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.
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.
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).