Monday, April 18, 2011

Going from bearish to neutral on bonds (ZB)

Long before I ever subscribed to technical analysis I got by for many years on instinct, intuition, The Force, whatever you want to call it. I've been playing ZB for four months now using TA around the fundamental forces behind the interest rate/inflation story. Last week I closed out of some short ZB and felt like I was at a reset moment. I was still short some OTM calls that didn't expire for two weeks but at the time they were a full 3'00 OTM and I wasn't ready to close out early yet, other than those I was ready to reset. I've been watching the ZB chart like I watch TV for a while now and all I can tell you is that my gut instinct says something has changed. I got short one contract on Friday simply because we were up 3'00 in three days, that's good enough for me to take a short-term downside shot. But after watching the combination of price and volume after I entered  my trade I felt something has changed. In watching the BxA sizes I noticed that there was a larger bid under bonds than in the past, I normally don't pay attention to this but it was the first sign that something was different. I've been trading off the JUN contract chart ever since we rolled and not the aggregate chart. The trading range on these are different depending on what you're looking at. So the JUN contract ZBM1 that has been very technically sound told me to get short at 121, I did, but my gut said this wasn't holding. So I backed out to the aggregate chart and the top of the range there is really 122, but I don't feel comfortable with that either right now.

So adhering to what got me to the dance I listened to my gut an put in an order over the weekend to hopefully get out on Monday and I got lucky with this S&P announcement this morning that temporarily caused a 1'00 sell off. We spent the rest of the day today recouping that loss. So one of the major ratings agency does the previously unthinkable and publicly calls out the US on its debit/credit rating and the market shrugs it off after an hour? This confirms for me that at least temporarily there is a bid under bonds right now. As a trader I have to be willing to throw my bias over board and just listen to the market. In the past I've posted here that I'm willing to be short up to 5 contracts at 122'00 with no hedge because I would double down at 125'00, I'm changing that and now taking my short size down to 3 contracts at 122'00 and I'm going to use a stop, and if I add to this position it's probably going to be in the form of an OCO order where I scale in to shorts near 122 but have a tight stop. I absolutely still believe in the inflation/interest rate fundamentals long-term, but I'm trading for short-term profits, not investing with biases and waiting around long-term to hope it comes true.
ZBM1 JUN Contract: Trading Range 118-121

Aggregate Chart: Trading Range 118-122

 ZB Trade: Entered Friday, exited this morning

The probable OCO order that I'll use when we hit 122. I'm willing to risk a quarter point (0'08 to make 3'00), so 12:1 risk/reward. I intend to stagger my OCO orders and not put them all in at the same prices. This way a spike trade past my stop loss doesn't exit all my positions. If these all get run and my stops are hit, I'll use this same trade strategy but with a larger size as we approach 125. That is where I'm willing to stay short longer term and absorb the pain of being wrong.

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