- New Science in old markets -

Bonds rally toward trouble

Various Government bond markets have rallied in the past two weeks after bottom extension signals in some of the shorter maturities, as reported in the November 9th and November 10th editions. We advised 'playing the bounce' and readers should now be long of some of these instruments.

We think this strength is temporary and the reasons were originally given on October 29th - there was a compression in the 30-year US Treasury and it broke down into a sharp drop that lasted 5 days, ending with those bottom extensions. The 30-Year and 10-year are shown here:

30 yr & 10yr

That most recent compression in the 30-year will offer resistance to any more strength and this may be enough to turn the trend back down again. We often see this aspect of compression signals - we call it a 'return movement' - in which a compression breaks, a new trend starts and there is a brief return to the compression before the move resumes. This is because 'attractors' form in any complex system of which traded markets are a good example and compressions fulfil that role - see our userguides for more on this.

Accordingly, on any close approach to the lows of these compressions in the 30-year (at 155 19/32) sell all bond longs and reverse into US Treasury shorts. We chose to buy European bonds for the rally but you may have chosen US instruments instead - no matter, sell everything but sell short only the US as there is QE in Europe but not in the US (at the moment).

Here is a summary chart of the US 30-year, showing how compressions provide either support (if the price breaks into an uptrend) or resistance (if the price breaks into a downtrend, as in the most recent example):

30-yr summary