Bonds are setting up for Tradeable downleg

CBOT:ZB1!   T-Bond Futures
We've been pounding the table over the past week that a tactical shift was emerging towards inflation based trades. The PBOC liquidity injections changed the dynamics, and traders last week began bidding up base metals on the SHFE. Extreme short positioning by Leveraged funds across the commodity complex after such a washout sets the table for a profit taking rally that will turn technicals positive and get traders playing long. Rallys in Oil , Coffee , Soybeans have confirmed this, and now Rates trades are showing evidence as well.

The US Long Bond has rallied sharply since the March 17 low around 144. A clear 1-2-3 Impulsive move is underway on the weekly charts and there is nice symmetry between the Wave 1+3 advances. As is typical at the beginning of the rally we saw Banks & Dealers positioned very bullishly on bonds. My 18m Relative Strength Score on their net Position was 100% at the time representing extreme bullishness.

Today however is a much different story. Their net position now scores 17%, and positioning on the 10Yr note is even more extreme, scoring 0%. This means over the past 18m + 5yrs Primary dealers have never been more short the 10 Yr note.

All we are waiting now is for price action to confirm our thesis & we are seeing this. A reversal candle "shooting star" is forming on the weekly charts and is showing that this rally is losing it's legs. On the hourly chart we can see a Horizontal support resistance line that has been in place @ the 156 level since July 14th. Traders can start positioning short now with confirmation coming on the break below 156.

How to play it:

Short the 30yrBond @ 156'09.
Sell the 155 Put for 44/64

Close the position on multiple hourly closes above this weeks high at 157.09 -

Your loss would be 1point minus the premium of the put for approx a 1/2 point expected loss.

Your potential gain is 1.09 on the future + 44/64 on the put for approx 1.90 gain - A R/R of almost 4-1.

Good Trading to all

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