Bund/BOBL spread: Stalking a Short Sale at Record Highs

Whiplash

The IMC blog initiated a short position in the December Bund/BOBL spread at 32.12 on September 9th.  It then only took two weeks for the spread to reverse from a two-month low of 31.89 to a new contract high.  This was quite a reversal on the daily timeframe.  Consequently, the position was exited with a loss at 33.90 on September 28th.

The spread also did an about-face on the weekly charts.  The first week of September was marked by a close below the rising 30-bar Moving Average for the first time in a year.  The prior two times this happened, the Bund/BOBL spread continued to decline for months following.

As it turns out, the third time was not the charm for the Bund/BOBL spread.

Time to Reload

Despite the trade loss, traders should be looking to reload their guns and setup for another shot.  On the weekly timeframe, the Bund/BOBL spread is merely returning to where it previously peaked at an all-time high in late July.  A break back below the September low would put the spread back in a bearish position as it would both be below the weekly 30-bar MA again and triggering a Turtle-style (Donchian band) breakout to the downside.

euro-bund-euro-bobl-spread-30-bar-ma-weekly

Euro Bund Euro BOBL spread (30-bar MA) weekly

Furthermore, a break of the September low after the recent breakout to new highs could accelerate a downward move as anyone who went long on this breakout would likely get their liquidation parameters triggered.  We want to be short if that happens.

Trade Strategy:

The blog will work a hypothetical order to short the December Bund/BOBL spread on a close below the September low of 31.89.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.90). 

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