Thursday, April 23, 2015

German Bund Wrestles with Bearish Reversal Implications

Recent technical developments discussed below have provided advance notice for the volatile price action in Bunds.  To a lesser extent, they pointed toward a move to higher yields.  Today’s recovering price action will be watched closely to see if enough of the prior (Wednesday) session’s decline can be recovered to indicate the sell-off in Bunds is completed.

In the last 5 years, only 3.7% of the sessions experienced declining price action as great as Yesterday’s.  Wednesday’s decline of 79 tics in Bunds was larger than any since January 21.  We remember that late-January instance brought about an incredible bullish answer the next session before the contract raced immediately to a new contract high. 

A similar outcome is certainly possible here and we shall take our clue from the disposition of trade nearer to the close, gauging the commitment of the bullish contingency against the rejuvenated interest of a sorry bearish camp.  Specifically, we shall look to the ‘mid’ of trade yesterday on a settlement basis to parse the next leg of this developing price action. 

Bullish minded participants could look to add to positions with an expectation that RXM5 would settle today above 159.58, taking steps to hedge or remove this position in the event these expectations don’t materialize.  Conversely, bearish minded participants could initiate shorts on the expectation that longs will regard advancing price action as an opportunity to cover positions.  Greater conviction for continued falling price action should attend a settle below 159.58.  Otherwise, shorts might want to cover positions, looking for another opportunity in the future to position at more favorable levels.     

The Bund seemed to take its cue from U.S. economic developments yesterday, selling off with a notably stronger than expected existing home sales number.  We should expect that all eyes will be on the jobless claims data due out shortly to help reconcile the changed nature of job growth seen in the last employment report which was weaker than expected.  

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