Bund/BOBL Spread: Roll With the Bear

Out With the Old, In With the New

The IMC blog entered a short position in the December Bund/BOBL spread at 31.81 on October 10th.  The December European treasury futures contracts are expiring soon, so it’s time to roll over into the March contracts.

We noted in September that the close below the rising 30-bar Moving Average on the nearest-futures weekly chart for the first time in a year could have marked the beginning of a multi-month decline.  That’s how it played out the last two times the spread cracked the weekly 30-bar MA.

euro-bund-euro-bobl-spread-nearest-futures-weekly

Euro Bund Euro BOBL spread (nearest-futures) weekly

Another bearish development occurred one month ago.  The Bund/BOBL spread closed back below the 2015 high of 30.58.  Remember the old charting rule: Old resistance, once broken, becomes new support.  Well, that support level gave out four weeks ago.  This confirms that the trend has indeed turned bearish.

Where To Now?

A Fibonacci .618 retracement of the move from the 2015 low to the 2016 high would take the spread down to 26.13.  That’s another three full points from here.

But that does not mean the decline has to stop at Fibonacci support.

If the current decline from the 2016 record high replicates the 9.40-point decline from last year’s record high, the Bund/BOBL spread would hit 24.74 before it’s all over.

The bottom line is that the spread continues to break layers of technical support and the next targeted support area is still a few full points away.  Therefore, it makes sense to simply roll the contracts over and stay short.

Heck, we may even be willing to add to the position if the right setup comes along!  We’ll keep you posted if we see something interesting.

Trade Strategy:

Exit the hypothetical short December Bund/BOBL spread and simultaneously enter a short March Bund/BOBL spread at the market-on-close on Wednesday, December 7th.  Initially, the spread will be liquidated on a two-consecutive day close above 34.30. 

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