Bund/BOBL spread: Short Sale Parameter Revision

Trailing Along

For the last several months, the IMC blog has been stalking the Bund/BOBL spread for a short sale.  Basically, we’ve been trailing the spread with a contingency to get short on a break of a prior month’s low.

It hasn’t happened yet.

September Bund BOBL spread daily

September Bund BOBL spread daily

Trading for the month of July ended today.  The September Bund/BOBL spread finished with a new contract high.  A mid-month correction left an obvious price support area on the chart at the July low of 32.54.  Therefore, we are going to raise the short sale parameters to enter on a break of this correction low.

The Bund/BOBL spread is rocketing higher as negative interest rates in Europe continue to propel the treasury spreads.  Once the “rocket” runs out of fuel, though, a significant reversal is likely.

One way we may know that the fuel is gone is when the spread breaks below technical support on at least two timeframes.  The break of the mid-July low would do the trick on the daily timeframe.

On the weekly chart, the rising 30-bar Moving Average may be the trip switch to keep an eye on.  When the Bund/BOBL spread closed below the weekly 30-bar MA in 2013 and again in 2015, it continued to trend lower for months afterwards.

Bund BOBL spread weekly (30-bar MA)

Bund BOBL spread weekly (30-bar MA)

Therefore, a close below the weekly 30-bar MA for the first time since August of 2016 would confirm that a downtrend is in motion.  Once that happens, we will likely be positioned on the short side and looking to add.

Trade Strategy:

Cancel the current hypothetical order to short the Bund/BOBL spread and replace it with a new hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below the July low of 32.54.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 34.26). 

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