Trading Lesson: Why the Low in Bond Market Is Important for Traders

05/23/2018 4:40 pm EST

Focus: BONDS

Jeff Greenblatt

Director, Lucas Wave International, LLC

It’s important for traders to watch various resistance levels like we have in the Dow right now but just as important to be cognizant of the bond market, writes Jeff Greenblatt, editor of  Lucas Wave International.

There are many differences between intermediate and mastery level in trading. What I’ve found in my travels working with people around the globe is mastery level traders take a global view of the action. It’s one thing to concentrate on whatever you might be trading. It’s quite another to consider that nothing trades in a vacuum.

I offer the bond market. With the exception of various cycle phases, the bond market has been in a 35-year bull market. It’s only been in the past year or so people started to realize something changed.

We’ve heard from any number of experts talk about the Fed creation of an easy money bubble, the latest being Ron Paul Wednesday morning. Count me in that camp as well.  However, it is well documented Paul is no fan of the Fed, but it’s safe to assume there will not be an “End the Fed” movement anytime soon.

chart 1

Reuters: Most Fed policymakers say rate hike needed 'soon' in their minutes Wednesday.

Why are we talking about this? The era of easy money quantitative easing is over.

There is a lot of risk these days, namely domestic and geopolitical risk. However, the biggest risk to the markets may very well be rising interest rate environment which won’t end anytime soon.

With the recent volatility, we’ve seen the market not absorb a rising rate environment very well. It’s vitally important to keep tabs on bonds.

So today I want to take a finer look at the intermediate picture of the bond market right now. So here it is: the bond market is trying to find a low on some interesting calculations.

Here’s the long-term view of the long bond. What we have is a top at 177.34 (32nds converted to cents). Regular readers of this column now know about the vibrational square out capability of all financial markets. Right now, we have a 178-day low. That lines up well, doesn’t it? There is a problem. The 178-day cycle lines up with the secondary high, not the top. The 177 and 178 is nearly perfect and in an ideal world these would line up perfectly.

But there’s something else to consider. The low is also 479 days from the top. It makes this turn very interesting and it means one of two things.

chart 2

First of all, this is lining up well enough to give us a significant bounce.

On the other hand, should the bear be so strong the reversal doesn’t last, it should lead to a big leg down. What these vibrations do is become points in time where important reactions materialize. The higher probability is a reaction in the new direction higher but when a very good reading like this one violates, it means the underlying structure of the new trend is so powerful it can overcome good readings like this.

What does this mean to the stock market? It should take one of the big risks off the table. Using that logic, the market should be up hundreds of points since the low last Friday. But it is not. It’s an indictment of the stock market more than anything. The stock market itself is in a true divergence right now with the Dow holding at mid-range while the Russell 2000 (RUT) has been making new highs. On the one hand, it’s very bullish for the Russell small caps to be leading to the upside. On the other hand, it’s not so bullish to see the other indices lagging the way they are.

As we enter the sell in May and go away season there are two factors to watch in the coming weeks. First of all is the next seasonal change point on June 21 and the big 610-day window from the bottom in February 2016 is in the middle of July. That is important because the 610-day window for the Dow Jones Industrials (DJI) hit in January off the August 2015 bottom.

It’s important for traders to watch various resistance levels like we have in the Dow right now but just as important to be cognizant of the bond market.

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