Thursday, January 22, 2015

Bund; Don't Get Swept Up in Hype

RXH5 (March Bund) was required to settle above 157.25 by Monday’s close in order to remove the bearish implications of Wednesday’s single session decline.  This and more has been done in short order.  In fact, the contract recovered overnight lows, yesterday’s oversized decline and more, closing above yesterday’s opening level forming a potential bullish continuation.   

Bullish price action may seem to have been relentless in the Bund.  Today’s 10 minute chart could be drawn with an elected bull flag having an objective of 159.80.  That objective, should it be achieved, would represent a yield of roughly 30 basis points from current 45.

Stepping back to look at the last two sessions we would note that price action, though very volatile and having fallen considerably is not terribly distant from where it was trading on Tuesday. 

One measure that I have found helpful when conflicting data is evident is to take a read on the combined price action of the last two sessions - making a candlestick combining both.  To do this with Wednesday’s and Thursday’s price action in the Bund would leave a very long lower shadow on a bearish ‘hanging man’.  

One of the major contentions that I have found reliable in reviewing trends is that they are required to take and defend new ground.  Some patience can be allowed a developing trend, but we would be less accommodating of a mature trend.  As impressive as the recovering price action in the Bund has been over the last 24 hours, it has not gained any appreciable ground.  It has instead remained relatively flat over the last week.

Recent price action has not been a strong testament to the bullish trend which carried prices from 139 a year ago to today’s new intra session high of 158.08.  We would recognize as important that price action has remained upside-constrained since last Friday’s 157.97 high. 

The above analysis is not likely consistent with what you will read elsewhere.  Instead, you are more likely to read how strong the bund has shown to be as it has been able to recapture lost ground.  I caution against that view.  While the bullish trend may reassert itself, it has shown little progress this week. Until it does, bullish participants are cautioned to tread lightly and take on some hedges.  Shorts position holders, while maintaining discipline against the prospect for newly minted substantial gains, should not despair unduly.  There remains good chance you may very soon have your day.  

Economic agents have been asked to digest a lot over the last few days.  Today’s interpretation of those events, currently priced in relatively high global fixed income levels, along with forthcoming data may find current consensus thinking lacking and lower global fixed income prices soon prevailing.   

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