S-T Bund Failure Could Have L-T Bearish Implications

June 7, 2018 10:12AM CDT

In 30-May's Technical Blog we discussed the 160-handle-plus extent of the second-half of May's rally that could not be ignored as a significant threat to what we've contended is a new secular bear market in Euro bunds. In this analysis we identified 28-May's 160.29 corrective low as the short-term risk parameter the market needed to sustain gains above to maintain a more immediate bullish count. In the now-prompt Sep contract this analogous short-term risk parameter at 160.19 was broken yesterday, exposing AT LEAST the intermediate-term trend as down.

The important by-products of this relapse is the market's definition of Tue's 161.66 high as the latest smaller-degree corrective high and a more reliable risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed. The importance of 29-May's 164.19 high goes without saying.
Bund Sep '18 240min Chart
Stepping back to a broader view, two things stand out in the daily chart of the Sep contract below:

  1. the market's return to former 159.39-area resistance-turned-support and
  2. the clear 3-wave (to this point at least) structure to Feb-May's entire 154.31 - 164.19 rally.

Left unaltered by a recovery above 164.19, this 3-wave recovery attempt can be considered a corrective/consolidative event within the still-arguable secular bear trend. Per this count that 164.19 high serves as a key high, resistance and risk parameter to a resumed bearish policy. This said, a break below 15-May's 157.37 low remains required to, in fact, confirm Feb-May's recovery as a 3-wave correction and re-expose the secular bear. Per such, it would, conversely, be premature to CONCLUDE a resumption of such a major bear market. What we CAN conclude however are the exact risk parameters this market is now required to recoup to threaten and then negate a resumed bearish count: 161.66 and 164.19.
Bund Sep '18 Daily Chart
Bund Weekly Chart
Taking even a bigger step back by looking at some historical weekly charts above and below, and as discussed in that previous blog update, we cannot ignore the prospect that the entire 2016 - 2018 sell-off attempt is a 3-wave and thus corrective structure as labeled above. But if this is the case, then 1) it would mean a resumption of the 27-YEAR secular bull to eventual new highs above 160.86 and 2) the bull better get about behaving like one with increasingly obvious, impulsive strength above last week's 164.19 high.

On a weekly close-only basis below, the 2016 - 2018 decline looks no-less a 3-wave and thus potentially corrective event. However, this perspective shows Mar-May's recovery attempt thus far as a mere 3-wave corrective affair and the market's position still below a vast preponderance of all of the price action from 4Q16 until 1Q18's breakdown below it. In other words, Mar-May's recovery attempt is easily seen as a mere correction ahead of a resumption of the secular bear to new lows below 157ish in the months and quarters ahead AND without first recovering above 164.19 and possibly even above 161.66.

We don't think there's any rush to "chase" bearish exposure lower given the 159-handle-area as a key support candidate. But if recovery attempts from this support unfold in a labored, corrective "bear-flag" manner, we believe a bearish policy and exposure will have increasingly favorable risk/reward merits in the weeks ahead. For the time being a neutral/sideline position is advised. We will be watchful for proof of 3-wave, corrective behavior on a smaller-degree in the days/weeks ahead for a preferred risk/reward selling opportunity. In lieu of strength above at least 161.66 however, further and possibly accelerated losses should not surprise, especially if the market nibbles through this 159-handle-area support.

Bund Weekly Chart

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