In the previous post I mentioned the monthly RSI and the long term chart of bonds. In this ill drill down into some longer term bond themes that can help hone the trading potential of long term bond trends.
To start with I failed to mention the 62 month price channel for $TNX. I intentionally did so because i fear of data mining and curve fitting. That being said, this channel has held the last two secular cycles in bonds. Currently the height of this is 5.25% on the 10 year bond.
To put tighter constraints on our near term projections of this market i suggest the 9 month 2 deviation bollinger bands. In secular bull markets for bonds, we want to look for yields ($TNX) to be in the upper range of the bollinger bands and above 50 on the monthly RSI. This is a general set up–not a signal. From there you’ll look for buy points in the bond market, using trend line breaks or whatever else it is that you use. In secular bear markets, we will look for price in the lower range of these bands and RSI below 50.
Drilling down to the weekly charts for a stellar trade; when the yield ($TNX) has its RSI touch below 26 short the 10yr bond for a 10% move–this works 92% of the time–though it is rare. This is also a great market timer in stocks, as the stock market is a buy for at least 1 month when this occurs. In general when the weekly RSI is at extreme levels, below 30 or above 70, one should look for a reaction in the stock market. This reaction will be based in part on if we are in a secular bull/bear in bonds.
Another nice trade for “picking bottoms” in equities is to look at the 12 month ROC of 3 month Tbills, as we can see here. When the ROC spikes above 5 its time to look for buy signals in the equity markets. Theory being that once everyone runs to cash it creates buying opportunities. I like this at the very least for a set up.
In addition, Edison Gould observed that since the creation of the fed, “Whenever the Fed raises either fed funds, margin requirement, or reserve requirements three consecutive times without a decline, a top is near in equities.” The average pullback was 17% with 87.5% accuracy since 1915. I really have no idea how this plays in a Q.E. environment, but its long term accuracy is at least worth making note of.
Moreover, we now have price and momentum indicators for these long term secular trends in the RSI and donchian price channels. We also have a narrower range for intermediate term expectations in the monthly bollinger bands. This coupled with how to trade bonds and equities when bonds move aggressively in one direction or the other and how to trade short term rates gives us a nice foundation to build upon.
