Buying More Time
The IMC blog is working orders to short the September Bund/BOBL spread. We’ve been doing this for months, actually. The spread has continued to climb, so we have just patiently waited for a trend change to materialize before we throw our hat in the ring.
September treasury contracts are expiring soon. Therefore, we need to recalibrate our short sale parameters and start stalking the December Bund/BOBL spread.
It appears that the December Bund/BOBL spread has found stiff resistance as soon as it crossed the 33.00 level. This spread peaked at 33.24 on July 5th and backed off. It then posted a new contract high of 33.41 on July 29th, but quickly retreated again. Then the spread made it all the way back up to 33.36 just this past Friday.
On the one hand, the fact that the spread just can’t get past this barrier makes it tempting to short against. On the other hand, the more a spread tests support/resistance, the more likely it is to eventually break it. Therefore, we are inclined to wait for a break of support before we get short.
The December Bund/BOBL spread made its low for the month at 32.51 on August 2nd. It got awfully close on August 16th when it dropped to 32.55, but the spread recovered again and went on to make new highs for the month. Therefore, the IMC blog will consider a break of these similar lows a support breach worthy of an entry signal on the short side.
On the weekly timeframe, we’ve been monitoring the rising 30-bar Moving Average for support. The spread has closed above the weekly 30-bar MA every week for a year straight now. A close back below would signal a bearish trend change on this timeframe.
Recall what happened when the Bund/BOBL spread closed below the weekly 30-bar MA and triggered a bearish trend change in 2013 and 2015. The decline continued for months afterwards. We want to make sure we are swimming downstream with the tide when that happens again.
Coincidentally, the weekly 30-bar MA is currently located at 32.65. When the December spread becomes the nearest trading month this week, then a break of the current August low will also put the Bund/BOBL spread below the weekly 30-bar MA. This could create a one-two punch by way of a technical support break on two different timeframes. It’s hard to get a better setup than that.
Cancel the current hypothetical order to short the September Bund/BOBL spread and replace it with a new hypothetical order to sell one December Euro bund contract and simultaneously buy one December Euro BOBL contract if the spread closes below the current August low of 32.51. Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.41).