In the December 5th edition we pointed out that the bond rally had produced a top extension in the December futures contract, which was then the 'front month'. We gave the usual advice when dealing with top extensions - to 'wait a bit' before selling. This is because a top extension usually signals the start of a 'topping' period in which the market concerned will often churn sideways and may make new highs during this process.
The market squeezed higher on yesterday's Federal reserve rate hike (with some soothing words about a slightly reduced pace of future rate increases) and now we have a second top extension signal:
If that were all there was, we would probably just say 'wait some more', for the same reasons but there is another factor that we can see in the yield charts. Bond yields move inversely with price, so the relevant signal here is a bottom extension, which also occurred yesterday. This has happened at the same level as the most recent weekly-scale compression that we saw just as the yield was about to rise sharply through September.
Experienced readers will know that we expect to find support at these old compressions when they are re-visited and these two reasons are enough to warrant a trade. Sell bonds now.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com