The 30-Year U.S. Treasury Bond futures have been in a state of flux since the end of July. The indecision in this market can most easily be seen on this Commitment of Traders chart. We track both the raw numbers from the COT reports, as well as tracking the momentum of the participants. Based on our experience, momentum can mean every bit as much as the raw numbers and momentum is a very useful tool in determining sentiment. One look at the recent chart of the 30-Year Treasury Bond makes it obvious that even commercial traders aren’t real sure about what’s going to happen next.

The Setup

Our trading is a combination of mechanical programs and discretionary setups. The current play in the bond market is a great illustration of why we use both methods. The setups for both programs follow the same principles.

  • Step one: only take trades in line with commercial trader momentum. This is akin to, “Don’t fight the Fed.”
  • Step two: wait for the market to compress against the commercial trader position, “Don’t catch a falling knife.”
  • Step three: enter the market in line with the commercial traders once the market begins moving back in line with commercial traders’ momentum, “Lift off.”

The setup helps minimize losses by waiting for the market to compress against the commercial traders’ position as our protective stop loss order is placed at whatever swing high or low is generated by the market’s movement against them. Finally, the position isn’t initiated until the market begins to move back in our predicted direction.

The primary difference between the discretionary and mechanical versions of this program is that the discretionary version uses the exact same parameters on both the long and short side in all 35 markets that we trade. As such, the discretionary version of this program has not triggered a buy signal because the market isn’t oversold enough for a bounce to generate the trading signal. You can see the difference on the two charts that were posted to go with it.

As it stands, the mechanical version generated a buy signal last night. The mechanical version has won 7/8 trades this year on the long side. The current setup allows placing an entry stop at the overnight high of 141^20. If this entry order is filled, we can assume for our purposes that the Friday’s low of 140^20 will be the protective stop point. Ideally, this market will head back up through the 144 level as it tests the spike’s 148 high from October 15th.