December Treasury Bonds are up 15/32 at 119:05 this morning as I write. The enclosed chart shows that the intermediate term uptrend since the June lows is still intact. That uptrend line was tested earlier this week in the 118:00 area. That is the good news for bonds. The bad news is that today is when the Treasuries $300 billion buyback program of treasury securities ends that began several months ago, so that artificial support for bonds and notes is going away after today. Also, the directional movement indicators are bearish but the ADX line is meandering at a low level, sideways. My expectation is that until the bonds break and close below the 118:00 area, I believe that prices will chop around this area for awhile. The covered put write trade that I have on currently is the perfect position to have in this scenario. The indicators suggest a sluggish pattern for the bonds as well.

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 21 days left until option expiration.

Oct. 30, 2009
David Hall