit quality deterioration. This will accompany a deteriorating economy. And the rising interest rates will have a symbiotic relationship, so to speak, with rising inflation. A real mess. And even the idiots at the central banks are aware of these stiff resistance areas in yields and are not going to want yields to blow right through them, as it would cause too much disruption.

And for all of the questions which have come in since the blog started about how to short bonds, this is going to be one really good approach to trade the long term bear market in bonds. But to add, this is my approach only, I only share with the readers what I am doing or pondering doing with my own money. As such, these are never recommendations. Selling short is much trickier than buying, and I never sit idly in a short position. So specifically, and as expressed above, my approach is to buy bonds/cover (partially or fully) short positions into the big resistance areas in yields, when accompanied by a (bond price) selling climax – for a shorter term trade. And then sell bonds/go short into the big support areas in yields, when accompanied by a (bond price) buying climax.I do not plan on “investing” on the short side in bonds. I know that is a mouthful, but one side is basically the opposite of the other side. And overall my main approach (and maybe a “simpler” approach regarding a major bear market in bonds) is – continue being very patient, and then use the great buying areas which set up to accumulate assets which will benefit from the “quadrillions” of currency units which will continue to come out of the global bond markets over the next many years.

 

About

img_0074bwcrsmTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.

 

 



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'Trader Scott’s Market Blog – The Trump Overreaction/Bonds/Trade Setup – December 3, 2016' have 3 comments

  1. December 5, 2016 @ 6:03 am Luke

    Hi Scott, thanks once again for your incredibly valuable insights. This post was particularly helpful. I’ve one question/clarification, if I may. How do you identify a selling climax as opposed to preliminary ending action(s). In looking at the BATS: TLT 60 chart you posted in this update I can’t figure the difference. Thanks!

    Reply

    • December 5, 2016 @ 10:42 am traderscott

      The first (preliminary) ending action is virtually always followed by more EA or a selling climax. There is no easy answer Luke, except to say over the years I developed a way to help me with much higher probabilities by using the breaks of support and knowing these are the areas then when the strong hands will show up in a big way. That’s why I keep repeating to wait for the market to trade below a certain price first. Usually, if we’re doing this well, the preliminary will show up before the support area, almost like an alert. So the point is to assume the preliminary will be followed by another push to new lows, and just patiently wait for the market to come to you. That will be your highest probability trade. If a preliminary comes in below a decent support area, then that could be a good trade, but I’ll be much quicker to take profits (if possible), if it’s the first ending action.

      Reply

  2. June 19, 2017 @ 7:00 am Trader Scott's Market Outlook for the Week of June 19, 2017 (Video)

    […] December 2016 lows. There are several posts from early December about my bullishness on bonds and why I was buying. That selling climax setup in bonds was textbook, with the incompetent chanting about a […]

    Reply


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