December Treasury Bonds are down 13/32 at 119:07 this morning as I write. The enclosed chart shows directional movement indicator that keeps flipping back and forth from bearish to bullish and back to bearish again as of yesterday’s close. One problem is that the ADX line is dropping at a low level suggesting a lack of trend. The good news for the bears is that all my other indicators are pointing bearish. The price is trading within a boundary between some intermediate up trend lines and the 90 day exponential moving average on the bottom, and the 200 day exponential moving average on the top side. The overall trend since June is up, but the recent price action suggests at least an intermediate top is forming. The bonds have that rounded top look, and a intermediate term head and shoulders top forming. If this is a valid head and shoulders top, the neckline is in the 118:20 area. If prices close below the 118:20 area, then the downside measured target would be 113:20 which coincidentally is right near the August lows. I recommend holding our current positions for now. I would be a lot more aggressive on the downside if the ADX line showed some life.

Followers of this letter should be short one December T-bond from 119:16 and short one December T-bond (119:00 strike) put option from 1 46/64. Followers should also be long one December T-bond (115:00 strike) put option from 50/64 and short 2 December T-Bond (113:00 strike) put options from 27/64 each for an overall credit of 4/64 or $62.50 gross. There are 28 days left until option expiration.

Oct. 23, 2009
David Hall