Thursday, June 5, 2014

Bund Post-ECB; Bullish Hammer or Bearish Hanging Man

At this writing, the September ’14 Bund contract has traded in a wide range of over a point today and is marginally higher on the day (+30 tics).  The relatively small difference between the opening and current level suggests that despite the news from the ECB, economic agents are still undecided about what to do with the Bund.  Were the bulls more certain, they would have pushed prices closer to recent highs and if the bears were similarly convicted, prices would not have recovered from today’s lows. 

How might we interpret this price action and who should be charged with the implications of this indecision?  First, we would note that recent price action over the last 5 sessions has been bearish with several bearish candlestick formations (hanging man, doji and harami).  The bearish trend, if it should even qualify as a trend yet, is in extreme infancy and is still subject to qualification. 

Should the indecision shown in the price action today be charged against the bearish contingency within the infant bearish trend or is today’s uncertainty a sign of the longer trend breakdown?  In candlestick analysis terms, do we recognize today as a bullish hammer or a bearish hanging man?

A bullish hammer is most helpful in marking the end of a bearish trend when found after a long bearish trend.  A hanging man is most helpful in advising of a topping market after a long bullish trend.  The Bund has been trading in a longer-term bullish trend since September.  It might therefore be appropriate to charge today’s indecision against the bullish contingency.  Why given all the support the ECB has indicated they are willing to provide has the Bund not regained recent highs?  Why is the bullish contingency unwilling to push forward with recent gains and recover the rather shallow decline of the last week? 

As to the other half of the equation; the bearish contingency has been punished time and again since September and it is a matter of survival that they have become skittish and reactive to swings in price and upon ECB announcements.  This we can understand as natural and we find no insight in this natural tendency from a discouraged lot.  We can understand why the bearish contingency is unwilling at this stage to involve more capital to press Bunds lower.  They may however become more emboldened if the bullish contingency does not seize the moment.    

Bottom Line:

Given the length of the bullish trend in Bunds and recent bearish candlestick technical developments over the last week, I would be inclined to recognize today’s price action as a bearish hanging man.  This would suggest that bullish participants consider taking profit against the risk of making a new high.  Bearish minded should use the recent high as a stop (force a new high).  More conservative position takers could wait for the formation to be confirmed tomorrow.     

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