Wednesday, May 04, 2005

Bond Boxes say Buy!

This morning the US treasury announced that it is considering issuance of long term bonds starting next year. No real surprise here (other than the timing of this announcement). After all, the demands of Social Security and Medicare/Medicaid will force huge amounts of government borrowing for years to come.

A speculator must ask now wonder whether or not to fade the news (i.e. take a position opposite to the market's initial reaction to the news - in this case the reactions was a big drop.) The best way to do this is to look at our bond boxes. (The graph is posted above.)

Note that the recent high at 115-17 was 15 ticks above the115-02 top of a projected 46 tick box (not very good shooting, but since the trend is still up I wasn't looking for a place to get short anyway).

This morning's news dropped the market to 113-14. This is a little below the projected low of the projected 113-20 to 115-02 box and just above the low of the actual, market defined 40 tick box between 113-08 and 114-20. (The caption in the picture says 46 ticks but this is a mistake!) Plus, we see that the market established a 35 tick box on the way down from 115-17 and the low of the next projected 35 tick box would be 113-11.

So we have 3 box lows: 113-20, 113-11 and 113-08 with the price low this morning at 113-14. It is normal for the market to interrupt an uptrend with a box lower than the previous one. So the conclusion is that the market is a screaming buy on a reaction back down to the midpoint (113-28) of the 113-11 to 114-14 box.

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