Picking a top in an historic bull market like we are seeing in U.S. treasuries is a difficult proposition. This is especially true in the late stages of a bull market as remaining weak shorts run for the exits and prices rally sharply, just before the "gravity effect" takes hold and prices collapse, setting highs usually not seen again for years. Though it is still too early to say if U.S. treasuries are in the final stages of the bull market, some traders who are considering establishing a short position may perhaps wish to consider exploring buying puts in Treasury Bond futures options. By buying puts outright, a trader knows the risk involved in the trade is limited to his total investment in the put purchase. An example of this trade would be buying the September Bond 146 puts. With the September futures trading at 150-17, the Sep 146 puts are trading at 1-40, or $1,625 per option, not including commissions. The total investment in the put would be the maximum potential risk on the trade, which will be profitable at option expiration in late August should the September futures be trading below 146-00 minus the premium price paid for the put.
The U.S. Bond market bulls gained new life, as continued uncertainty out of Europe and disappointing U.S. Economic Data propelled traders to bid-up Treasury Bond futures prices above the 150-00 level and new all-time highs. Bond prices soared on Wednesday, as many traders begin to show great concerns about the stability of the Spanish banking system. This came on top of continued talk of Greece leaving the Euro. The Bond rally continued on Thursday, after U.S. jobless claims rose by 10,000 last week to 383,000, which was the highest level in 5 weeks. In addition, the ADP employment report showed only 133,000 private sector jobs were created last month, which is well below the 157,000 jobs that was the consensus estimate. These disappointing jobs figures may be setting up traders to revise lower their estimates for this morning's non-farm payrolls report for May. The current consensus is for a gain of between 150 and 175 thousand jobs last month, which is a moderate increase after April's dismal 115 thousand jobs gain. All the gains are expected to occur in the private sector, as both cash-strapped state and local governments continue to shed public sector jobs. Speculators have added to their net-long position in U.S. Treasury Bond futures, with the most recent Commitment of Traders report showing non-commercial traders (large speculators and funds) added 43,760 new-net long positions for the week ending May 22nd. This was before the recent price rally, which seems to have generated new enthusiasm for U.S. government debt to the detriment of both equities and commodities. Bond prices may also be getting support from short-covering by those looking to "pick a top" in this historic bull market, though a top may not appear until prices go "parabolic", which has not yet occurred at this point in time.
Looking at the daily continuation chart for Treasury Bond futures, we notice prices moving nearly straight-up since the "bear trap" was sprung back in March of this year. Prices are holding nicely above the 20-day moving average, and until we see a close below this indicator, it may be difficult to call an end to the recent up move. The 14-day RSI has moved into overbought territory, with a current reading of 74.45. Please note a possible bearish divergence is forming in the RSI, and should the non-farm payrolls report be positive, that may be the catalyst for a much needed technical correction. Being in uncharted territory, Thursday's contract high of 150-26 should be viewed as the next resistance level, with support seen at the 20-day moving average, currently near the 146-17 area.
Mike Zarembski, Senior Commodity Analyst
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